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U.S. Insurers: Dim possibility of a quick recovery

After a period of stability in premium rate hike, the U.S. insurance market has yet again softened. Weakness in some macro factors and almost muted economic growth in the first three months of the year have cropped up as serious threats to the recovery in this industry.

And if these aren’t enough, renewed uncertainty over an interest rate hike — the key growth driver of insurers owing to the proportionate reactivity of their investment income — has cast a pall over the optimism with which the year had unfolded.

The possibility of an interest rate hike still hangs in the balance with the Federal Open Market Committee removing any previous hint on this matter. And as the interest rate environment is unlikely to reverse in the near term, returning to a favorable premium rate environment seems unlikely.

Overall, lack of consistency in economic growth, fundamental challenges — such as weak underwriting gains and low investment yields — and heightened competition can curb insurers’ profitability in the quarters ahead.

On the other hand, a strong liquidity profile by virtue of continued capital inflow into the industry, ample capacity, conservative product design and evolving coverage cannot only limit any downside but also keep the growth trend alive.

One of the segments enjoying a steady influx of capital is cyber insurance. This space has emerged as a winner with the fastest growth logged in the industry over the last few quarters.  

Also, the ongoing reserve development will continue to support insurers’ financials. Moreover, increasing demand from the 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 Jun 1 to Nov 30, is again expected to keep catastrophe losses modest. This should lead to a recovery in underwriting and a lower combined ratio for Property & Casualty (P&C) insurers. On the other hand, the possibility of lower catastrophe losses indicates lower premium rates.

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