By Max Dorfman, Research Writer, Triple-I

Poor personal lines performance will keep the U.S. property/casualty insurance industry’s underwriting profitability constrained for at least the next two years, Triple-I’s chief insurance officer told attendees at a members only webinar today.

“We forecast net combined ratios to incrementally improve each year from 2023 to 2025,” said Dale Porfilio, FCAS, MAAA, “with the industry returning to a small underwriting profit in 2025.”

The industry’s combined ratio – a standard measure of underwriting profitability, in which a result below 100 represents a profit and one above 100 represents a loss – is expected to end 2023 at 102.2, almost matching the 2022 result of 102.4.

“Catastrophe losses in the first half of 2023 were the highest in over two decades, slightly higher than the record set in first half of 2021,” Porfilio said. Triple-I predicted net written premium growth for 2023 at 7.9 percent.

Michel Léonard, PhD, CBE, Triple-I’s chief economist and data scientist, discussed key macroeconomic trends impacting the P&C industry results including inflation, rising interest rates, and overall P&C underlying growth.

“U.S. CPI will likely stay in the mid-to-upper 3 percent range through the end of the year,” Léonard said, noting that underlying growth for private passenger auto has resumed its pre-pandemic trend. “Increases in replacement costs continue to decelerate and have now returned to pre-COVID trends as supply-chain backlogs and labor disruptions ended.”

Léonard added that U.S. GDP “will likely decrease on a quarterly basis in the second half of the year compared to the first half, but still avoiding a technical recession in 2023.” 

For homeowners, Porfilio noted that the 2023 net combined ratio forecast of 104.8 is nearly identical to 2022 actual. He said homeowners incurred the majority of the first half of 2023 elevated catastrophes.

“A cumulative replacement cost increase of 55 percent from 2019-2022 contributes to our forecast of underwriting losses through 2025,” Porfilio added. “Premium growth in 2023-2025 is forecast to be elevated primarily due to rate increases.”

On the commercial side, Jason B. Kurtz, FCAS, MAAA, a principal and consulting actuary at Milliman, said commercial lines experienced underwriting gains in 2022.

“Commercial auto, however, was one commercial line that did not perform well in 2022,” he said. “For commercial auto, 2022 saw a return to underwriting losses, as the industry logged a 105.4 net combined ratio, the highest since 2019.”

“Workers compensation is the brightest spot among all major P&C product lines, with strong underwriting profitability forecast to continue through 2025,” Kurtz added. “Premium growth is expected to be modest, however, with approximately 3 percent growth each year.”

Donna Glenn, FCAS, MAAA, chief actuary at the National Council on Compensation Insurance, highlighted key factors that influenced the 2022 workers compensation results.

“Overall frequency continues its long-term negative trend as workplaces continue to get safer,” Glenn said. “Medical severity has remained moderate despite rising inflation, and wages and employment are above pre-pandemic levels. While severity was notably higher in 2022, it’s been moderate over the last few years. Together, these system dynamics result in a healthy and strong workers compensation system.” 

Moderating inflation and replacement costs provide glimmers of hope for property & casualty insurers, but underwriting profitability will remain a challenge for most lines of business for the foreseeable future, according to actuaries at Triple-I and Milliman, a risk-management, benefits, and technology firm. Their findings were presented at a Triple-I’s quarterly members-only webinar.

Dr. Michel Léonard, Triple-I chief economist and data scientist, forecast that costs of materials and labor involved in replacing or repairing insured property will decline from 8.1 percent at year-end 2022 to 4.5-6.5 percent at the end of 2023 on the way to 0.9 percent in 2024.  Supply-chain issues since the start of the COVID-19 pandemic and Russia’s invasion of Ukraine have kept replacement costs at historic highs.

When the cost to repair or replace damaged cars or homes is high, premium rates that determine how much policyholders pay for coverage should rise proportionately. As Triple-I has previously reported, though, this has not been the case for homeowners and auto insurance.  Premium rates for both of these lines of insurance have not kept up with rising costs. As a result of these and other factors, insurers have struggled to remain profitable.

Personal auto replacement costs, Dr. Léonard projected, will fall from nearly 10 percent to near 0 percent by 2024. Homeowners replacement costs are predicted to fall from 7.6 percent to below 2 percent by 2024.

Worsening profitability generally

The P&C industry’s 2022 combined ratio – a measure of underwriting profitability – is estimated at 105.8, a 6.3-point worsening from 2021. Combined ratio represents the difference between claims and expenses paid and premiums collected by insurers. A combined ratio below 100 represents an underwriting profit, and one above 100 represents a loss. 

For the overall P&C industry underwriting projections, Porfilio said, “We forecast premium growth of 8.4 percent in 2022 and 8.5 percent in 2023, primarily due to hard market conditions and exposure growth.”

The personal auto line of insurance has been a primary driver of the industry’s weak underwriting results. Dale Porfilio, Triple-I’s chief insurance officer, said the 2022 net combined ratio for personal auto insurance is forecast at 111.8, 10.4 points worse than 2021 and 19.3 points worse than 2020. He said supply-chain disruption, labor shortages, and costlier replacement parts all contribute to current and future loss pressures.

