The View for 2022: P/C Insurance Predictions and Trends

By | December 20, 2021

It’s tough to make predictions, especially about the future.

— Yogi Berra, Major League Baseball player and humorist

Even before 2021’s final results were in the books, the forecasters were looking ahead to 2022. All in all, barring surprises like a pandemic, the stars appear aligned for a happy new year for the property/casualty insurance industry to the extent it controls its own fate.

Here is a selection of prognostications about P/C insurance for 2022.

But first some perspective. The New York Times recently reported that astronomers have discovered an asteroid flying through space that could crash into the Earth in 2022. It is about a half-mile wide and could do tremendous damage if it struck. Although astronomers say the chance of a collision is about 1-in-1 million, they also say more observations are needed to rule out a collision.

A Demanding Year

According to Swiss Re Institute’s latest sigma study, there will be a rise in insurance demand that could break premium records in 2022.

This expected rapid growth reflects rising risk awareness in the wake of the pandemic and continued strong rate hardening in insurance commercial lines.

The insurer estimates that global non-life premiums will grow by 3.3% in 2021, 3.7% in 2022 and 3.3% in 2023.

“Market conditions suggest that positive pricing momentum will continue across all lines and regions. Inflation-driven higher claims development in all lines of business, continued social inflation in the U.S. and persistently low interest rates will be the main factors for market hardening,” said Jerome Haegeli, Swiss Re group chief economist.

The outlook for the insurance industry is also boosted “by a strong cyclical recovery from the COVID-19 shock, but economic growth is expected to slow in the next two years due to an unfolding energy price crisis, prolonged supply-side issues, and inflation risks,” said the study.

Steady and Stable

P/C insurers will enjoy steady underwriting profits and earnings in the face of headwinds, according to Fitch Ratings. The headwinds include higher inflation and a likely reduction in contributions from investment gains. These analysts predict a 97 combined ratio. However, if higher inflation persists, profitability and reserve strength would be expected to weaken in longer-tail segments, including workers’ compensation and other liabilities. Catastrophe risk exposures will add volatility as well. Fitch expects 2022 to be the fifth successive year of price rises, although growth will be slower than in 2021. Analysts also believe that the risk of rising inflation will remain manageable for the industry in 2022.

AM Best has revised its 2022 commercial lines market segment outlook to stable from negative for key segments, despite some near-term challenges including inflation, an uneven economic recovery and continued pressure on jury awards and settlement costs. The stable outlook reflects AM Best’s expectation that “on balance the segment will remain profitable, its risk-adjusted capital position will remain sound, and the segment will be resilient in the face of these near- and longer-term challenges.” AM Best analysts cite the relatively modest negative impact of the COVID-19 pandemic, continued strong pricing momentum and favorable rulings to date on many business interruption coverage disputes. AM Best has revised its market segment outlooks to stable for workers’ compensation, commercial property and surety. The outlooks for commercial auto, general liability, medical professional liability, and professional liability are negative.

Wishful Thinking

Insurance agency Woodruff Sawyer detects a “noticeable shift in the wind in favor of insurance buyers” in 2022. Woodruff Sawyer warns that “insurers’ optimism around continued rate increases may be wishful thinking,” noting that a second quarter survey by CIAB reported that average commercial lines rate increases in the quarter were 8.3%, down from 10.0% in Q1 2021. The magnitude of rate increases has lessened since the fourth quarter of 2020. “Our view of 2022 is that rate increases will flatten throughout the year, particularly in property and casualty. New market entrants increase competition, which should drive rates lower. High-quality risks may even see some rate decreases by late 2022,” the agency concludes.

The Muted Impact of COVID

AM Best revised its outlook for the workers’ compensation segment from negative to stable for 2022. This action reflects a number of factors, among them the “unexpectedly muted impacted of the COVID-19 pandemic” and solid risk-adjusted capitalization, redundant loss position and favorable combined ratios. Counterbalancing factors include states’ rate decreases, claims latency and the long-term health effects of the virus and regulatory and legislative actions that could affect the ultimate cost of certain claims. Also, intensifying competition.

Returning to Pre-Pandemic Market Trends

The personal lines insurance segment has managed to navigate 2021’s challenges including above-average catastrophe activity, a return to pre-pandemic frequency trends, and increased loss cost severity. Looking ahead to 2022, ratings agency AM Best is maintaining a stable market segment outlook on the personal lines insurance industry.

AM Best analysts point to the segment’s strong risk-adjusted capitalization, underwriting actions limiting volatility in the homeowners line, and the acceleration of the use of technology as reasons for the outlook. Also, carriers continued rate actions throughout 2021 and were able to limit the impact of catastrophe losses in 2021 with exposure management and enhanced reinsurance.

While a number of factors favor the segment, personal lines writers also face challenges heading into 2022. These include auto loss frequency returning to pre-COVID levels and severity increasing while having premium trends keep pace. Insurers also face the likelihood of catastrophe events and claims from secondary perils. Another challenge is rising reinsurance costs.

