Category Archives: Industry Financials

Monetary Policy Drives Economic Prospects; Geopolitics Limits Inflation Improvement

Inflation, interest rates, and recession will dominate the U.S. economic narrative in the first quarter of 2023, shifting in the second and third to a focus on timing of recovery and a more neutral monetary policy and, in the fourth, whether and when the Fed will signal the start of a new easing cycle, according to Triple-I Chief Economist and Data Scientist Dr. Michel Léonard.

“We forecast the U.S. economy to grow 3.2 percent in 2023, up from 2.6 percent in 2022,” Léonard says. The U.S. Consumer Price Index (CPI) ended 2023 at 6.5 percent year over year, down from a high of 9.1 percent year over year in June. “Triple-I expects inflation to continue to decline throughout 2023, though not equally from one to the next quarter. The pace and extent of any inflation slowdown are predicated on improvements in global geopolitical risk.”

P&C underlying growth, which has been below overall GDP since the start of the pandemic, is likely to grow at a faster pace than the rest of the U.S. economy throughout the year.

“We remain cautious and forecast insurance underlying growth for 2023 to be around 3 percent, up from 2 percent in 2022,” Léonard says. “We forecast P&C replacement costs to increase by between 4.5 percent and 6.5 percent year-over-year in 2023. P&C replacement costs increased on average 25 percent since the beginning of the COVID-19 pandemic in 2020.”

Even though Triple-I expects economic fundamentals to improve throughout 2023, line-specific underwriting considerations will continue to depress performance, Léonard says.

Triple-I members can access the Triple-I’s Economic Dashboard, available at the organization’s members-only website. The Dashboard’s ongoing updates allow insurance industry professionals to follow key economic reports (e.g., federal governmental updates on interest rate, unemployment, and housing trends) in real time, adjust forecasts, and recalibrate strategy. Each quarter, the Triple-I’s Outlook provides a road map about which key economic reports will most impact insurance industry performance.

To learn about the benefits of Triple-I membership, click here.

JIF 2022: Combined Ratio Takes Center Stage

Photo credit: Don Pollard

By Max Dorfman, Research Writer, Triple-I

Insurers are expected to post an underwriting loss in 2022, following four years of modest underwriting profits, according to a panel at the Triple-I’s Joint Industry Forum.

The panel was introduced by Paul Lavelle, head of U.S. national accounts for Zurich North America, who noted that the insurance landscape has dramatically changed over the past year.

“The biggest concerns for the world economy are rapid inflation, debt crisis, and the cost of living,” Lavelle said in his opening remarks. “I think that’s why, we as an industry, need to pull this together, and deal with all the variables.”

The panel consisted of Dr. Michel Léonard, Triple-I chief economist and data scientist; Dale Porfilio, Triple-I chief insurance officer; and Jason Kurtz, principal and consulting actuary for actuarial consultant Milliman Inc.

“Inflation overall has gone up and replacement costs have come down,” Léonard said in his initial remarks. “Growth has been challenging because of federal reserve policy that has brought the economy to a halt. Most growth has been disappearing in homeowners, a bit on the commercial real estate side, and on the auto side.”

Porfilio said the rise in loss trends across the insurance industry reveals an underwriting loss, with a projected combined ratio of approximately 105 in 2022. The 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 a ratio above 100 represents a loss.

The 2022 underwriting loss comes after a small underwriting profit from 2018 through 2021, at 99. However, underwriting results are expected to improve as the industry moves forward.

“The results don’t look like the prior years,” Porfilio said. “The core underwriting fundamentals are concerning. However, after a poor result in 2022, we do expect some improvement in 2023 and 2024.”

Still, commercial lines remain relatively successful.

“In the aggregate, commercial lines are relatively outperforming personal lines,” said Kurtz. “That was the case in 2021 and we expect that to be the case in 2022 and through our forecast period of 2024.”

This includes workers compensation, which is closing in on eight years of underwriting profits, according to Kurtz.

On the personal auto line, gains from 2020 have been changed to the biggest losses in two decades.

“Personal auto is very sensitive to supply and demand,” Léonard said. “In the last 24 months, there’s been a historic swing in prices, and particularly the used auto side. It’s all about supply and demand. Those prices increased 30 to 40 percent year-over-year. Recently, though, prices have come down a bit.”

