U.S. commercial lines insurance underwriting performance improved moderately in the last year. Fitch Ratings' review of initial industry aggregate statutory financial results in 2012 reveals that a market turn is taking hold with a second year of material premium growth and a sign that loss ratios reached a cyclical peak in accident year 2011.
Commercial lines accident year loss ratios are anticipated to show continued improvement in the near term, as positive pricing momentum should be sustained through the latter portions of 2013. A shift toward historical natural catastrophe loss levels would further promote meaningful profit improvement.
The forthcoming special report, "Commercial Lines Market Update," will provide further depth into profitability in the broader commercial lines sector and factors within individual lines that are driving results. The report is set to be released on April 9, 2013 and will be available at our website at www.fitchratings.com.
Net written premiums in commercial lines increased by approximately 4% in 2012. This revenue growth is attributable largely to significant increases in premium rates over the last 18 months across nearly all segments and a return to modest insured exposure increases in a slower growth economic environment.
Commercial lines insurance underwriters showed modest underwriting improvement in 2012, as the accident year loss ratio for primary lines fell by nearly two points to 74.3%. The loss ratio still translates into a significant underwriting loss and remains 17 percentage points above the previous cyclical best of 2006.
Accident year 2012 loss ratios improved in all major commercial segments, except for medical professional liability (MPLI). Other liability segments have shown greater loss ratio stability versus other lines. Despite recent underwriting improvements and more sharply rising premium rates, workers' compensation remains one of the weakest performing segments. Underwriters in this segment must contend with rising claims severity due to medical cost changes that are higher than general inflation levels.
For the second straight year, natural catastrophe events had a significant impact on commercial lines insurers. The coastal flood losses in densely populated commercial centers from Hurricane Sandy generated substantial commercial property losses. Accident year loss ratios in the special property line are on par with 2011's result, which is nearly 15 percentage points above historical industry averages.
While MPLI is experiencing continued deterioration in performance, this segment is less likely to experience a turn in market pricing in the near term due to competitive factors and other changes occurring in healthcare markets. However, this segment also has the strongest loss reserve position of all commercial market segments, and MPLI has reported sharp reserve redundancies over the past five years.