Swiss Re expects the property/casualty market in the U.S. to rebound in 2023, due to proactive underwriting and positive portfolio reinvesting gains.
According to its latest U.S. P/C outlook sigma report for April 2023, return on equity (ROE) fell to 2.5% in 2022 because of high inflation and natural catastrophe payouts. As a result, the industry net combined ratio reached 102.4% in 2022.
The combined ratio for the industry is expected to improve to 100% in 2023, and 98.5% in 2024.
With loss severity expected to ease, underwriting improvements will be seen as rate gains outpace claims costs.
In 2022, the P/C industry realized an underwriting loss of $23 billion and net investment income of $49 billion.
Though premium growth of 7.5% is predicted for 2023, and 5.5% for 2024; the road to underwriting profits could get bumpy with an above-average Q1 2023 catastrophe storm season expected.
ROE improvements of 8.0% in 2023 and 9.5% in 2024 is expected. The forecasted ROE suggests the greatest improvement seen since 2009.
After 15 years of favorable reserve adequacy, weakening is expected, mainly due to increasing wages and medical care costs in 2024. Liability exposures accounted for 52% of industry premiums in 2022, but 87% of loss reserves at year end.
Mainly due to reserve releases in 2020 and 2021, the greatest deceleration of favorable reserve development has been concentrated in workers compensation since 2017, as reflected by statutory data.
Sustaining its worst numbers in more than 25 years, personal auto physical damage reported a direct loss ratio of more than 20ppt in 2022. With earned premiums of $113 billion in 2022, this suggests $23 billion in extra claims costs compared to the historical average.
Higher used car prices and more expensive repairs may add to increased claims costs, according to the report, though auto profitability is expected to improve due to rising insurance rates.
Swiss Re economists forecast a narrowing gap between commercial and personal lines loss ratios, as slowing rate gains in commercial liability will likely be partly offset by acceleration in property and personal lines. Property jumped almost 17%, while rate gains in most liability lines slowed.
Going forward, earnings will reflect rate actions, the report stated, prompted by expected underwriting deterioration. Investment gains from higher interest rates continue to accrue, while inflation has passed its peak.
Rate increases are expected through 2023, according to Swiss Re; the result of “inflation, natural catastrophes and geopolitical uncertainties continuing to put upward pressure on claims and operating costs.”
The report added that financial stability risks highlighted in the first quarter hold the potential for credit downgrades and associated higher capital requirements.
Additional downside risks, according to the report, include a more severe than expected recession and the potential for a resurgence of high inflation in the coming two years. The latter would adversely impact insurers’ exposure and premium growth, claims costs, investment yields and capital gains.