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United States Insurance Report Q3 2011
Business Monitor International, June 2011, Pages: 74
The United States Insurance Report provides industry professionals and strategists, corporate analysts, insurance associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on United States's insurance industry.
The US insurance sector remains in recovery mode. The global financial crisis that reached its climax in late 2008 hit a non-life segment that, in global terms, stood out for the contraction in non-life penetration over the preceding years. A full and substantial recovery in the non-life (mainly property/casualty) segment will probably only come when the housing and construction sectors recover fully. In the meantime, the economic environment remains suboptimal – even if some macroeconomic indicators are clearly moving in the right direction. The equity bear market from 2008, and the volatility in some fixed income markets, contributed to the double-digit contraction in demand for most of the life segment’s products. Markets have stabilised but the environment of rock-bottom interest rates and low bond yields constrains the returns that can be generated by many of the industry’s products. Following the enactment of the Dodd-Frank Act, regulatory change is more of a wildcard than it has been.
Both of the main segments of the US insurance sector are recovering from the impact of the global financial crisis, which reached its critical phase in late 2008 and hit the US harder than any other country. In the case of the life segment, the main impact was an across-the-board downturn in premiums and annuity contributions. Facing unemployment and/or having access to other vehicles for long-term savings, a lot of US households ceased using life insurance. The use of group products fell as corporations decreased their payrolls. The attractions of variable annuities fell sharply as returns were affected by the extraordinary volatility in financial markets. Looking forward, we only expect a very gradual recovery in the fortunes of the life segment. The US labour market remains patchy. For those households whose breadwinners are in work, disposable income is being restricted by rising prices for gasoline and other essentials. An environment of near-zero interest rates, low nominal bond yields and inconsistent investor appetite for equities and other ‘risk’ asset classes is not conducive for rapid expansion in sales of life insurance or annuity contributions. (Please note, so that the figures in this report are more directly comparable with those in BMI’s other insurance sector reports, we have included the health insurance written by the life companies with the health insurance written by the property/casualty companies in the non-life segment. Our figures do not include health insurance premiums written by pure health insurance companies).
The decline in property/casualty net written premiums from the end of 2006 to the end of 2009 was the first three-year fall since 1930-33. According to the Insurance Information Institute (III), net written property/casualty premiums (which are broadly analogous to non-life net premiums, although figures show gross premiums that include health business written by the life and the property/casualty companies) tracked sideways in 2010 and should do again in 2011. Thanks mainly to a recovery in personal property/casualty lines, net written premiums rose on a quarter-by-quarter basis through much of 2010, although they were falling as recently as the first quarter of last year. Net premiums for commercial property/casualty lines fell by 9.4% in 2009, according to the III, and slipped by another 2% in 2010. The III is looking for them to stabilise this year. An additional challenge for property/casualty insurers is the likely continuing deterioration in combined ratios, which, across the entire segment, have been well in excess of 100% since the end of 2009. According the III, the problems are the ‘expected return to normal catastrophe activity’ along with the ‘deteriorating underwriting performance related to the prolonged commercial soft market’. Conversely, the III is looking for the combined ratio for personal lines to stabilise at just below 100% this year.
The changing regulatory environment in the wake of the Dodd-Frank Act is something of a wildcard. Outwardly, the American Council of Life Insurers (ACLI) is confident that it will be able to ensure that new regulations recognise the peculiar nature of the life insurance industry and, in particular, how it differs from the banking and securities industries. By contrast, the III is concerned that some insurers will fall unfavourably under the purview of the Systemic Risk and Resolution Authority on the basis of their absolute size alone. The III also sees the potential for the new Federal Insurance Office to evolve into a quasi-regulator.
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