US P&C sector to see cost pressures increase in 2022 from inflation

Last year saw the net combined ratio of the US property and casualty (P&C) insurance industry increase to 99.5%, compared to 98.7% for 2020, largely due to a deterioration in the personal auto and workers compensation lines, according to a report by the Insurance Information Institute (III) and Milliman. Looking ahead, the report forecasts the 2022 net combined ratio to increase slightly to 99.6% as a result of inflation and supply chain disruption. The report says that homeowners, commercial auto, commercial multi-peril and general liability saw significant improvement year over year for insurers. Presenting the report, Michel Léonard, chief economist and data scientist, and head of the III’s economics and analytics department, said the US P&C industry's performance continues to be constrained by historically high inflation, impacting replacement costs. “The insurance industry's performance continues to be severely constrained by macroeconomic fundamentals. The average replacement costs for P&C lines is 16.3%, nearly twice the US average CPI of 8.5%,” he said, noting that while the Federal Reserve forecasts US inflation to decelerate to 4.3% by year-end, “III expects the transition to take longer”. Dale Porfilio, chief insurance officer at III, said that 2021 had the worst full-year catastrophe losses since 2017 across all P&C product lines, though fourth-quarter actuals were materially lower than prior expectation. “Healthy premium growth observed in 2021 is likely to continue through 2024 due to the hard market,” Porfilio said. “The 2021 net expense ratio of 27.0 points was the lowest in more than a decade, due to premiums growing at a faster rate than expenses.” For the whole P&C insurance industry, Porfilio said to expect loss pressures to continue due to inflation and supply chain disruption. Jason B Kurtz, a principal and consulting actuary at Milliman, said the commercial multi-peril (CMP) 2021 combined ratio improved 3.6 points from 2020, primarily due to strong net earned premium growth (6.3% year over year) from the economic recovery and a hard market. “Despite the improvement relative to 2020, the CMP line still experienced an underwriting loss in 2021 and we expect underwriting results in 2022-2024 will continue to be adversely impacted by inflation and cat loss pressures,” Kurtz said. Looking at the workers compensation line, Kurtz noted that underwriting profits continue, although margins shrunk in 2021 and are expected to continue to shrink through 2024. “The workers comp line has experienced seven straight years of underwriting profitability, a remarkable turnaround after eight straight years of underwriting losses,” he said. “Not surprisingly, rate increases have been hard to come by. Coupled with low unemployment, these forces will constrain premium growth for the foreseeable future.” On the commercial auto side, the 2021 combined ratio improved by 3.0 points from 2020, due to lower adverse development on prior accident years and a two-point reduction in expense ratio, according to Dave Moore, Moore Actuarial Consulting. “The 2021 combined ratio dipped below 100% for the first time since 2010 and we've had the lowest expense ratio in more than a decade,” he said. “Watch for social inflation loss pressure and prior year adverse loss development in 2022-2024.”

US P&C sector to see cost pressures increase in 2022 from inflation

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