Expectations that 2022 could be a “breakout year” for US P&C market results, following a couple of challenging years, have not materialised due to continued weakness in personal auto.
Pending large reported losses from Hurricane Ian will add to underwriting losses. However, continued commercial lines pricing momentum and potential for higher investment portfolio yields provide hope for better profits in 2023.
This was the view of Jim Auden (pictured), managing director, North America insurance, at Fitch Ratings, when he spoke to Intelligent Insurer just ahead of this year’s meeting in Dallas, Texas.
Fitch’s current market sector outlook for US P&C is neutral, despite plenty of challenges with the COVID-19 pandemic, natural catastrophes and rising litigation costs.
“Results have been very steady over the last four years or so with industry combined ratios of 99 to 100 percent, statutory earnings in the $60 billion range every year and a tremendous increase in industry surplus from 2018 to 2021, with earnings and growth in investment performance,” Auden said as he pointed to an industry surplus of more than $1 trillion at year end 2021.
“For 2022, we thought that it could be a breakout year where results would be better than a 99 to 100 percent combined, but it’s not looking that way currently,” he added.
Premium growth remains very favourable, according to Auden, who said that last year it was around 10 percent, while this year it could be more like 7 to 8 percent. The combined ratio at mid-year was still around 100 percent for the market, which Auden said “reflects a sharper divergence between commercial lines and personal lines results”.
“Property rates should remain robust in the near term as a result of catastrophe exposure.” Jim Auden, Fitch Ratings
Commercial lines have benefited from more than three years of “favourable pricing” and “more conservative underwriting practices” with changes in limits, retentions, and terms and conditions. As a result, this business sector was quite profitable in 2021, something that Fitch suggested should continue this year as well.
Personal lines saw a “real turnaround” in performance, according to Auden. In 2020, there was a record underwriting performance in automotive as the pandemic led to considerably lower driving activity and accident frequency.
“But in 2021, things deteriorated pretty rapidly,” he said, with driving not quite back to normal but accident frequency up as people drove less safely. As a result, accidents were at higher speed and caused more damage. Plus, inflation and its impact on supply chain shortages affected auto performances in 2021, resulting in a significant underwriting loss.
“We thought things would stabilise in 2022 but in fact performance worsened this year,” Auden said. “So there are still loss severity issues for collision bodily injury claims, but more so physical damage claims that again have shortages of parts and higher labour costs making it more expensive to fix damaged vehicles. Results are pretty poor there and it could take some time for things to stabilise.”
He said that Fitch found that most companies in US re/insurance are well capitalised as there were record levels of capital take-up last year. But industry surpluses are down about 9 percent so far this year, tied to equity market deterioration.
“Companies need to price for increasing loss costs to maintain results as they are.”
Good rate momentum
Commercial lines rates have been hardening for the last three or four years, Auden said.
“In terms of what this means, you worry about market fatigue in that area. Maybe customers self-insure, use captives more, but we haven’t seen that.”
He said that rate momentum was still pretty good this year, with some signs of rates moderating in many areas. Certain segments are expected to have enduring rates, for example property rates should remain robust in the near term as a result of catastrophe exposure.
The newer business of cyber risk has seen rapid rate growth with increasing cyber attacks and especially ransomware events.
But other segments such as directors and officers liability had “a big increase” in rates a few years ago and that’s flattened this year, he added.
“In personal lines we’re seeing increasing rates there too, which was definitely needed with the results. Auto premiums are going up in nearly all jurisdictions, but maybe not as much as needed, and homeowners has definitely experienced rate increases.”
Auden said that many commercial segments may have adequate pricing or near adequate pricing but loss costs are continuing to rise.
“With the advent of higher inflation, which could be here for a while, companies need to price for increasing loss costs to maintain results as they are.”
Inflation and interest rates have hit the investment side this year leading to a poor investment performance in 2022 relative to the past three years, he said.
“I don’t think we’ve seen companies change their asset allocation at this point but they are definitely feeling the effects now.”
The upside is that new money is being invested at higher rates by companies, so their investment earnings should go up in the future with higher rates. But the market volatility remains something they will have to deal with, he concluded.
APCIA 2022, Fitch Ratings, Investments, Premium Growth, P&C, Commercial Lines, Insurance, Reinsurance, Jim Auden, North America