Slow underlying growth and inflation are among the biggest challenges facing U.S. auto, home, and business insurers, according to the Insurance Information Institute’s (Triple-I’s) 2023 Economic Outlook.
Triple-I expect long-term growth to remain below 2 percent and long-term inflation to remain above 2.5%.
A recovery by year-end 2023 remains unlikely as the Fed continues its hawkish policy and bond yields increase.Dr. Michel Léonard, CBE, Chief Economist and Data Scientist, Triple-I
The Consumer Price Index is likely to decrease as pandemic supply chain disruptions ease, and commodity and energy prices reach a precarious war-time equilibrium.”
P&C Insurance Underlying Growth & Replacement Costs
The Outlook’s key takeaways:
- Property and casualty insurance, a category which includes U.S. carriers who underwrite auto, home, and business coverage, saw its cyclical underlying growth rebound fail to materialize in 2022’s second half as interest rate tightening depressed housing starts, corporate spending, and vehicle expenditures.
- Increases in P&C replacement costs (e.g., vehicle parts, housing construction materials) slowed down over 2022’s last two quarters but are up 40% since 2019.
- U.S. Gross Domestic Product (GDP) growth is likely to remain depressed for at least the next two quarters after the Federal Reserve shifted away from its hawkish stand on interest rates; the Fed’s three-year Consumer Price Index (CPI) expectations remain overly optimistic, Triple-I believes.
According to Beinsure Review, the US P&C industry recorded a net underwriting loss of $26.5 billion in 2022, worsening by $21.5 billion from the previous year.
The US insurers showed a substantial weakening of underwriting profitability over the year, with personal lines losses and the impact of Hurricane Ian causing its collective combined ratio to deteriorate to 102.7%, according to S&P Global Market Intelligence analysis.
8.4% growth in net earned premiums and a 21.4% decline in policyholder dividend were countered by a 13.9% increase in incurred losses and loss adjustment expenses and a 6.2% rise in other underwriting expenses.
The personal lines segment, specifically the auto lines of business, were considered to be primarily responsible for the decline in underwriting results.
The 20 percentage point (ppt) gap between personal and commercial insurance lines loss ratios in the first nine months of 2022 is likely to decrease in 2023 as personal lines rate increases gain momentum and the drivers of motor inflation decelerate.
U.S. GDP Growth and Inflation
The Triple-I is slightly more optimistic than the U.S. Federal Reserve when it comes to the U.S. Gross Domestic Product (GDP), forecasting the nation’s GDP to grow slightly above Fed expectations between 2023 and 2025.
The macroeconomic fundamentals for P&C insurers are forecast to be mixed for the balance of this year.
Property and casualty insurer net premiums written are forecast to continue to grow due to hard market conditions regardless of slowing underlying growthDale Porfilio, Chief Insurance Officer, Triple-I
Underwriting losses, however, are expected to persist, driven by challenging results in personal lines.
Net premiums written are premiums written after reinsurance transactions. A hard market is a seller’s market. It describes an environment is which insurance is expensive and in short supply.
The timeline of any recovery in insurance underlying growth will be dictated by Federal Reserve monetary policy and any shift away from tightening rates. As certainty over the timing of this change firms up, the cost of mortgages and other consumer loans will decrease, fueling underlying growth, especially for homeowners and personal auto.
Even though we expect economic fundamentals to improve throughout 2023, line-specific underwriting considerations will continue to depress performance.
For example, we expect personal auto underwriting trends, including adverse frequency and severity, to continue into 2023. Insurers underwrite specific risks, in various business lines, to charge the policyholder an appropriate premium for assuming the risk.
Insurer economic growth had generally been tracking below the nation’s overall Gross Domestic Product (GDP) since the start of the pandemic in 2020.
Impact of Natural Catastrophes for the P&C Insurance
The US P&C insurance industry has experienced challenges in recent years due, in large part, to increases in the frequency and severity of natural catastrophes, as well as a tightening reinsurance market, according to Beinsure Natural Catastrophes Review.
Of the economic losses, $270 bn was attributable to natural catastrophes. In addition to a devastating earthquake in Haiti that, sadly, claimed more than 2 000 lives, there were more than 50 severe flood events across the world, as well as tropical cyclones, episodes of extreme cold and heat, and severe convective storms (SCS).
Natural and man-made disasters resulted in global economic losses of USD 280 billion in 2022, the sixth highest on Swiss Re sigma records, and the 16th highest since 1970 after normalising for GDP growth effects.
According to Global Commercial P&C Insurance Market Review, Florida’s property insurance market has been negatively impacted by contractors who exploited the state’s former one-way attorney fee statute by artificially inflating the cost of insurance claims in collaboration with questionable billboard attorneys. These additional challenges have created unsustainable underwriting losses and have caused the reinsurance market to harden.
P&C insurance replacement costs
Triple-I, however, expects insurer underlying growth in 2023 to catch up on overall GDP, ending the year at around 3 to 3.5%, whereas the broader U.S. economy is forecast to grow at a rate of 3.2% this year, up from 2.6% in 2022.
P&C insurer replacement costs are projected to increase between 4.5% and 6.5% year-over-year in 2023.
P&C insurers are generally defined as those offering auto, home, business insurance coverage. This is an improvement from 2022’s 8.1% and 2021’s 11.8% year-over-year increases. Vrious P&C replacement costs increased upwards of 25 percent since 2020.
The Triple-I is cautious about forecasting any reductions in inflation and replacement costs in 2023 because of ongoing heightened geopolitical risks and their impact on global supply chains and commodity prices.
Should replacement cost increases subside this year, it will benefit homeowners and personal auto insurers the most, followed by commercial property and auto insurers (see about Impact of Social Inflation for P&C Insurance & Commercial Auto Insurance Costs).
Used autos, new vehicles and construction materials experienced the steepest rise in prices in recent years amongst a basket of key goods replaced or repaired by P&C insurers.
Triple-I expects 2023’s economic narrative to focus in Q1 on inflation, interest rates and recession, but gradually shift from Q2 to Q3 to the timing of a recovery and a more neutral monetary policy in Q4, depending upon the Federal Reserve’s actions.
According to Sigma Research Swiss Re Institute, higher used car prices alone caused auto insurers an estimated USD 15 billion of extra claims costs; costlier repairs added to the bill. Elevated construction costs reduced profitability in property lines.
Economic growth, however, will not be steady throughout the year. Economists expect the Fed to tighten further in Q1 2023, likely pushing the U.S. economy into a recession in either Q1 or Q2. As such, Triple-I expect growth in the first half of the year to be significantly lower than in the second half of the year.
Growth remains constrained below full potential by monetary policy and geopolitics. The length or depth of any recession in 2023 and the timing of any recovery in 2023 or 2024 will be determined by whether the Federal Reserve shifts from tightening to neutral to accommodative.Michel Léonard – Chief Economist and Data Scientist Triple-I
Current expectation is that tightening will continue through at least Q1 and Q2 before shifting to, at best, neutral as the year progresses, with no easing on the table for 2023.
The U.S. Consumer Price Index (CPI), which measures the inflation rate, ended 2022 at 6.5 percent year-over-year, down from a high of 9.1% year-over-year in June 2022. Triple-I expects inflation to continue to decline throughout 2023.
The base forecast, driven primarily by domestic economic considerations, is for CPI to end 2023 between 3% and 4% year-over-year.
However, improvements will not be steady throughout the year. Looking at each quarter, we expect inflation to be down in Q1, flat or slightly up in Q2, and down in Q3 and Q4. The pace and extent of any inflation slowdown are predicated on improvements in global geopolitical risk outside the purview of domestic monetary policy.