Cyber Rates and Wariness

Smarting from increasing payouts and shrinking profits, insurers are reducing the cyber cover they will provide at the same time that demand for coverage is soaring. Insurers have been able to charge higher rates to cover their cyber costs, but they still remain wary.

Fitch Ratings notes that the cyber insurance market saw sizable rate increases and tighter terms and conditions in 2021, as some larger writers of cyber insurance reported deteriorating loss experience. Favorable pricing momentum is expected to continue in 2022, according to a survey by The Council of Insurance Agents and Brokers that indicated rising cyber renewal premium rates over the last 18 months, including a 25% increase in the second quarter of 2021. However, continued unfavorable claims experience points to higher cyber loss ratios in 2021. Earned premium growth from recent pricing actions should help stabilize results for 2022.

S&P Global believes that the pandemic caused economic and insured losses from cyber attacks to skyrocket, which has heightened awareness of the risk and increased demand for cyber re/insurance. “The trend toward digitalization will inevitably lead to a higher likelihood of cyber incidents. Prices in the cyber re/insurance market could therefore rise sharply over 2021-2023, even doubling in some cases,” said S&P Global

Ratings analyst Manuel Adam. S&P expects this business line to be one of the fastest growing insurance markets over the next decade. While the number of reinsurers and insurers offering cyber coverage is rising, along with demand, capacity is still limited. S&P has warned that a lack of capacity “could be holding back the development of a sustainable cyber re/insurance market.”

Gate Opens for Private Flood

The National Flood Insurance Program has developed Risk Rating 2.0, a strategy to move all properties to a true risk-based rates. Risk Rating 2.0 is rolling out in two phases. In phase one, which began on Oct. 1, 2021, new policies, as well as policies eligible for renewal on that date, are subject to the new rating methodology. In phase two, policies renewing on or after April 1, 2022, will be issued under Risk Rating 2.0 methodology.

Under Risk Rating 2.0, the annual premium rate is expected to decline for a quarter of policyholders in the NFIP. But, many will see rates increase and reach their full risk rate in roughly five years. Eventually, the new rating measures should lead to more adequately priced NFIP risks and more competitive coverage offered by private insurers.

According to AM Best, higher premium costs for federal flood insurance should make the private flood insurance market more competitive and inviting for more insureds to the private market.

However, private sector carriers are being selective and avoiding risks in flood-prone areas while concentrating more on commercial properties than homeowners.

New Heights for Insurtech M&A Deal Making

Clyde & Co.’s Vikram Sidhu writes that M&A deals involving insurtechs “will accelerate to reach new levels” in 2022. This will include deals in which insurtechs are the targets of larger existing players.

However, there will also be an increasing number of deals with insurtechs as the acquirors and/or deals between insurtechs. Sidhu notes that insurtechs with solid funding can put some of their money to use for their own acquisitions.

At the same time, incumbent insurance industry members are increasingly seeing acquisitions of insurtechs as a more attractive way to bring in-house new technologies, businesses, and know-how instead of homegrown development.

Finally, investors in insurtechs see sale of their investments as an attractive exit alternative to the IPO route, which also will fuel M&A activity.

Weather or Not for 2022

With an average hurricane season being 14 named storms, 7 hurricanes, and 3 major hurricanes, Colorado State University weather gurus predicted the 2022 hurricane season has a 40% chance of an above-average season. They predict 13-16 named storms, 6-8 hurricanes, and 2-3 major hurricanes.

They also predict: 25% chance of 15-18 named storms, 9-11 hurricanes, and 4-5 major hurricanes; 25% chance of 9-12 named storms, 3-5 hurricanes, and 1-2 major hurricanes; and a 10% chance of 6-9 named storms, 2-3 hurricanes, and 0-1 major hurricanes.

The 2021 season was very active with 21 named storms, but only relatively average in the number of hurricanes (7) and the number of major hurricanes (4).

Moving to the Endemic Phase of COVID-19

Dr. Elizabeth McNally, director of the Center for Genetic Medicine, is among the few willing to venture a prediction about the virus:

“In 2022, we will move more to the endemic phase of SARS-CoV-2 infection, where we continue to learn to live with the virus. Although there are many concerns about new variants, especially Omicron, at this stage it seems like those who are vaccinated and boostered are not likely to become very sick after being exposed to the virus. The greatest risk remains for those who choose to avoid vaccination.

“Since natural immunity from prior infection and immunity from vaccines both wane over time, the overall U.S. population will have a range of protection in 2022. To manage this broad range, I predict we will rely more on antibody testing to help guide patients with underlying medical conditions and inform their need for additional boosters. I suspect we will see a vaccine specific to the Omicron variant.

“Travel will continue but will likely required more rapid testing, especially when crossing borders.

“For those who choose to remain unvaccinated, I doubt the world will get easier for them. The vaccinated are losing their patience with having to take so many steps to protect the unvaccinated. At some point, we may just stop doing so much testing on those who are vaccinated and boostered, and instead just focus resources on better protecting the unvaccinated.

“The newly arriving medications will help reduce need for hospital beds. But moving forward, all attention needs to focus on managing the availability of hospital beds.”

Topics Trends Property Casualty

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