For the commercial multi-peril line, Jason B. Kurtz, a principal and consulting actuary at Milliman, said underwriting losses are expected to continue.

“Insurers will need to consider rate increases to offset economic and social inflation loss pressures,” Kurtz said.

Dave Moore, president of Moore Actuarial Consulting, said the 2022 combined ratio for commercial auto is forecast to have worsened in 2022. Moore also stated that general liability is deteriorating.

“We forecast a small underwriting profit for 2023 and 2024, but inflation and geopolitical risk put pressure on these forecasts,” he said, adding, “premium growth from the hard market is forecast to slow in 2022 to 2024.”  

For the commercial property line, Kurtz noted that the industry is seeing strong premium growth and that rate increases should help alleviate some of the pressure from catastrophe losses. Despite Hurricane Ian, he said he expects an underwriting profit in 2022, continuing into 2023 and 2024.

Donna Glenn, chief actuary at the National Council on Compensation Insurance, noted that the workers compensation line of business has seen declines in rates and loss costs for several years, partially driven by reductions in on-the-job accident frequency. This line, Glenn added, is expected to continue its profitability.

Learn More:

Drivers of Homeowners Rate Increases (Triple-I Issues Brief)

Personal Auto Insurance Rates (Triple-I Issues Brief)

Risk-Based Pricing of Insurance (Triple-I Issues Brief)

The property/casualty insurance industry’s underwriting profitability is forecast to have worsened in 2022 relative to 2021, driven by losses from Hurricane Ian and significant deterioration in the personal auto line, making it the worst year for the P&C industry since 2011, actuaries at Triple-I and Milliman – an independent risk-management, benefits, and technology firm – reported today.

The quarterly report, presented at a members-only webinar, also found that workers compensation continued its multi-year profitability trend and general liability is forecast to earn a small underwriting profit, with premium growth remaining strong due to the hard market.

The industry’s combined ratio – a measure of underwriting profitability in which a number below 100 represents a profit and one above 100 represents a loss – worsened by 6.1 points, from 99.5 in 2021 to 105.6 in 2022.

Rising rates, geopolitical risk

Dr. Michel Léonard, Triple-I’s chief economist and data scientist, discussed key macroeconomic trends impacting the property/casualty industry, including inflation, replacement costs, geopolitical risk, and cyber.

“Rising interest rates will have a chilling impact on underlying growth across P&C lines, from residential to commercial property and auto,” he said, adding that 2023 “is gearing up to be yet another year of historical volatility. Stubbornly high inflation, the threat of a recession, and increases in unemployment top our list of economic risks.”

Léonard also noted the scale of geopolitical risk, saying, “The threat of a large cyber-attack on U.S. infrastructure tops our list of tail risks.”

“Tail risk” refers to the chance of a loss occurring due to a rare event, as predicted by a probability distribution.

“Russia’s weaponization of gas supplies to Europe, China’s ongoing military exercises threatening Taiwan, and the potential for electoral disturbances in the U.S. contribute to making geopolitical risk the highest in decades,” Léonard said.

Cats drive underwriting losses

Dale Porfilio, Triple-I’s Chief insurance officer, discussed the overall P&C industry underwriting projections and exposure growth, noting that the 2022 catastrophe losses are forecast to be comparable to 2017.

“We forecast premium growth to increase 8.8 percent in 2022 and 8.9 percent in 2023, primarily due to hard market conditions,” Porfilio said. “We estimate catastrophe losses from Hurricane Ian will push up the homeowners combined ratio to 115.4 percent, the highest since 2011.” 

For commercial multi-peril line, Jason B. Kurtz, a principal and consulting actuary at Milliman – a global consulting and actuarial firm – said another year of underwriting losses is likely.

“Underwriting losses are expected to continue as more rate increases are needed to offset catastrophe and economic and social inflation loss pressures,” Kurtz said.

For the commercial property line, Kurtz noted that Hurricane Ian will threaten underwriting profitability, but that the line has benefited from significant premium growth. “We forecast premium growth of 14.5 percent in 2022, following 17.4 percent growth in 2021.”

Regarding commercial auto, Dave Moore, president of Moore Actuarial Consulting, said the 2022 combined ratio for that line is nearly 6 points worse than 2021.

“We are forecasting underwriting losses for 2023 through 2024 due to inflation, both social inflation and economic inflation, loss pressure, and prior year adverse loss development,” he said. “Premium growth is expected to remain elevated due to hard market conditions.”

“After a sharp drop to 47.5 percent in 2Q 2020, quarterly direct loss ratios resumed their upward trend, averaging 74.2 percent over the most recent four quarters,” Porfilio said. “Low miles driven in the first year of the pandemic contributed to 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 disruption, labor shortages, and costlier replacements parts are all contributing to current and future loss pressures.”

Overall, loss pressures from inflation, risky driving behavior, increasing catastrophe losses, and geopolitical turmoil are leading to the need for rate increases to restore underwriting profits.