Fitch Ratings expects the U.S. property casualty insurance (p/c) industry to generate modest underwriting improvement in 2024, following poor auto insurance results and inordinate catastrophe losses in 2023. However, persistently high inflation and slowing economic growth, with Fitch’s expectation for GDP to drop to 1.2% in 2024 from 2.4% in 2023, raise the potential for an unfavorable shift in loss reserve adequacy that clouds the earnings picture, led by commercial auto and other liability product lines.
We anticipate that a higher proportion of individual companies will report unfavorable loss reserve development in this environment. However, few insurers are expected to have material capital deterioration from forthcoming loss reserve weakness, with capital for issuers expected to remain within ratings expectations.
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. It will also largely dictate if uncharacteristic adverse reserve development persists in personal auto business.
In aggregate, the p/c industry has generated modest calendar year reserve development of approximately 1% of earned premiums for the last five years, including 2023. The industry’s long-run trend of reserve adequacy reflects balance sheet conservatism and improvements in information systems, claims processes and loss modeling over time.
Loss reserve experience has varied by product line. While segments including fidelity & surety, medical professional liability and special property reported reserve redundancies over the last five years. However, workers’ compensation represented over 90% of all industry-favorable development from 2018-2022, averaging 14% of the segment’s calendar year earned premiums for this period.
Fitch Ratings-New York/Chicago-12 January 2024: Fitch Ratings expects the U.S. property casualty insurance (p/c) industry to generate modest underwriting improvement in 2024, following poor auto insurance results and inordinate catastrophe losses in 2023. However, persistently high inflation and slowing economic growth, with Fitch’s expectation for GDP to drop to 1.2% in 2024 from 2.4% in 2023, raise the potential for an unfavorable shift in loss reserve adequacy that clouds the earnings picture, led by commercial auto and other liability product lines.
We anticipate that a higher proportion of individual companies will report unfavorable loss reserve development in this environment. However, few insurers are expected to have material capital deterioration from forthcoming loss reserve weakness, with capital for issuers expected to remain within ratings expectations.
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. It will also largely dictate if uncharacteristic adverse reserve development persists in personal auto business.
In aggregate, the p/c industry has generated modest calendar year reserve development of approximately 1% of earned premiums for the last five years, including 2023. The industry’s long-run trend of reserve adequacy reflects balance sheet conservatism and improvements in information systems, claims processes and loss modeling over time.
Loss reserve experience has varied by product line. While segments including fidelity & surety, medical professional liability and special property reported reserve redundancies over the last five years. However, workers’ compensation represented over 90% of all industry-favorable development from 2018-2022, averaging 14% of the segment’s calendar year earned premiums for this period.
Workers’ compensation loss reserves are likely still significantly redundant, but carriers’ ability to maintain large redundancies in a weakening pricing environment remains uncertain, with declining workers’ compensation premium rates point to higher future loss ratios going forward. The segment benefits from a long-term trend of declining claims frequency, but a significant rise in medical inflation could lead to a reduction in reserve strength.
The commercial auto liability and other liability – occurrence (OL-OCC) and claims made (OL-CM) segments have reported significant unfavorable calendar year reserve development in each of the last five years. OL-OCC reported reserve deficiencies averaging 7% of segment earned premiums from 2018-2022 and commercial auto averaged 6%.
On an accident year basis, these segments continued to exhibit weakness in the 2015-2019 accident years. Reserve experience thus far is better in the 2020-2021 underwriting periods. However, potential for segment reserve weakness in the 2022 and 2023 accident years is elevated by recent economic inflation and rising social inflation from increases in litigation activity and nuclear verdicts.
The personal auto line is traditionally a source of reserve stability with a history of generating modest reserve redundancies over time. However, auto writers’ slow recognition of sharp increases in claims severity from pandemic-related supply chain shortages, higher parts and labor costs, and greater litigation exposure led to large underwriting losses and adverse reserve development in 2022 and 2023.
While underwriting changes and large premium rate increases will foster better personal auto performance in 2024, reserve deficiencies may continue to emerge in this segment over the near term.
The sector outlook for US P/C insurance for 2024 is neutral for both commercial and personal lines. We expect results to be stable to improving, with a gradually emerging recovery in personal auto, continued stability in commercial lines underwriting and investment income growth.