Swiss Re forecasts profitability for the US property-casualty sector to improve this year and next after a weak 2022, according to a new report.
According to the report, return on equity sank last year, spurred by high inflation and payouts for natural catastrophes. Reserve adequacy was also an area of concern, slowing down after more than 15 years of favorable development and set to deteriorate even more in 2024 with higher wage and medical inflation.
“Overall, however, the outlook is brighter: underwriting actions have been taking inflation into account, inflation itself is easing, and gains from reinvesting the portfolio at higher yields are accruing,” said report authors James Finucane, Swiss Re senior economist, and Thomas Holzheau, chief economist Americas. “We expect a narrowing of the gap between commercial and personal lines loss ratios – nearly 20 ppt in 2022 – amidst divergent trends within commercial lines: rate increases in property have surged; in liability, gains are slowing. We forecast premium growth of 7.5% in 2023 and 5.5% in 2024, with ROE improving to 8.0% and 9.5%, respectively.”
Key forecasts in Swiss Re’s US P&C Outlook include:
“We expect notable improvement in US P&C industry ROE this year and next on higher underwriting and investment income,” Finucane and Holzheau wrote.
The report projected that higher underwriting and investment income would drive an improvement in ROE.
“Compared with 2022 ROE of 2.5%, our 2023 estimate would be the strongest year-on-year improvement since 2009,” the economists wrote.
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Downside risks for profitability include a more-severe-than-expected recession or a resurgence of high inflation this year or next, the report said.
Swiss Re predicted that the industry combined ratio would improve to 100% this year and 98.5% in 2024.
“The industry net combined ratio reached 102.4% in 2022, driven by inflation that raised loss severities across most lines of business,” Finucane and Holzheau wrote. “Natural catastrophes added 6.9 ppt to the combined ratio, above the prior 10-year average (6.2% on the combined ratio) but below the five-year (7.3%).
“We expect loss severities to ease as US headline CPI inflation decelerates to our forecast 4.0% in 2023 and to 2.8% in 2024, setting the stage for improved underwriting results as rate gains outpace claims costs. But, with high catastrophe activity early in 2023, the path to underwriting profits might not be smooth: hurricanes, tornadoes, rain and wind storms contributed to above-average 1Q 2023 catastrophe claims.”
Rate trends are “bifurcating” for commercial lines, according to the report.
Average rates for commercial lines rose by 8% year over year in the fourth quarter of 2022, roughly in line with the 8.1% rise in Q3. Property spiked nearly 17% after rising 12% in the third quarter.
In contrast, rate rises in liability lines slowed, with the exceptions of medical malpractice and broker errors and omissions, the report said. General liability increased 5% quarter over quarter after rising 6% in Q3 2022, while commercial auto rate increases slowed to 7.6% from 8.2%.
“Cyber and D&O have grabbed headlines for their rapid deceleration, although the starting point for cyber is much higher,” Finucane and Holzheau wrote. “By one estimate, D&O rates are expected to decrease 20% or more in 2023, depending on industry, amidst continued increases in commercial rates overall.”
Swiss Re projected rate increases through 2023, with inflation, natural catastrophes and geopolitical uncertainty continuing to drive claims and operating costs.
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