Fitch: U.S. Commercial Insurance Market Performance Heading Downward

Underwriting performance for the commercial lines sector of the U.S. property/casualty (P/C) insurance industry is
likely to deteriorate in 2016, according to a new report from Fitch Ratings. The decline follows a three-year underwriting profit for the industry with a combined ratio of approximately 94% in each of the last three years (2013-2015).

“Catastrophe losses below historical norms contributed to strong 2015 commercial market results; however, results
will likely stumble in 2016 as industry competition heats up and premium rates are declining in a growing number of
product segments,” said James Auden, Managing Director, Fitch.

Renewal rates are flat or declining for most commercial market segments following a hardened market from 2011-2014. The price competition comes from underwriting success and market capacity expansion from earnings accumulation. As price competition intensifies however, this will likely be a drag on premium growth, according to
Fitch. Commercial lines written premium volume grew by only 1.8% in 2015.

Workers’ compensation, the largest commercial lines segment, has steadily improved over the last five years to a significant underwriting profit in 2015; however, Fitch views these results as a cyclical peak with future results deteriorating due to competitive pressure and the inherent volatility in this business.

Commercial automobile liability insurance continues as a standout weak performer, generating a large 2015 underwriting loss and adverse loss reserve development due to claims severity issues. While commercial auto business continues to have meaningful premium rate increases, Fitch expects the segment to generate another underwriting loss in 2016.

Favorable loss reserve development from prior underwriting periods declined in 2015 representing two percent of calendar year commercial lines earned premium. American International Group, Inc.’s (AIG) large fourth quarter reserve charge significantly affected this result.

“Commercial property results will greatly influence overall commercial market results for 2016, a reversion toward
more severe catastrophe losses would lead to a sharper decline in 2016 performance,” added Auden.