Profitability for non-life insurance companies is likely to improve globally as the industry adapts to elevated risks, according to a new analysis.

Swiss Re’s study found that although a hard market is likely to continue, 2023 is expected to be a “transition year” globally for property and casualty (P&C) insurance.

“Our analysis shows that non-life insurers’ profitability is set to improve strongly in the coming years as higher interest rates and rate hardening more than offset higher claims costs from persistent inflation,” said Jérôme Jean Haegeli, Swiss Re’s chief economist. “This will be vital to enable industry resources to grow at a rate that will match global demand for insurance protection.”

Swiss Re added that despite the positive outlook, profitability within the P&C insurance sector is likely to remain lower than the rising cost of capital this year.

Turning the corner will require insurers to become more disciplined with their capital and use it more efficiently, the study found.

A number of insurance companies have already taken measures to cut spending.

Last month, Farmers Insurance said it was laying off 11% of its employees throughout all its business lines to better position itself for “long-term profitability and growth.” About 2,400 employees were affected as the insurer shifts to a “more simplified and streamlined organizational structure,” the California-based company said in a press release.

Also in August, Kemper Corp. announced it was exiting the preferred home and auto market to enhance its returns and “support profitable growth” in core businesses. Its specialty business Kemper Auto will not be affected.

Other companies have sought savings by reducing the amount of in-person vehicle inspections. Instead, they’re relying on virtual and photo-based estimating despite concerns from repairers that those tools don’t always produce accurate results.

Swiss Re also said that reinsurers, which offer protection to insurance companies by spreading out the risk, can offer primary insurers “access to their balance sheet at costs below insurers’ capital costs.”

They can do so because their portfolio is diversified throughout a wider assortment of geographic areas and risks, Swiss Re added.

“In the current capital-demanding environment, reinsurance can enable primary insurers to write new business more efficiently, provide certainty for legacy liabilities, and support the growth of new business,” said Gianfranco Lot, Swiss Re’s chief underwriting officer P&C reinsurance.

“The elevated risk landscape calls for more frequent adjustments to underwriting practices. Focusing on portfolio quality and margins as well as contractual clarity in the whole industry will be key in this respect.”

Swiss Re noted how demand for insurance protection has spiked since 2017, driven largely by increased natural catastrophes and inflation, which has contributed to higher replacement values.

It said simultaneously, higher capital growth became necessary to narrow global protection gaps. 

In the U.S., P&C insurance capital has grown by an average of 5% per year for the past decade, it said, adding that the need for natural catastrophe protection rose 7% annually during the same timeframe.

Worldwide, unprotected risk exposure has been on the rise for the past five years, Swiss Re said, estimating global protection gaps for natural catastrophes, crop, mortality, and health insurance at $1.8 trillion in premium equivalent terms last year.

“Both primary insurance and reinsurance sectors contribute to closing the protection gaps,” Swiss Re said in its report. “In an environment where heightened risk awareness prevails, the role of reinsurance in providing peak capacity for the primary insurance sector is becoming increasingly relevant. 

“This is also reflected in the fact that property reinsurance — the line covering the largest part of natural catastrophes – has seen premium volume growth of 4.3% in primary insurance and 5.9% in reinsurance over the last decade.”

Allstate has blamed catastrophe losses for much of its recent troubles, announcing in August that its estimated catastrophe losses for the month of July were $313 million pre-tax.

The insurance giant, which attributed the losses to 18 events, responded by implementing auto rate increases of 8.2% across 12 locations.

So far in 2023, Allstate reported catastrophe losses and subsequent rate increases for every month.

Other insurers have suffered significant catastrophe losses as well, according to a recent S&P’s analysis, which found that despite most insurers writing more premiums during the first three months of the year, the overall loss ratio spiked, growing from 72.4% in Q1 2022 to 76.2% during Q3 2023.

“The first quarter was an unusually active period for natural catastrophes, which, in combination with ongoing inflation-related challenges in the private auto business, led to the highest personal lines direct incurred loss ratio for a first quarter since at least 2001,” S&P’s report said.

The latest loss ratio is a record high for a single quarter since at least 2001, the period S&P began analyzing the data. State Farm incurred the most significant loss ratio with 87.9%, a figure attributed to inflation and national catastrophes.

A separate SwissRE report released in June indicated that while premium growth remains strong, “natural catastrophe losses and persistent inflation weighed on underwriting results” during Q1.

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