After a tumultuous 2017, the U.S. commercial lines market should eke out a small underwriting profit in 2018 assuming catastrophe losses return to more historical norms, Fitch Ratings said in a new report.

Still, Fitch is maintaining a negative sector outlook for commercial lines, and results this year for individual parts of the commercial lines market are likely to vary widely. Specific areas such as workers compensation will see deteriorating results but still remain profitable. Commercial auto – with a slightly worse 111 combined ratio in 2017 – will remain stagnant, Fitch said.

“Commercial auto insurance remains a chronic problem for underwriters despite numerous rounds of rate increases and underwriting actions,” said James Auden, Managing Director, in prepared remarks. “Loss severity trends, rising litigation costs, shortages of experienced drivers and continued reserve weakness may limit the potential for underwriting improvement in the near term.”

Any improvement in U.S. commercial insurance performance comes off a very low base point in 2017. Overall, the sector’s combined ratio rose to almost 104 in 2017, up from 99 in 2016. Fitch sees improvement, however, if there are no more “unusual large catastrophe events.”

Premium growth will be a big factor behind some of those predicted gains. Fitch noted that direct written premiums in commercial lines grew moderately in 2017, a slight improvement compared to 2016, and the trend should continue in 2018.

“Revenues should rise further in 2018 based on improved pricing in auto and property segments,” Fitch said. “Economic growth that leads to insured exposure changes in areas such as higher payrolls and business receipts, and growth in business investment and construction activity, point to additional near-term premium expansion.”

Workers Comp Versus Commercial Auto

Fitch said that commercial auto is the only major commercial insurance segment that reported significant positive rate movement, with quarterly rate increases averaging more than 7 percent in most of 2017 and in early 2018. But its continued, large underwriting losses are a predictor of more rate and other underwriting actions in the months ahead.

On the other hand, workers compensation was the most profitable major commercial market segment in 2017, with a 92 combined ratio, posting a third consecutive large underwriting gain for the year. Fitch says that workers comp will see challenges from competitive forces, potentially leading to a higher combined ratio but one that is still profitable and below 100 in 2018.

Other Fitch report highlights:

• Commercial property and other related liability segments have had positive premium movement in 2017. The prediction is that property premium growth in the second half of 2017 for this area will accelerate through 2018.

• Catastrophe loss experience led to wildly different underwriting results in 2017 compared to previous years. Some special property lines that had combined ratios in the 80 range for the last four years produced a 117 combined ratio in 2017. Commercial multi-peril saw its combine ratio jump to 108 in 2017 versus 101 in 2016.

The full report is entitled: “U.S. Commercial Lines Market Update: Underwriting Loss Should Reverse in 2018.

Source: Fitch Ratings