“The industry lived through high profitability in 2020 due to less drivers,” Porfilio added. “Fourteen billion was returned to customers that year.”

However, due to increased driving and reckless driving, the loss ratios have gone up.

The combined ratio in 2021 stood at 101, and in excess of 108 in 2022, according to Porfilio. Still, loss trends are expected to return to normal in 2023 and 2024.

Interest rates have also affected homeowners lines.

“The federal policies have been punishing growth,” Léonard said.

“Underlying loss pressure and Hurricane Ian have created challenging results,” Porfilio added.

However, the hard market has caused growth of 10 percent in 2022, partially due to exposure agreements, as well as rate increases.

The combined ratio for 2022 is expected to be around 115, dropping to approximately 106 in 2023, before an expected decrease to around 104 percent in 2024.

On the commercial auto side, the panelists predict an underwriting profit with a combined ratio of 99 in 2021, but there was a four-point loss in 2022. This is expected to improve in 2023, with a forecast ratio of 102, and 101 in 2024.

On the commercial property lines, the markets are facing shortages of steel, glass, and copper, according to Leonard, with labor challenges contributing to low-to-mid-double-digit percentage time increases to some tasks.

“One of the most important factors in this is labor. It’s very unlikely that labor will go back to where it was,” Léonard said. “We’ve estimated that it will take 30 percent longer for repairs, rebuild, and construction, and five percent in terms of cost.”

However, Kurtz said that the net combined ratio for commercial property markets is projected to be approximately 99.1 in 2022, a small underwriting profit in spite of losses tied to Hurricane Ian. For 2023, the combined ratio is expected to be roughly 94 and 92 in 2024.

“We are anticipating further rate increases and further premium growth,” Kurtz added.

Indeed, insurers continue to adapt to these new challenges. Although 2022 is predicted to result in small losses, the industry continues to evolve.

As Lavelle said in his introduction, “Insurance companies are no longer able just to assess the risk, collect the premium, and pay the loss. We’re being looked at to come up with answers.”

Ian, Personal Auto, Inflation, Geopolitics Driving Worst P&C Underwriting Results Since 2011

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.

Fla. P&C Crisis Worsens As Hurricane Season Begins

Already this year, three Florida insurers have been declared insolvent due to their failure to obtain full reinsurance as the 2022 hurricane season bears down.

“We have the potential of a massive failure of Florida insurers, probably the worst on record,” says Triple-I communications director Mark Friedlander. According to Friedlander, the $2 billion reinsurance fund created in legislation Gov. Ron DeSantis signed into law at the end of May isn’t nearly enough, and private reinsurers are pulling back from the market because of its high level of property claims and litigation.

“It needed to be at least double the amount of the funds that were allocated for reinsurance coverage for hurricane season and open to other perils as well,” Friedlander said.

Most recently, insurance rating agency Demotech announced that it had withdrawn its financial stability rating for Southern Fidelity Insurance Company after the insurer placed a moratorium on writing new business and processing renewals in Florida until it secured enough reinsurance for hurricane season. When the Tallahassee, Fla.-based insurer failed to do so by the June 1 start of the season, the OIR ordered it to “wind down operations,” indicating the company could become the fourth Florida residential insurer to fail this year, following the liquidations of St. Johns, Avatar, and Lighthouse.

Cyber Premiums Nearly Doubled as Losses Fell

By Max Dorfman, Research Writer, Triple-I

Direct written premiums for cyber policies grew sharply in 2021 from 2020, spurred by claims activity and cyber incidents. According to a recent analysis by S&P Global Market Intelligence, direct written premiums nearly doubled, to approximately $3.15 billion in 2021, from $1.64 billion the previous year. Direct written premiums for packaged cyber insurance rose approximately 48 percent, to $1.68 billion in 2021 from $1.14 billion in 2020. 

The average loss ratio for stand-alone policies decreased to 65.4 percent in 2021, from 72.5 percent in 2020, while they significantly grew premium. Analysts believe this might be a sign that insurers are becoming more disciplined and conservative in their cyber underwriting. Still, Fitch Ratings analysts noted that cyber insurance is the fastest-growing segment for U.S. property and casualty insurers, with prices increasing at “considerably higher” speed than other commercial business lines.

