Rocky road for property and casualty insurance continues

It may be a stretch to say the property and casualty insurance industry is in crisis, but there is burgeoning evidence and concerns that all is not right with the business and that it’s going to get worse before it gets better.

Consider a few facts:

• Underwriting losses fueled by rising claims costs and catastrophic events have resulted in an industry-wide combined ratio of 103%, an unsustainable level.
• Motor vehicle insurance premiums skyrocketed by 20.3% in December from a year earlier, the largest increase since the mid-1970s, government data show. The highest annual increase for auto insurance in nearly half a century made a notable upward contribution to the national inflation rate that may not be fading soon.
• Global insured losses from natural disasters hit a record $125 billion, and experts expect when all is counted, 2023 will set a new record for the number of billion-dollar events. Last year was also the deadliest since 2010, with more than 75,000 fatalities counted globally.
• With commercial rate hikes averaging 15% since 2019 and US personal lines rising 4.5% over that period, insurance is becoming increasingly unaffordable for many.

Rising auto repair and construction costs, inflation, supply chain disruptions, and, let’s face it, poor management, have ganged up on P&C insurers producing the most widespread losses in history.

2023 results 'a bloodbath'

“Last year’s results were a bloodbath because nothing changed in how insurers treat loss,” said Franklin Manchester, a principal global insurance advisor at SAS, a global leader in AI and analytics software based in North Carolina. “We saw insurers raising rates, retreating from markets, and cutting costs. But those actions are not the answer to our current problems.”

While insurers perhaps can’t be blamed for climate-change induced natural catastrophes and roiling economic conditions, there’s growing sentiment that the property and casualty industry as a whole is unprepared to deal with the changing dynamics and 21st century factors.

“The insurance industry is notorious for being slow to change,” said Elad Tsur,  co-founder and CEO of New York-based Planck, an AI-based data platform for commercial insurance. “With regard to analyzing and underwriting risk, things are far too inefficient, and the impacts are compounding. There are lags and errors in manually entering data and gaps in data that do not account for risk appropriately. This is leading to commercial insurance industry losses, which in turn, is driving up costs for the customer.”

Indeed, so far, the industry-wide response to the problems is to raise rates and discourage new customers.

Farmers Insurance Group raised home-insurance rates by more than 23% in some states while  Nationwide Mutual declined to renew thousands of home-insurance policies in hurricane-prone areas.

State Farm, coming off a record $13 billion property casualty loss in 2022, stopped writing new home-insurance policies in California. The state’s regulators last month approved a 20% home-insurance rate increase.

Rate hike requests OK'd

Regulators across the nation are giving in, sometimes reluctantly, to auto insurance rate hike requests. Last month, regulators approved auto rate increases for Allstate averaging 17% and 15%, respectively, for New Jersey and New York.  California has allowed Allstate to boost its auto rates by 30% and is pondering a 40% increase request for home insurance after the company said it won’t write new policies.

“The unfortunate reality today is that insurance is becoming increasingly unaffordable for many,” said Luca Russignan, head of insurance at Capgemini Research Institute for Financial Services, a  global think tank for the French IT consulting firm. “As a result, it would not surprise me to see P&C insurers to continue refocusing on profitable organic growth, pulling back in multiple markets, and seeking underwriting profitability.”

Fully rescuing the industry from compiling losses will take a major course correction, analysts say, not an easy thing to accomplish for an industry mired in tradition and molasses-like movement.

“In these dire circumstances, top U.S. insurers can no longer behave as though capital is the only thing that matters,” said SAS’s Manchester. “The analytical models most insurers use to set rates look backward because they're based on historic data. By default, they can’t predict the precedent-defying effects of climate change.”

Instead of simply collecting premiums and paying out when accidents or disasters strike, the industry must move more toward mitigation and preventing catastrophes before they happen and employ new sophisticated data-gathering techniques.

“There’s a concern that because of the perception that catastrophe models are so data-centric,  they're not adequately weighing recent data more heavily than earlier data,” said Dr. Peter Sousounis, vice president and director of climate change research at Verisk, a data analytics and risk assessment firm based in Jersey City, New Jersey. “As result they create a catastrophe forecasting model that reflects the climate of some past year, like a model that might reflect the climate of 1960, as opposed to 2020.”

P&C insurers seek to mitigate risk

Insurers are increasingly recognizing their part in mitigating risks associated with climate change and other environmental issues, say some analysts.

“By reimagining the approach to risk management, they aim to not only provide financial safety nets but also contribute to preventing or reducing the severity of losses before they occur,” said Gregg Barrett, founder of The WaterStreet Company, a group of property and casualty insurance industry experts based in Montana. “This proactive approach is essential in the face of catastrophic climate change and the surge in cybercrime, particularly as it's related to infrastructure impacted by the climate.”

Barrett predicts a continuing trend of legacy insurers merging, acquiring and/or partnering with the more adroit insurtechs to better develop mitigation.

“With stabilizing interest rates, insurance companies are shifting from a passive approach to a more strategic one, divesting non-core businesses and acquiring firms that offer innovative capabilities, especially in insurtech,” he said.

The property and casualty industry is also facing challenges related to claims processing. With longer claim time frames and rising costs, insurers are pressed to find more efficiencies without compromising customer experience, Barrett said.

“Digital solutions are increasingly being employed for faster and more efficient claims processing, balancing the need for technological efficiency with personalized customer service,” said Barrett. “We see this significantly more from mutuals than any other group currently.”

Faced with the changing market, some experts believe the P&C “crisis” is temporary one that will resolve over time as insurance becomes ultra-personalized for consumers as opposed to a one-size-fits-all approach. Swiss Re’s global P&C outlook sees a much better 2024 than last year. It recently raised its premium growth estimate to 7.0% for 2024 (from 5.5%) and forecast 4.5% growth in 2025. It forecasts an industry ROE of 9.5% in 2024 and 10.0% in 2025.

"We are in a hard insurance market,” said Todd Greenbaum, president and CEO at Input1, an insurance company digital billing and payment service based in California. “This means that capacity is diminished, resulting in fewer options for coverage and higher prices. Insurance carriers have been required to increase prices to build greater reserves after the large losses in recent years."

With homes still in short supply and automobile supply chains still recovering, the cost of finished products and materials are higher than normal, said Greenbaum, who predicts at some point these factors will normalize and prices will ease.

"With that said, despite advances in IoT devices, drone coverage, and large datasets that improve risk modeling, the price for insuring homes and drivers is still too generalized,” he said. “Individual young drivers continue to be penalized with high rates even if they exhibit the same behaviors as more experienced drivers. Homes made of less flammable material or where other important mitigation steps are taken, are not being properly priced for those precautions."

Finally, he said, inflated claims remain a problem.

“Technology continues to play a critical role in risk evaluation and claims monitoring, but it hasn't yet led to a broad and meaningful benefit for policyholders,” said Greenbaum. “Hopefully, it soon will."

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].