S&P: P/C Insurers Could See Potholes in 2017 as Earnings Outlook ‘Isn’t Too Pretty’

This year will be a turning point for the U.S. property/casualty (P/C) insurance sector, as rising claims outpace pricing and reserve releases materially decrease. But it will not be a “softer for longer” rate cycle for the sector, according to a report from S&P Global Ratings, titled, “Getting Over The Potholes: U.S. P/C Insurance Sector Outlook Remains Stable.”

S&P analysts said they expect the combined ratio to top 100 in 2017 and interest rates to remain historically low. Yet the stable outlook is supported by insurers’ “continued underwriting discipline, prudent risk management, conservative investments, and very strong capital adequacy.”

S&P will be watching to see if nontraditional players enter the business and how Trump’s policies will play out.

“There are pockets of growth opportunities for societal risks, but we expect insurers to keep these prospects at arm’s length for now. These orthodoxies promote capital preservation, which is good for credit, but leaves the door open for nontraditional players,” said S&P Global Ratings credit analyst Tracy Dolin. “Although we have not seen technological advances cause any ‘uberization of insurance’ yet, we believe that the next 10 years will make the sector look very different than what we saw in the prior 30.”

The report cites Trump’s potential effect on regulation, including the Dodd-Frank Act and the economy. “The prospects of looser fiscal policies in the shape of tax cuts and greater infrastructure spending may propel insurers to rethink their investment strategies as well as provide asymmetrical growth opportunities for surety writers,” according to S&P.

The overall creditworthiness of the U.S P/C sector is not expected to change in 2017. Any shift to a negative outlook would most likely come from a “confluence of unforeseen events that ultimately changes the risk perception and capital adequacy.”