Cybercrime is increasing

According to the FBI’s Internet Crime Complaint Center (IC3) 2021 Internet Crime Report, the department had 3,729 ransomware complaints, with over $49.2 million of adjusted losses. In total, there was $6.9 billion in losses coinciding with more than 2,300 average complaints daily. The most common complaint was phishing scams, demonstrating a trend that has continued for some time.

Indeed, several data points demonstrate the increasingly dire situations organizations face when it comes to cyberattacks, and the need for businesses to become more vigilant. These include:

Challenges await

According to one analysis by Fortune Business Insights, the compound annual growth rate of cyber insurance could increase by 25.3 percent from 2021 to 2028, with the market growing to $36.85 billion.

However, Tom Johansmeyer, a cyber insurance expert, told Harvard Business Review in March 2022, “Cyber insurance is harder for companies to find than it was a year ago – and it’s likely going to get harder. While cyber insurance is becoming more of a must-have for businesses, the explosion of ransomware and cyberattacks means it’s also becoming a less enticing business for insurers.”

Organizations should combine these policies with a strong cyber security plan to fully safeguard against the possibility and consequences of a breach.

Learn More:

Triple-I “State of the Risk” Issues Brief on Cyber

Cyberattacks Growing in Frequency, Severity, and Complexity

As Cybercriminals Act More Like Businesses, Insurers Need to Think More Like Criminals

Triple-I/Milliman See
P&C Loss Pressures Continuing

Triple-I/Milliman See Loss Pressures in P&C Industry Continuing

By Max Dorfman, Research Writer, Triple-I

The latest insurance underwriting projections for property/casualty lines by actuaries at the Triple-I and Milliman – an independent risk-management, benefits, and technology firm – reveal that the industry saw the 2021 combined ratio worsen by 0.8 points from 2020, driven by deterioration in the personal auto and workers compensation lines. The report, Insurance Information Institute (Triple-I) /Milliman Insurance Economics and Underwriting Projections: A Forward View, presented at a members-only event on May 12, also found that homeowners, commercial auto, commercial multi-peril, and general liability all experienced significant improvement year-over-year.

Michel Léonard, PhD, CBE, Chief Economist and Data Scientist, and head of Triple-I’s Economics and Analytics Department, discussed key macroeconomic trends impacting the property/casualty industry results. He noted that the U.S. P&C insurance industry’s performance continues to be constrained by historically high inflation, which affects replacement costs.

“The insurance industry’s performance continues to be severely constrained by macroeconomic fundamentals,” he said “The average replacement costs for P&C lines is 16.3 percent, nearly twice the U.S. average CPI of 8.5 percent.”

Léonard noted that while the Federal Reserve forecasts U.S. inflation slowing to 4.3 percent by yearend, “Triple-I expects the transition to take longer.”

Dale Porfilio, FCAS, MAAA, Chief Insurance Officer at Triple-I, noted that 2021 had the worst full-year catastrophe losses since 2017, though Q4 actuals were materially lower than prior expectation. Kentucky tornadoes and Colorado wildfires in December were part of these losses, with homeowners suffering over 60 percent of the insured losses. Hurricane Ida was the worst single event, although multiple other billion-dollar events also contributed to the 2021 insured catastrophe losses.

“Healthy premium growth observed in 2021 is likely to continue through 2024 due to the hard market,” Porfilio said, adding, “Net expense ratio at 27.0 points was the lowest in more than a decade due to premiums growing at a faster rate than expenses.”

For the P&C industry as a whole, he said to expect loss pressures to continue due to inflation and supply chain disruption.

On the commercial side, Jason B. Kurtz, FCAS, MAAA, a principal and consulting actuary at Milliman, said  the commercial multi-peril 2021 combined ratio improved 3.6 points from 2020, primarily due to strong net earned premium growth, which stood at 6.3 percent year over year, from the economic recovery and a hard market.

“Despite the improvement relative to 2020, the CMP line still experienced an underwriting loss in 2021, and we expect underwriting results in 2022-2024 will continue to be adversely impacted by inflation and CAT loss pressures,” he said.

Workers compensation had another very profitable year, Kurtz said, with the 2021 combined ratio coming in at 91.8 percent, although margins shrank in 2021 and are expected to continue to shrink through 2024.

“The workers comp line has experienced seven straight years of underwriting profitability, a remarkable turn-around after eight straight years of underwriting losses,” Kurtz said.  “Not surprisingly, rate increases have been hard to come by. Coupled with low unemployment, these forces will constrain premium growth for the foreseeable future.”   

