Analysts at Fitch Ratings predict a better underwriting result for U.S. property/casualty insurers in 2023 compared to 2022, but the combined ratio is still going to hover above breakeven, according to their forecast.
Fitch forecasts a 100.4 industry combined ratio for the full year in 2023. Above-average catastrophe-related losses and sharp deterioration in auto results drove the industry statutory combined ratio to 102.5 in 2022 — coming in above the 99-100 range for the previous four years. With premium rates rising significantly in 2023 in those underperforming automobile and property segments, underwriting results are likely to improve. Still, claims volatility amid higher inflation and macro uncertainty may impede a return to underwriting profitability, the analysts said, explaining the go-forward forecast. (Note: Fitch’s estimate of the 2022 statutory combined ratio, 102.5, published in mid-April, differs slightly from a late March estimate of 102.7 published by AM Best. Like Fitch, AM Best analysts do not forecast an industry underwriting profit for 2023.)
In addition, commercial lines combined ratios in aggregate are anticipated to slightly deteriorate from current favorable underwriting profit levels.
Recapping last year, Fitch notes that declining underwriting performance in personal lines drove a 31% drop in statutory earnings in 2022 for the P/C industry. Policyholders surplus fell 7% to $980 billion at year-end, largely from large unrealized investment losses.
On the top line, direct written premiums jumped by more than 9% for the second straight year in 2022, with both commercial and personal lines insurers increasing rates. In 2023, Fitch foresees direct written premium growth moderating slightly but staying above historical norms because of the rating momentum in personal lines.
17 Years of Reserve Releases
Also impacting underwriting profitability this year is higher potential claims cost volatility, which may result in future adverse reserve development. In 2022, the P/C industry reported the 17th straight year of favorable calendar-year reserve development.
Overall reported reserve redundancies declined to 0.6% of earned premiums in 2022, from levels averaging 1% in 2019-2021 and a level of 2% in 2018. Significant reserve deficiencies emerged in both personal and commercial auto liability last year, Fitch said, adding that other liability lines also experienced adverse development.
The biggest driver of the overall redundancy continues to be the workers’ compensation line. The Fitch report notes that 2022 was the sixth straight year in which favorable workers’ comp development represented over 12% of calendar-year premiums.
On an accident-year basis, Fitch noted that litigation-related losses, which fueled adverse development in liability lines for accident years 2016-2019, reversed amid the pandemic in accident years 2020 and 2021. Also impacting accident year 2021 were inflation and supply chain shortage effects on loss severity, leading to the reported adverse development in the 2021 accident year for personal and commercial auto liability.
Fitch suggests there is higher potential for adverse development in accident year 2022 in multiple segments due to ultimate effects of inflation and economic volatility on key claims factors, including construction materials, auto parts, contract labor, medical services and litigation costs.
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