Underwriting losses from rising costs, extreme weather events, legal system abuse, and regulatory resistance to rate adequacy, pummeled the property casualty industry in the second quarter of this year pushing net income to its lowest levels in 12 years.
The perfect storm of economic, legal, and weather events, “…continue to have significant negative financial consequences for insurers,” said Robert Gordon, senior vice president, policy, research and international for the American Property Casualty Association (APCIA).
In a report released Monday, the APCIA said the industry eked out a collective $0.4 billion in earnings in the second quarter of 2023, the lowest since 2011. Net income for the first half was $8.9 billion, representing a pre-tax return on revenue of just 2.3% and a paltry after-tax annualized return on statutory surplus of 1.8%
Property casualty industry statutory capital and surplus grew 8.1% in the first half, fueled by $63.7 billion in increase in unrealized capital gains (primarily unsold equity investments), reversing a $101.8 billion net decrease in unrealized gains in the first half of 2022.
Aggregate value cited
“Despite the surplus growth, the June 30 aggregate value of $1.04 trillion remains below the high-water mark of $1.05 trillion set at the end of 2021, meaning that there is less capital and surplus per unit of risk exposure today than there was 18 months ago,” the report said.
The first half combined ratio of 104.3% was 4.4 points higher than last year’s 99.9%. The associated net underwriting loss through June 30 of 2023 was $24.1 billion, compared with a $6.5 billion loss one year earlier.
“APCIA estimates catastrophe losses of $30.7 billion for the second quarter and $38.4 billion for the first half of the year, not including early third quarter losses from the Maui wildfire and Hurricane Idalia estimated at about $12 billion combined,” APCIA said. “A series of convective storms and a Northeast Winter storm contributed to the first half catastrophe losses, which were 18.2% higher than in 2022. Catastrophe losses accounted for 10.2 percentage points in the combined ratio for all lines; the impact of catastrophes on homeowners and commercial property lines was proportionately much greater.”
Events slow P&C industry premium growth
Macroeconomic events have slowed the property casualty industry’s direct premium growth over the last several quarters. Rising interest rates and persistent inflation are dampening economic growth as businesses anticipate a low-growth or recessionary period. Industry direct premiums grew 8.8% to $467.7 billion in the first half of 2023 compared to a year earlier.
“Other key issues impacting the industry include legal system abuse, natural catastrophe losses, and rising insurance input cost inflation,” said Gordon.
The report singled out the trucking sector as a victim of legal system abuses, finding that the average size of verdicts against trucking firms surged 867% between 2010 and 2018, and 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,” said Gordon.
Catastrophe losses in the first half of 2023 were $50 billion, according the Swiss Re, which were $2 billion above the first half of 2022 and well above the 10 year average. Severe convective storms caused $35 billion (nearly 70%) in insured losses worldwide.
“In the U.S., catastrophe losses pushed what would otherwise have been a profitable quarter into underwriting loss territory,” said Gordon. “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 are experiencing significant loss cost pressures, the report said. Personal auto incurred losses have risen faster than the growth in premium volume. The first half saw personal auto losses rise 12.3% over 2022, with property losses up 10.7% and liability losses up 13.4%. Meanwhile, direct premium growth for all commercial lines in the first half of 2023 was 6.4%, down significantly from a 13.4% rise a year earlier. On the other hand, workers compensation premiums grew at a more normalized rate of 3.1% following a spurt in 2022’s first half of 10.5% growth.
Despite the headwinds, Gordon said “…the aggregate industry balance sheet is strong enough to meet its contractual commitments and obligations to consumers and businesses,” but called the challenges “ever-increasing.”
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at email@example.com.
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