The U.S. property and casualty market is positioned for a return to underwriting profitability and significant return on capital improvements for the full year following the best Q1 result since 2007, according to Fitch Ratings’ latest findings.

However, full-year results may not match Q1’s due to natural catastrophes and loss reserve experience unknowns, the report states.

“The industry underwriting combined ratio (CR) improved by over eight points YoY [year over year] to 94% in Q1, representing the best first quarter underwriting result since 2007. Favorable prior-period reserve development was higher in Q1, representing 3.3% of earned premiums versus 1.9% in the prior-year quarter. Fitch’s sector outlook for U.S. personal lines insurance recently moved to ‘improving.'”

Fitch says strong statutory underwriting profit YoY during Q1 was driven by lower winter storm losses and a recovery in personal auto results.

“The market faces considerable challenges regarding the sustainability of commercial lines pricing to meet ongoing loss-cost inflation and heightened litigation-related risk in several segments,” Fitch wrote regarding commercial lines compared to personal lines. “Favorable pricing conditions in Q1 supported ongoing strong net written and earned premium growth of 10% and 11%, respectively.”

Policyholders could see the brunt of where P&C insurers gain profits this year, according to Fitch.

“Sharp price increases will continue to support personal lines underwriting improvement through 2024, as reflected in direct written premiums (DWP) growth of 16% in personal auto and 13% in homeowners relative to 1Q23,” the report states.

Decreases in the direct loss ratio for private passenger auto and homeowners stand out as the biggest improvements, according to Fitch’s data.

“Improvement in performance for 2024 will continue to be driven by personal lines results, attributable to recent substantial pricing actions and a moderation of unusually high loss severity trends,” the report says.

Higher yields contributed to a 32% YoY increase in investment income, but this figure was also affected by a one-time $2.1 billion dividend from affiliates for Liberty Mutual.

Q1 direct loss ratio in private passenger auto insurance dropped by nine points with the most substantial improvement in physical damage coverage, while the homeowners’ loss ratio fell by 13 points.

Fitch concluded that, “The accuracy of insurers’ loss projections for claims severity tied to inflation and litigation risks in commercial auto and other liability business will determine if the P/C industry will reach its 19 consecutive year streak of favorable calendar-year loss reserve development in 2024.”

A June Swiss Re Group report also points to the compounding effects of more severe and frequent natural catastrophes on critical infrastructure and supply chains as a key emerging risk.

Summed up, decreasing resilience of supply chains would lead to more business interruptions, risking economic slowdown and underfunding of public health could lead to higher morbidity and mortality rates, particularly in case of a future pandemic, which could also result in lower economic growth, Swiss Re wrote.

“We live in a world characterised by interconnected crises, which in turn can give rise to new risks,” said Patrick Raaflaub, Swiss Re Group chief risk officer. “For re/insurers, it is key to anticipate trends and understand how major global issues such as climate change, economic uncertainty, or geopolitical turmoil could impact not only the industry but also society as a whole.”

Post-COVID, cost savings is the focus, and while cost pressure has grown, so have the risks to supply chains — as exemplified by the Red Sea crisis, Swiss Re wrote.

“Due to the more volatile geopolitical landscape, increasing frequencies of extreme weather events, economic uncertainty, and heightened cyber and technology risks, key supply routes around the globe are likely to become less secure,” Swiss Re said.

LexisNexis Risk Solutions found in its 2024 U.S Auto Insurance Trends Report that high claim severity continues due to parts and labor shortages and rising attorney involvement.

According to the report, 93% of claimants who sought legal counsel were likely to retain services in the future. LexisNexis also found that consumer dissatisfaction around total loss because of lengthy claims processes remains high at 46%.

A May CNBC article surmised that with new and used vehicle prices trending down and a flat month for maintenance service costs, insurers could slow their premium increases.

U.S. Bureau of Labor Statistics (BLS) recently reported the motor vehicle insurance index rose 1.8% in April after rising 2.6% in March. Auto insurance is mentioned as an item that had a notable increase of 22.6% over the past year.

Multiple media agencies have reported that it is the largest annual increase for auto insurance since 1979.

Images

Featured image credit: designer491/iStock

Data graphs provided by Fitch Ratings