For commercial auto, the 2021 combined ratio improved by 3.0 points from 2020 due to lower adverse development and a two point reduction in expense ratio, according to Dave Moore, FCAS, MAAA of Moore Actuarial Consulting.

“The 2021 combined ratio dipped below 100 percent for the first time since 2010 and we’ve had the lowest expense ratio in more than a decade,” he said. “Watch for social inflation loss pressure and prior year adverse loss development in 2022-2024.”

According to projections, both personal auto and homeowners lines produced underwriting losses in 2021. Prices need to reflect the underlying risk, particularly because the economic risk is quickly escalating.

Porfilio said the 2021 combined ratio for personal auto jumped up to 101.4, the worst since 2017 and 8.9 points worse than 2020.

“While miles driven are largely back to 2019 levels, riskier driving behaviors have led to increased insured losses and fatality rates,” he said.

Overall, the loss pressures from inflation, supply-chain disruption, risky driving behavior, and increasing catastrophe losses are leading to the need for rate increases to restore both homeowners and personal auto lines to an underwriting profit, which is projected to take at least two more calendar years.

Insurers, Regulators
Push Back on Changes
In S&P Rating Criteria

Insurers, regulators, and members of Congress have expressed concern about proposed changes in how Standard & Poor’s Global Ratings defines “available capital” in its rating criteria. Specifically, S&P would no longer consider certain debt to be counted as available for purposes of rating insurers’ financial strength and ability to pay claims.

“Disruptive” and an “overuse of market power” is how the Association of Bermuda Insurers and Reinsurers (ABIR) described the measure in an 18-page letter to S&P, which has requested comments by April 29 on its proposed methodology and assumptions for analyzing the risk-based capital adequacy of insurers and reinsurers.

S&P’s proposed changes, in ABIR’s view, would lead to the sudden removal of billions of dollars overnight that otherwise would be available to underwrite catastrophe risk – a sector in which average insured losses have risen nearly 700 percent since the 1980s.

“This debt is viewed as capital by the regulators,” ABIR CEO John Huff says in a news release. “If carriers are forced to restructure debt, they’ll get less favorable terms today. Any replacement debt will increase financial leverage, which is counter to the stability people seek from a rating agency.”

Members of the U.S. House of Representatives and Senate, along with the U.S. state insurance regulators, through the National Association of Insurance Commissioners, have expressed similar concerns about S&P’s proposed change in its rating criteria.

ABIR points out ambiguity in the timing of the rollout of the planned changes, saying, “Insurers and reinsurers will have no time to respond to the new debt treatment before S&P has indicated the changes will go into effect.”

“There is no glide path or grandfathering,” Huff says. “It’s just a cliff. “

Bermuda’s insurers urge the rating agency to provide a transition period for any such changes, as well as grandfathering debt that already is in place.

“If there’s a transition plan, we can work within that,” Huff says. “But having this so abrupt is quite disruptive. Standard & Poor’s should be adding stability, not causing disruption.”

Invasion’s Impact on CPI, P/C Replacement Costs

Russia’s invasion of Ukraine since Feb. 24, combined with persisting supply chain disruptions related to the pandemic, continue to drive inflation as measured by the Consumer Price Index (CPI). From a property/casualty insurance perspective, these forces have a particularly strong impact on replacement costs – especially in the automotive sector.

Total P/C replacement costs represent a weighted average for the homeowners, personal and commercial auto, commercial multi-peril, general liability, and workers compensation lines. Auto replacement costs include new and used vehicles, as well as parts and labor for construction and repair.

Based on the March release of CPI data from the Bureau of Labor Statistics, total P/C replacement costs rose to 16.3 percent in February – up 4.6 percent from 11.8 percent in December. That increase is 3.3 percent greater than Triple-I projected in December, before the invasion began.

While CPI growth is largely being fueled by rising gasoline prices stemming from uncertainty surrounding affairs in Eastern Europe, the key driver of replacement costs is the industry’s exposure to auto prices. New-vehicle price increases only broke double-digits in the fourth quarter of last year; however, used-vehicle price inflation has been above 25 percent in nine of the past 12 months.

