Inflation, extreme weather and regulatory woes among issues faced by the industry
The property-casualty insurance sector continued to battle significant headwinds during the first half of the year, according to a new report on the sector’s financial results from the American Property Casualty Insurance Association (APCIA).
“While the aggregate industry balance sheet is strong enough to meet its contractual commitments and obligations to consumers and businesses, the ever-increasing challenges from claims cost and expense increases, extreme weather events, legal system abuse, and ongoing regulatory resistance to rate adequacy in a few jurisdictions continue to have significant negative financial consequences for insurers,” said Robert Gordon, senior vice president for policy, research and international at APCIA.
Among the report’s key findings were:
- Rising underwriting losses caused P&C insurers’ Q2 after-tax net income to sink to just $0.4 billion, the lowest level since 2011. Net income for the first half of 2023 was $8.9 billion, representing a pre-tax return on revenue of 2.3% and after-tax return on statutory surplus of just 1.8% (annualized)
- The industry’s statutory capital and surplus grew 8.1% in H1, driven by a $63.7 billion increase in unrealized capital gains – mainly unsold equity investments. This revered a $101.8 billion net decrease in unrealized gains in H1 2022. Despite the surplus growth, the June 30 aggregate value of $1.04 trillion is still below the $1.05 trillion peak set at the end of 2021
- The H1 combined ratio of 104.3% was 4.4 points higher than last year’s combined ratio of 99.9%. The associated underwriting loss through June 30 was $24.1 billion, up from a $6.5 billion loss a year prior
- APCIA estimated catastrophe losses of $30.7 billion for Q2 and $38.4 billion for the first half. These estimates do not include early Q3 losses from the Maui wildfire and Hurricane Idalia, estimated at a combined $12 billion
- H1 catastrophe losses were driven partly by a series of severe convective storms and a Northeast winter storm. First-half catastrophe losses were 18.2% higher than those in 2022. Catastrophe losses accounted for 10.2 percentage points in the combined ratio for all lines, APCIA reported. However, the impact of catastrophes on homeowners’ insurance and commercial property lines was much greater
The P&C industry’s direct premium growth has been slowing in line with the economy over the last several quarters, APCIA reported.
“Other key issues impacting the industry include legal system abuse, natural catastrophe losses, and rising insurance input cost inflation,” Gordon said.
The trucking sector is one of the industries most heavily impacted by litigation abuse, APCIA said. The average size of verdicts against trucking companies skyrocketed 867% between 2010 and 2018, according to a study by the US Chamber of Commerce’s Institute of Legal Reform. The study also found that between June 2020 and April 2023, the average award in trucking lawsuits was $27.5 million, while the average settlement was $10 million.
“Litigation abuse has a negative impact on consumers and businesses across the economy, and APCIA continues to seek reforms addressing abuses associated with issues such as third-party litigation financing, nuclear verdicts, and attorney advertising,” Gordon said.
The industry also continues to weather the impact of catastrophe losses. According to Swiss Re, global insured catastrophe losses for the first half of 2023 hit $50 billion – a $2 billion increase from H1 2022 and the second-highest level since 2011. Severe convective storms accounted for $35 billion in insured losses worldwide – nearly 70% of the H1 total.
“In the US, catastrophe losses pushed what would otherwise have been a profitable quarter into underwriting loss territory,” Gordon said. “But it’s not just the weather that is impacting insurance marketplaces and consumers. Across the country, insurers are having to recapitalize after suffering from these historic losses as well as historic high economic inflation, legal system abuse, and worsening regulatory restrictions. Together these pressures have forced some insurers to rebalance their risk nationwide.”
Personal and commercial auto lines in particular are being battered by loss cost pressures, APCIA reported. Personal auto losses have been driven up faster than premium volume growth. Personal auto losses in the first half rose 12.3% over 2022, with property losses up 10.7% and liability losses up 13.4%. However, direct premium growth for all commercial lines in H1 was just 6.4%, a significant drop from the 13.4% rise the previous year.
Workers’ compensation grew at a more normalized rate of 3.1% after a spike of 10.5% growth in the first half of 2022, APCIA reported.
Net investment income earned (interest and dividend income) and net realized capital gains both fell in the first half as compared to 2022, by 12.5% and 38.3%, respectively, APCIA reported.
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