Amid market volatility and economic uncertainty following last week’s poorly received jobs report, Insurance Insider recently analyzed what could happen to the property and casualty insurance industry if a recession occurred.

The analysts surmise that the industry could “weather a recession” but only if loss costs and reserving pressures don’t worsen.

The article notes that, over time, the economy has become more dependent on services rather than historical trends of a smaller industry and capital base that were interlinked.

“This shift has played out differently in personal lines cycles versus commercial lines and reinsurance,” the article says. “Even within those segments, trends and results could be very different.”

Looking back to recessions in the early 1990s, early 2000s, the Great Recession, and the COVID-19 Recession, the overall P&C industry outperformed the S&P 500 three out of four times.

“Insurance stocks are often considered a safe haven during uncertainty versus other financials such as banks. So, it is highly likely that the same thesis will play out if the economic climate gets cloudy… a declining GDP must also intersect with a materially adverse loss cost environment for overall ROEs [returns on investment] to fall.”

GDP growth is declining for nearly all of the top insurance writers in the U.S. within California, Texas, Florida, New York, and Illinois. State Farm and Allstate are among the top personal line writers in all five states, according to Insurance Insider.

“For us, the more worrying factor is the direction of loss cost trends and reserving adequacy for prior years,” the analysts wrote.

A report from the National Association of Insurance Commissioners (NAIC) on P&C 2023 full-year results states that it was the third consecutive year of underwriting losses due to above-average catastrophe frequency despite a modest improvement in personal auto.

“Rapidly rising claims costs driven primarily by increased frequency of severe storms and rising replacement costs continued to challenge U.S. property & casualty (P&C) insurers in 2023,” the report states.

“However, net income more than doubled on strong investment gains but the investment yield was slightly lower due to stronger balance sheets… The first few months of 2024 have seen several severe storms, and most experts predict a record hurricane season which will challenge insurers’ bottom lines. Additionally, increased consumer spending has also impacted inflation, which has created uncertainty in the cost of settling claims.”

According to NAIC data, there were 28 catastrophic events in the U.S. last year that generated at least $1 billion in insured losses.

NAIC noted during Q4 2023 the personal lines market saw double-digit rate increases and some insurers began withdrawing from catastrophe-prone areas “due to significant pressure from high inflation, rising reinsurance costs, and rapidly growing losses from natural disasters.”

“Premium growth in the P&C industry continues to be strong, evidenced by a 10.5% increase in direct premiums written (DPW), with the momentum leaning toward the personal lines market which comprised roughly half of total DPW,” the report says. “… After a historically bad year, underwriting performance for personal auto improved largely due to premium increases and expense reductions to offset inflation.”

In April, the U.S. Bureau of Labor Statistics said motor vehicle insurance was one contributor to the consumer price index rising to 3.5%.

The 12-month inflation rate increased from 3.2% in February at an acceleration faster than expected, according to multiple media outlets.

Yahoo Finance reported at the time that auto insurance’s 22.2% annual increase is the largest since December 1976 when prices increased 22.4%.

In June, Fitch Ratings predicted the P&C market would return to underwriting profitability and significant return on capital improvements for the full year following the best Q1 result since 2007, barring effects from natural catastrophes and loss reserve experience unknowns.

Fitch said strong statutory underwriting profit year over year 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.”

The Insurance Insider report states that in three of the four recessions since the early 1990s, commercial carriers outperformed the rest of the industry.

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