2021 was “another eventful year” for US property and casualty (P&C) insurance, according to James Auden, managing director and P&C sector head for Fitch Ratings’ North American insurance rating group.
While Fitch identified some positive pricing momentum in commercial lines, as well as the potential for combined ratio improvement, the scales were tipped by severe catastrophe losses and ongoing uncertainty around inflation, supply chain issues, litigation trends, and the post-pandemic return to “normal” claims frequency.
“For the year, we would say that we expected better results earlier on, but the inordinate catastrophe losses led to another year of modest, breakeven underwriting results,” said Auden. “In 2021, we are expecting a combined ratio of approximately 99%, which is the same as we’ve seen in the prior three years. So, these are very consistent results, but we expected a bit better for the year.”
The P&C industry’s aggregate statutory net earnings for 2021 were approximately $60 billion, according to Fitch, following a trend over the past three years, where both realized and unrealized investment gains boosted P&C insurers’ earnings and surplus. However, there is a “problem” with that, stressed Auden, which is that stable earnings and growing surplus base typically leads to weaker returns on surplus.
“As we look out to 2022, we do have a neutral sector outlet,” said Auden. “This is a bit of a close call, but we are neutral. While we see combined ratio improvement and with continued favorable pricing in commercial lines, we could see a 97% or better combined ratio. But from an earnings standpoint, [the outlook] is tempered by a few things on the claim side, and also on the investment side as we look at potential Federal rate increases and three great years of investment performance, that’s likely to temper.
“On the loss side, there are number of factors that we are watching. Catastrophe losses are always the largest source of volatility in results, but also, the revival of inflation and supply chain issues in the economy have had a big effect on short-tail lines this year. If that inflation continues, it will likely revert to affecting longer tail lines more evidently as well.”
Auden also raised concerns about “claims frequency issues” when the COVID-19 pandemic ends and economic activity returns to pre-pandemic levels. Furthermore, as things “revert to normal,” litigation activity is likely to increase, which could lead to higher claims frequency and severity.
Commercial lines of business have “benefited from tremendous rate increases” over the last three years, but the gains have been offset by challenges in certain lines.
“Commercial auto - that’s been the notoriously worst performing segment probably over the last decade,” said Auden. “That had a similar recovery in 2020 to personal auto - not as strong - and this year, we’ve seen liability improvement, but the same physical damage issues in commercial auto that will drive the 2021 combined ratio higher.
“In commercial property lines, there were plenty of catastrophe losses this year. This is the segment getting the best rates still - and we’ve seen plenty of underwriting adjustments from major underwriters that will lead the further hardening of that business and potential for improvement.”
Liability lines saw the “best positive swinging performance” in 2021, according to Auden, and they’re still seeing strong rate momentum. However, the concern in liability lines is the potential for increased litigation once the latest COVID-19 surge is brought back under control. Furthermore, with the economic uncertainty triggered by the pandemic, there is heightened risk of insolvencies or bankruptcies, which could also lead to litigation, particularly in professional lines.
“Workers’ compensation [has] been the best performing segment in commercial lines for the last five years, with low 90s combined ratios,” Auden added. “Results have been stable in 2021, but rates have been flat to slightly down for some time, and we expect that to continue, and deterioration and performance could be accelerated with inflationary trends. It’s not just general inflation, but in workers’ comp, if we see medical inflation flare up, that will lead to sharper reductions in performance in workers’ comp.”