The underwriting profitability of the property/casualty insurance industry is forecast to have deteriorated in 2022 compared to 2021, driven by losses from Hurricane Ian and a significant deterioration in the car line of business, making it the worst year for P&C industry since 2011, actuaries from Triple-I and Milliman – an independent risk management, benefits and technology company – 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 expected to post a small underwriting profit, with premium growth remaining strong due to the tough market.
The industry’s combined ratio – a measure of underwriting profitability where a number below 100 represents a profit and a number above 100 represents a loss – deteriorated by 6.1 points from 99.5 in 2021 to 105, 6 in 2022.
Rising interest rates, geopolitical risks
Triple-I Chief Economist and Data Scientist Michel Léonard discussed key macroeconomic trends impacting the property-casualty industry, including inflation, replacement cost, geopolitical risk and cyber.
“Rising interest rates will have a chilling effect on underlying growth across all P&C businesses, from residential to commercial to autos,” he said, adding that 2023 “is preparing to be another year of historic volatility . Persistently high inflation, the looming recession and rising unemployment are high on our list of economic risks.”
Léonard also noted the magnitude of the geopolitical risk, saying, “The threat of a major cyberattack on US infrastructure is high on our list of tail risks.”
“Tail risk” refers to the probability of a loss occurring due to a rare event as predicted by a probability distribution.
“Russia’s arming of gas supplies to Europe, China’s ongoing military drills threatening Taiwan, and the potential for US election unrest are all helping to make geopolitical risk the highest in decades,” Léonard said.
Cats lead to underwriting losses
Dale Porfilio, Triple-I’s chief insurance officer, discussed overall projections for P&C industry underwriting and risk growth, noting that 2022 catastrophe losses are expected to be comparable to 2017.
“We forecast premium growth of 8.8 percent in 2022 and 8.9 percent in 2023, mainly due to tough market conditions,” Porfilio said. “We estimate that catastrophic losses from Hurricane Ian will take homeowners’ combined ratios to 115.4 percent, the highest since 2011.”
Jason B. Kurtz, principal and consulting actuary at Milliman — a global consulting and actuarial firm — said another year of underwriting losses was likely for the multi-peril commercial line.
“Underwriting losses are expected to continue as further rate increases are required to offset catastrophes and economic and social inflationary loss pressures‘ said Kurtz.
For the commercial property line, Kurtz noted that Hurricane Ian will threaten underwriting profitability, but the line has benefited from significant premium growth. “We forecast premium growth of 14.5 percent for 2022 after 17.4 percent growth in 2021.”
Regarding commercial autos, Dave Moore, President of Moore Actuarial Consulting, said the 2022 combined ratio for this line of business is almost 6 points worse than 2021.
“We forecast underwriting losses in 2023-2024 due to inflation, both social and economic inflation, loss pressures and unfavorable loss performance in the prior year,” he said. “Premium growth is expected to remain high due to tough market conditions.”
“After a sharp decline to 47.5 percent in the second quarter of 2020, quarterly direct loss ratios resumed their upward trend, averaging 74.2 percent over the past four quarters,” Porfilio said. “Low mileage in the first year of the pandemic contributed to a favorable claims experience.”
Since then, continued Porfilio, “mileage has largely returned to 2019 levels, but with more risky driving behaviors, such as B. distracted driving, and higher inflation. Supply chain disruptions, labor shortages and more expensive spare parts are all contributing to current and future loss pressures.”
Overall, claims pressures from inflation, risky driving, mounting catastrophe losses and geopolitical turmoil mean that rate increases are required to restore underwriting profits.