Property/casualty insurers’ operating environment today is very different than just a few short years ago.
Lines that were stable are now volatile and those that have struggled are looking profitable, reinsurance intermediary Guy Carpenter & Co. says in its 2018 Risk Benchmarks Research Report, which focuses on the risk and performance of U.S. P/C insurers.
Also, the familiar underwriting cycle has decoupled materially across long-tail casualty lines, with profitability, growth and reserve development moving in widely different directions by line and segment, Guy Carpenter analysts add.
It seems that every element of the insurance value chain is evolving rapidly.
“The accelerating rate of change has been a constant in the P/C insurance market over the past several years,” according to Tim Gardner, CEO, North America at Guy Carpenter. “The recent performance of the P/C industry seems a departure from the long-term trend, rather than the familiar regression towards it.”
In its annual review of U.S. insurance statutory financial data, Guy Carpenter found that strong equity market performance pushed industry surplus to its highest level ever at the end of 2017.
But the largest year of North American catastrophes since 2005 drove the gross loss ratio of the study’s median insurer up 12 percent in just two years.
In auto lines, claims frequency and severity increased as road congestion, repair costs and jury awards grew; road speeds increased; and more drivers were distracted by devices. These trends represent a shift for many carriers which, until recently, viewed personal auto insurance as a steady source of profitability, causing some to focus on homeowners or diversify into commercial lines.
Meanwhile, more than 60 percent of workers’ compensation carriers have achieved an underwriting profit since 2013, even as rates continue to decline. Though decreasing job readiness and trends in opioid abuse and legalized marijuana may impede future profitability, advancements in claims management and workplace safety are helping carriers manage risk, and many are already adjusting loss trend assumptions for such innovations.
“Insurtech innovations that just recently seemed like science fiction now offer insurers more nimble platforms and more granular data to better price, manage and mitigate risk. Profitable growth over the next 10 years is likely to be driven by realizing greater efficiency by transitioning away from legacy systems and leveraging new technology and data,” said Gardner.
Commercial casualty lines saw performance diverge to an extent not seen in over two decades, with correlations on initial and ultimate booked loss ratios dropping from near-perfect dependence to near independence or negative correlation in some cases, as line-specific claims and exposure trends trumped cyclical market conditions. If this decoupling persists, it could mean an increase in diversification benefit for carriers writing multiple commercial casualty lines.
Finally, increases in non-modeled losses like wildfires and assignment of benefit claims have implications for existing models calibrated on historic data. Guy Carpenter warns that carriers must factor these and other emerging risks into capital and risk management strategies.
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