Tale of Two Markets: Largest CR Gap Between Personal, Commercial Lines in 15 Years

May 18, 2023

It was the largest difference in about 15 years, according to actuaries at the Insurance Information Institute (Triple-I) and Milliman.

The 2022 net combined ratio for the P/C insurance industry was 102.4, with underwriting losses for personal lines partially offset by underwriting gains for commercial lines. Looking ahead, the 2023 net combined ratio is projected to be 101.5.

The quarterly report, Insurance Economics and Underwriting Objections: A Forward View, was presented yesterday during an exclusive Triple-I members only virtual webinar.

Michel Léonard, chief economist and data scientist at Triple-I, discussed key macroeconomic trends impacting the P/C industry results including inflation, rising interest rates and overall P/C underlying growth.

The underlying growth of the P/C industry continues to be constrained by monetary policy with no relief in sight, contracting -1.5% YTD compared with U.S. gross domestic product (GDP) at 1.3%, she said. GDP is forecast to grow slightly above Fed expectations between 2023 and 2025, Léonard added, but will remain below the Federal Reserve’s long term growth expectation for the foreseeable future.

“U.S. growth dropped over the last six months as rising interest rates depress new housing starts, corporate capital investments and spending on vehicles,” Léonard said.

The possibility of a U.S. recession by year-end 2023 remains high as the Fed remains hawkish, putting its long-term growth expectation further out-of-reach, the Triple-I opined.

“While it is unlikely that the stronger-than expected April jobs performance will lead the Fed to aggressively accelerate the pace of current monetary tightening, it may, however, expand the duration of the current tightening cycle,” said Léonard, adding, “P&C replacement costs are up an average of 40% since the beginning of the pandemic, significantly above cumulative increases in overall inflation.”

P/C industry underwriting projections were broached by Dale Porfilio, chief insurance officer at Triple-I. While commercial lines net combined ratios will likely remain good through the next couple of years, personal auto will need the same period to recover from poor results.

“Commercial lines achieved lower net combined ratios than personal lines in both 2021 and 2022, and we forecast that to continue through at least 2025,” said Porfilio. “All product lines are benefiting from improved efficiency to significantly reduce both operating and loss adjustment expense ratios, as evidenced by the industry expense ratios for 2022.”

The 2022 net combined ratio for personal auto came in at 112.2, 10.7 points worse than 2021 and 19.7 points worse than 2020, he said.

“The industry has not had this poor of a full year underwriting performance in decades,” he said, adding, “unless replacement cost trends begin to decrease materially – which is not currently forecast – it will take the industry into at least 2025 to restore personal auto results to underwriting profitability.”

Homeowners remains unprofitable, said Porfilio, who noted the 2022 net combined ratio came in at 104.6. He added, “Hurricane Ian, the second-costliest insured loss after Hurricane Katrina, was a significant driver of underwriting losses for the industry.”

Commercial property, general liability, and workers’ compensation were bright spots for the industry, said Jason B. Kurtz, a principal and consulting actuary at global consulting and actuarial firm Milliman. Each logged underwriting gains in 2022. On the other hand, commercial auto and the commercial multi-peril lines were sources of weakness in 2022, with each seeing combined ratios of about 105, he said.

“Commercial auto performed surprisingly well in 2021, but this appears to have been short-lived, as underwriting losses driven in part by material prior year adverse development returned in 2022. We expect further rate increases will be needed to offset loss pressures affecting this line,” Kurtz said.

One bright spot, according to Dave Moore, president of Moore Actuarial Consulting, is that cyber insurance direct written premium grew 50% in 2022.

“The cumulative growth over the last seven years has been 620%,” he said, adding that the direct incurred loss and DCC ratios for the last eight years have averaged “49% with 2022 coming in slightly below average at 45%.”

Workers’ compensation continues to exhibit strong commercial line results. The shifting workplace and workforce, the impact of the pandemic, and the economic recovery affected volume and location of workers compensation risk, but not profitability. Referring to private carriers, Donna Glenn, chief actuary at the National Council on Compensation Insurance, noted that premium increased 11% in 2022, returning to near the pre-pandemic levels of 2019.

“This marks the sixth consecutive year with a workers’ compensation net combined ratio under 90 and the ninth consecutive year of underwriting gains,” Glenn said.

Topics Commercial Lines Business Insurance

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