The US property/casualty insurance business is inherently volatile, given uncertainty related to insurer's underwriting activity. Fitch Ratings' assessment of operating performance in the insurance ratings process considers the stability and consistency in generating underwriting profits over time.
In a new Special Report: 'Property/Casualty Insurer Underwriting Volatility-Product Mix and Diversification Influence Results', Fitch analyzes the volatility of 10 major business segments based on the standard deviation of statutory accident year loss ratios from 1987-2012. The analysis utilizes a sample group of 100 individual US P/C insurers, representing approximately 85% of industry aggregate premiums.
Findings of this review reveal a wide disparity in loss ratio stability by segment. Private passenger auto liability is demonstrably the least volatile segment which is tied to the short-term nature of claim payments, high policy counts and low average claims cost. Longer tail liability lines, such as product liability-occurrence, exhibit the most volatile underwriting segments.
Variability in underwriting results is tied to an insurer's business mix, effects of product diversification, and overall operating expertise. The report includes an analysis of loss ratio correlations by segment that shows historical relationships in loss ratio movements across segments.
Key parameters in Fitch's Prism capital model that influence target capital levels relating to underwriting risk include: projected loss ratios, loss ratio volatility, and the duration of claims payments. The report includes an exhibit of underwriting volatility measures deployed for individual companies' yearend 2012 Prism results, with corresponding Prism score, revealing that a number of insurer's with high underwriting volatility are still well capitalized on a risk adjusted basis.
The report is available on Fitch's website at www.fitchratings.com.
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