Premium growth will also continue despite the economic slowdown says Moody’s, with expected real GDP growth of 1.9% in 2022 and 1.3% in 2023, following growth of 5.7% in 2021.
It notes that the sector has a healthy balance sheet, with high-quality investments and strong liquidity, although investment values are subject to interest rate and equity market volatility.
Moody’s estimates that direct premiums written for US commercial lines will increase by 10% to $430bn for full-year 2022 from $391bn in 2021 due to rising rates and growth in insured exposures.
Commercial insurers reported strong combined ratios during the first half of 2022, adds Moody’s, given the compounding effect of multiyear rate increases and tighter terms and conditions.
It wrote, “For 2022, we expect many commercial lines insurers to report the lowest full-year combined ratio since 2007, assuming normalized catastrophe losses. We also expect the price increases to be in line with loss costs in the year ahead, leading to continued strong commercial lines underwriting results.”
However, it also notes that higher construction materials and labour costs are continuing to increase loss severity for commercial property insurers.
Adding, “If medical inflation were to increase in line with the broader economy, commercial casualty insurers could experience underpricing and adverse reserve development.”
According to the report, insurers can be hit by rising social inflation, meaning loss costs resulting from legal environment changes.
Among US commercial lines insurers that Moody’s rates, shareholders’ equity declined by 19% from year-end 2021, which it attributes to higher interest rates driving unrealized investment losses on fixed income securities.
Despite the large unrealized investment losses, US commercial lines insurers have strong liquidity and generate good operating cash flow from new and renewal business, says Moody’s, adding that as their fixed income securities mature, insurers will benefit from higher current yields on new fixed income investments.