Looking beyond the implications of the uncertainty surrounding the interest rate hike, it is market softening that characterizes the Property & Casualty (P&C) insurance industry. In order to retain renewals and secure new business, carriers are aggressively reducing rates and making the market advantageous for buyers.

The softening was evident right through 2015 and continued in the first half of 2016. Pricing primarily remained soft in the areas of commercial property, workers’ compensation, general liability and business interruption. On the other hand, the commercial auto line has been witnessing an increase in rates.

By its very nature, a soft market causes lower underwriting profitability for carriers, as they prioritize market share gain over making more from premiums to exist in the market.

With the increasing appetite of carriers, their willingness to negotiate on terms and conditions, and enhanced capital strength, the market is likely to remain highly competitive in the quarter ahead.

However, greater demand for insurance, particularly following the emergence new insurable risks including cyber threat and endemic disease, will keep the business of P&C insurers afloat.

Is Rate Hike Uncertainty Too Much of a Concern?

P&C insurers are less sensitive to Fed interest rates than life insurers, but the sensitivity has both positive and negative directions. Whether the upside offsets the downside is yet to be seen, as there hasn’t been any palpable progress on the rate hike front so far.

A rising rate environment would boost investment earnings of P&C insurers that have been declining in a prolonged low-rate environment.     

However, the key downside is a significant amount of bonds in P&C insurers’ portfolio losing value if rates are hiked steadily (which is unlikely though). P&C insurers’ extreme sensitivity to asset inflation will aggravate the situation. And this could ultimately result in capital volatility.

In other words, the value of the properties insured by carriers will appreciate with an improving real estate market, increasing their potential liabilities from claims. This may outpace the rising yields on bonds they added to their portfolios for covering the claims. In fact, the bonds in their portfolios will lose value with rising interest rates.        

Addressing this concern would require P&C insurers taking more risk to meet the rising liabilities from claims. And this would eventually increase their costs.

Fundamentals Look Reassuring

In addition to the continuation of a soft market environment, slowing reinsurance renewals across most lines due to less significant catastrophe in recent years should keep P&C insurers’ bottom lines stressed.