Inflation, high interest rates and catastrophes contribute to 2023 P/C underwriting loss

The quarterly report, Insurance Economics and Underwriting Objections: A Forward View, was presented on Nov. 2, at an exclusive members only virtual webinar.

Michel Léonard, Ph.D., CBE, Chief Economist and Data Scientist at Triple-I, discussed key macroeconomic trends impacting the property/casualty industry results including inflation, increasing interest rates and overall economic underlying growth.

“P/C growth has improved in 2023, growing 1.3% versus 2.1% for overall gross domestic product (GDP). While many hurdles could derail such improvements, P&C underlying economic growth is currently positioned to increase faster than overall GDP by 2.6% versus 1.7% in 2024 and by 4.5% versus 2.0% in 2025,” he explained.

Léonard noted that top risk scenarios for 2024 include geopolitics, weaking employment and gross domestic product (GDP) contraction. “The Fed may also keep increasing rates into 2025, pushing down home and auto insurance underlying economic growth.”

Another area of concern, Léonard said, is P/C replacement costs. Between 2020 and 2023, P/C replacement costs increased an average of 45% whereas inflation for the overall U.S. economy increased 15% within that same period. “Increases in P/C replacement costs should continue to slow down faster than overall inflation over the next three years,” he said. “However, it will take 10 years of normal inflation for insurance replacement costs to process pandemic-related increases.” Normal inflation is defined as 2% per year.

Dale Porfilio, FCAS, MAAA, Chief Insurance Officer at Triple-I, discussed the overall P&C industry underwriting projections. “We forecast personal lines to improve each year from 2023 through 2025, but still lag behind strong underwriting profitability in commercial lines,” he said. He also noted that the improvements are expected to result in “the overall P&C industry returning to a small underwriting profit in 2025.”

Looking at personal auto, Porfilio forecast premium growth of 11.0% in 2023 as rate increases start to exceed loss trends, allowing the 2023 net combined ratio to improve incrementally to 110.5 from 112.2 in 2022. “Costlier replacement parts and low inventories are contributing to current and future loss pressures,” he said, adding, “unless replacement cost begins to decrease materially – which is not currently forecast— we project personal auto to remain at an underwriting loss through 2025.”

For homeowners, Porfilio noted that 2023H1 catastrophe losses were elevated and that approximately 70% of those losses were in the homeowners line. “For 2023, the net combined ratio is forecast at 110.9, 6.2 pts worse than 2022.”

Jason B. Kurtz, FCAS, MAAA, a principal and consulting actuary at Milliman – a premier global consulting and actuarial firm – said that commercial property, general liability, and workers’ compensation continued to be bright spots for the industry, while commercial auto continues to be troubled.

For commercial property, the 2023 net combined ratio is forecast at 91.6, nearly identical to 2022. “Hard market conditions continue into 2023, most notably in catastrophe-prone regions,” Kurtz said. “We expect premium growth to moderate through 2025.”

For commercial auto, underwriting losses continue, with 2023H1 direct incurred loss ratios at the highest in at least 15 years. “There will be a continued need for rate to improve the combined ratio results,” said Kurtz, adding, “We are forecasting the 2023 combined ratio at 106.7, 2024 at 103.4 and 2025 at 102.7. These combined ratios lead to a continued need for rate and that should help drive premium growth going forward. Inflation and prior year adverse development continue to weigh on this line and continue to bear watching moving ahead.”

Looking at general liability, Kurtz noted that the 2023 net combined ratio forecast of 96.9 falls between 2021 and 2022 actual results. He also said that premium growth is forecast to moderate in 2023-2025 as a result of the recent improved underwriting performance and lower GDP growth expectations.

Turning to workers’ compensation, Kurtz noted that the 2023 net combined ratio forecast of 90.6 continues the string of underwriting profits. “Favorable results are forecast to continue through 2025, with premium growth 2.7% for 2023, 1.9% for 2024 and 1.9% for 2025.”

Donna Glenn, Chief Actuary at the National Council on Compensation Insurance (NCCI), shared preliminary numbers for 2023 on workers’ compensation (WC) premium, payroll, and underwriting profitability. She noted that premium increased 11% in 2022, returning to near the pre-pandemic levels of 2019. Glenn also indicated that the 2023 combined ratio should be very similar to 2022, resulting in a full decade of WC calendar year combined ratios under 100. "All in all, the results for the first half of 2023 are remarkably stable," she said. "I want to be clear - we continue to be vigilant in monitoring results and trends." Glenn will present a full year of comprehensive results at NCCI's Annual Insights Symposium on May 14, 2024.

About the Insurance Information Institute

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About Milliman

Milliman is among the world's largest providers of actuarial and related products and services. The firm has consulting practices in healthcare, property & casualty insurance, life insurance and financial services, and employee benefits. Founded in 1947, Milliman is an independent firm with offices in major cities around the globe. For further information visit Milliman.

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Triple-I: Loretta Worters, [email protected]

Milliman: Jeremy Engdahl-Johnson, [email protected]

Source: Insurance Information Institute