“Despite fuel imports from Ukraine and Russia making up only a single-digit percentage of U.S. energy consumption, gasoline prices will likely remain elevated as speculation over OPEC exports, alternative fuel sources for Central Europe, long-term profitability of domestic drilling operations, and rising food-insecurity in fuel exporting counties in the Middle East continue,” said Dr. Michel Léonard, Triple-I’s chief economist and data scientist and head of its Economics and Analytics Department. “At the same time, new vehicle prices can be expected to keep rising as Russian exports of nickel and palladium cease.”

Russian exports of these metals – critical to automotive construction – account for 15 percent and 20 percent, respectively, of the global market.

Dramatic increases in used vehicle prices are common during and after economic corrections and recessions, Léonard said, adding that these elevated prices usually resolve themselves within 24 months of the end of the downturn. Assuming the supply-chain situation improves and the U.S. economy doesn’t slip back into recession, used vehicle price growth is likely to fall back in line with new vehicle inflation over the next 12 months.

P/C Insurers’ Profits
Still Under Pressure

The profitability of the U.S. property/casualty insurance industry is expected to remain under pressure, according to the latest underwriting projections released by Triple-I and Milliman actuaries. Speaking at a members only webinar yesterday, the actuaries said this is due to continued deterioration in personal lines.

The sector’s combined ratio – the most commonly used measure of underwriting profitability – is seen running at an estimated 101.3 combined ratio for 2021. A combined ratio under 100 percent indicates an underwriting profit, and one above 100 percent indicates a loss.

Dr. Michel Léonard, vice president, senior economist, and head of Triple-I’s Economics and Analytics Department, said the industry’s performance continues to be “significantly constrained” by higher-than-average inflation and lower underlying growth.

Dale Porfilio, Triple-I chief insurance officer, noted that the insurance industry had the worst full-year catastrophe losses since 2017 with the Texas freeze, Hurricane Ida, wildfires and tornadoes.

“Healthy premium growth in 2022 and 2023 is possible from an economic recovery and a hard market,” he said, noting however, that uncertainty from COVID-19 continues to put pressure on rates and profitability.  “Inflation, supply chain, and riskier insured behavior are also contributing to loss pressures.”

On the personal auto side, Porfilio said the 2021 estimated combined ratio has increased to 99.9 due to deteriorating non-catastrophe loss trends combined with excess catastrophe losses.

“Loss pressures forecast for 2022 and 2023 will likely result in profitability similar to pre-pandemic levels,” he said.  “Miles driven are back to 2019 levels, but with riskier driving behaviors such as speeding and impaired driving.”  

On the commercial auto side, underwriting losses are forecast to continue through 2023, but improve year-over-year said Dave Moore, president and consulting actuary at Moore Actuarial Consulting.

“We continue to observe a significant rebound in premium growth due to the economic recovery and the hard market,” Moore said. He cited a recent paper published by Triple-I, funded by a research grant from the Casualty Actuarial Society (CAS), that quantifies the impact of “social inflation” on commercial auto liability claims.

“Based on this research, we estimate that social inflation increased commercial auto liability claims by more than $20 billion between 2010 and 2019,” Moore said. “This can be influenced by a variety of factors, including negative public sentiment about larger corporations, litigation funding, and tort reform rollbacks.”

Jason B. Kurtz, a principal and consulting actuary at Milliman, said general liability underwriting losses are expected to continue, but profitability should improve due to rate increases.  Looking at the workers compensation line, Kurtz noted that underwriting profits continue, although margins continue to shrink.

“The pandemic recession, remote work, and economic recovery are still impacting volume and location of workers comp risk,” he said. “Claim frequency remains below pre-pandemic levels and if the trend of large reserve releases on prior accident years continues, 2021 is likely to be another profitable year.” 

Learn More:

What’s Happening With Auto Insurance Premiums

Trends and Insights: Drivers of Homeowners’ Insurance Rate Increases

Social Inflation and Loss Development

JIF 2021: Risk & the “New Normal”

Insurance industry decision makers and thought leaders gathered yesterday for the Triple-I Joint Industry Forum (JIF) in New York City to share insights on managing risk in the post-pandemic world.

The in-person, daylong program was conducted in accordance with New York City’s COVID-19 protocols. Topics ranged from climate and cyber risk and the impact of “runaway litigation” on insurer losses and policyholder premiums to the challenges and opportunities presented by “the Great Resignation” for acquiring and nurturing talent in the industry.

The panels featured speakers from across the insurance world, academia, and media. Watch this space next week for panel wrap-ups.