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Property/casualty sector likely to see challenging 2017

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The New Year will likely be more challenging for the U.S. property/casualty insurance industry than 2016, Kroll Bond Rating Agency says in a report. 

The New York-based credit rating agency issued a report Tuesday on the 2017 outlook for the property/casualty sector, noting that the industry will break even for the full year 2016 in terms of underwriting profitability, with a combined ratio of about 100%.

However, insured catastrophe losses for 2016 will be the most since 2012, likely coming in around $20 billion to $25 billion, the report said. It only took two quarters in 2016 to approach the average catastrophe losses of the three prior years, due to severe winter storms, several hailstorms throughout Texas, tornadoes and flooding, Kroll said.

This includes Hurricane Hermine, which was the first hurricane to make landfall in Florida since 2005; and Hurricane Matthew, which reached Category 5 status and caused considerable damage to Florida despite not making landfall until South Carolina.

“KBRA believes that if 2016 was considered challenging, 2017 will likely be more so,” the report said.

KBRA said the industry faces unfavorable loss trends in personal and commercial auto lines, where rate increases have been challenged to keep up with losses. For pricing in lines other than auto, KBRA said it anticipates the continuation of decreased rates, but to a lesser extent than recent years. Commercial lines, reinsurance and catastrophe reinsurance are all expected to see low single-digit rate decreases.

KBRA said it believes there is a potential need for significant increases in asbestos and environmental reserves, predominantly due to asbestos exposures over the long term.

The report noted that William Wilt, president of Assured Research L.L.C., said in September “we think the pressure on (insurers and reinsurers) to increase their asbestos liabilities will accelerate.” Assured Research also said, “The insurance industry’s track record on reserving for asbestos claims remains dismal.”

Despite the challenges faced in 2016, KBRA said it believes industry capital will end 2016 at or near a record high. In addition, alternative capital remains strong. 

“Although holders of (catastrophe) bonds may have been nervous as Hurricane Matthew approached,” the report said, “losses were minimal to insurance-linked securities funds. The ongoing strength and viability of the cat bond market was evident by recent issuances from XL Catlin and USAA.”