The property/casualty insurance industry’s underwriting profitability is projected to worsen in 2022 relative to 2021, driven by damage from Hurricane Ian and significant declines in the personal auto line, making it the worst year for the P&C industry since 2011. Actuaries Triple-Me and Milliman — an independent risk-management, benefits and technology firm — reported today.
The quarterly report, presented in a members-only webinar, also found that workers’ compensation continued its multi-year profitability trend and general liability is forecast to post a small underwriting gain, with premium growth due to the tough market. remains strong.
The industry combined ratio – a measure of underwriting profitability in which a number below 100 represents a profit and above 100 a loss – worsened by 6.1 points, from 99.5 in 2021 to 105.6 in 2022.
Rising Rates, Geopolitical Risks
Dr. Michelle Leonard, Triple-I Chief Economist and Data Scientist, discussed key macroeconomic trends affecting the property/casualty industry including inflation, replacement costs, geopolitical risk and cyber.
“Rising interest rates will have a chilling effect on underlying growth across P&C lines from residential to commercial property and auto,” he said, adding that 2023 “looks set to be another year of historic volatility.” Stubbornly high inflation , the threat of a recession, and a rise in unemployment top our list of economic risks.
Leonard also noted the scale of geopolitical risk, saying, “The threat of a major cyber attack on America’s infrastructure is at the top of our list of tail risks.”
“Tail risk” refers to the probability of a loss being caused by a rare event, as predicted by a probability distribution.
“Russia’s weaponization of gas supplies to Europe, China’s ongoing military drills threatening Taiwan and the potential for election upset in the US contribute to making geopolitical risks the highest in decades,” Leonard said.
Cats Drive Underwriting Losses
Del Porfilio, Triple-I Chief Insurance Officer, discussed overall P&C industry underwriting projections and risk growth, noting that 2022 catastrophe losses are projected to be comparable to 2017.
“We forecast growth of 8.8 percent in 2022 and 8.9 percent in 2023, mainly due to tougher market conditions,” Porfilio said. “We estimate that catastrophic damage from Hurricane Ian will increase the combined ratio of homeowners to 115.4 percent, the highest since 2011.”
For the Commercial Multi-Peril Line, a Principal and Consulting Actuary at Milliman – a global consulting and actuarial firm – Jason B. Kurtz said another year of underwriting losses is likely.
“Underwriting losses are expected to persist as more rate hikes are needed to relieve the pressure from the catastrophe and economic and social inflationary losses.”Kurtz said.
For the commercial property line, Kurtz said Hurricane Ian will threaten underwriting profitability, but the line has benefited from significant premium growth. “We forecast premium growth of 14.5 percent in 2022, following a 17.4 percent increase in 2021.”
Regarding commercial auto, Dave Moore, president of Moore Actuarial Consulting, said the 2022 combined ratio for that line is about 6 points worse than 2021.
“We are forecasting underwriting losses for 2023 to 2024 reflecting both inflation, social inflation and economic inflation, loss pressure, and adverse loss growth last year,” he added. “Premium growth is expected to remain elevated due to tough market conditions.”
“After a sharp decline of 47.5 percent in the second quarter of 2020, the quarterly direct loss ratio resumed its upward trend, averaging 74.2 percent over the most recent four quarters,” Porfilio said. “Fewer miles driven in the first year of the pandemic contributed to a favorable loss experience.”
Since then, Porfilio continued, “Miles driven have largely returned to 2019 levels, but with riskier driving behaviors, such as distracted driving and higher inflation. Supply-chain disruptions, labor shortages, and costly replacement parts are all contributing to current and future loss pressures.
Overall, loss pressures from inflation, risky driving behavior, increased catastrophic losses, and geopolitical upheaval are causing the need for rate increases to restore underwriting profits.
