A Year Of Speedy Recovery For U.S. Insurers?

The possible reversal of the persisting low interest rate environment and modest strengthening of the key economic indicators — employment, real estate, GDP and stock market — should help insurers witness accelerated recovery in 2015. Moreover, an already strong liquidity profile, conservative product design and evolving coverage opportunity should lead the industry to an upside.  

Following a slowdown in Q1, which saw an 8.7% earnings decline on 0.6% revenue drop, the insurance industry witnessed a recovery in the next two quarters, keeping pace with the broader finance sector. Earnings growth in Q2 and Q3 came in at 0.1% and 6.1% on revenue growth of 5.5% and 6.6%, respectively. With no major headwind cropping up in Q4 and most of the factors remaining favorable, the growth trend is likely to continue.
While the pace of premium rate increase remained subdued due to the still low interest rate environment, momentum is due shortly as the rate hike seems imminent. However, fundamental challenges — such as weak underwriting gains and low investment yields — and heightened market competition might continue to mar profitability to some extent.
No matter what, the ongoing reserve development will keep supporting insurers’ financials. Also, increasing demand from economically recuperating American households should place insurers in a favorable pricing cycle.
A lot depends on catastrophe losses too. Following two below-normal seasons in a row, the 2015 Atlantic hurricane season, spanning from June 1 to Nov. 30, is again expected to keep catastrophe losses modest. This should lead to recovery in underwriting and a lower combined ratio for Property & Casualty (P&C) insurers. Moreover, the possibility of lower catastrophe losses will keep lowering premium rates.

Time to Rethink Regulation?
Apparently, a safe and sleepy business nature keeps U.S. insurers out of federal regulations, which could have marred business expansion. But the industry is yet to be strongly braced by the advantages of operating under state-run regulations. Instead, decentralized regulation and consumer protection make the industry susceptible to insolvency.
Now, the changing nature of business – more like banks in terms of liabilities – perhaps calls for federal oversight. Though the necessity for a regulatory revamp has been strongly felt after witnessing the success of banks, this will delve another blow to the tottering industry.
A provision of the 2010 Dodd-Frank Act requires setting minimum capital and leverage standards on insurance companies as well, but these are yet to be implemented by U.S. lawmakers, who are considering the distinct business fundamentals unlike banks. But the industry, which accounts for 7% of GDP in terms of insurance premiums paid each year, is not likely to be relieved of Federal Reserve control for very long.
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