Analyst at KBW have released a report which predicts sustained combined ratio improvement in 2022, and likely beyond.
The continuing earn-in of rate increases that remain above even-elevated loss trends should translate into year-on-year initial accident-year core loss ratio improvement, and, assuming that the past, very typical cyclical conservatism embedded in initial 2021 accident-year loss picks persists, also points to favourable reassessments of its incurred losses.
The firm highlighted that individual monthly year-on-year rate increases have been significantly below 2001/2002 increases, which probably reflects the ‘shock’ aspect of 9/11 losses and declining or flat workers compensation pricing during the current cycle versus material increases 20 years ago.
KBW also noted that pricing generally reflects expected returns, although many insurers update the relevant inputs far too slowly.
The firm believes that the industry pricing has been sustainably ‘wrong’ for almost a decade, for workers compensation and commercial auto, two data-rich commercial lines whose loss trends (pandemic aside) have been reasonably stable over this period.
The analysts expect these lines’ respective underwriting results to regress toward adequacy in 2022, likely reflecting higher commercial auto rates and higher workers compensation losses.
But our primary conclusion from what the firm sees as consistently unexpected results is some sustained skepticism about the power of (objectively increased and improved) data and analytics.
Over the course of 2021, many insurance executives explained their companies’ relatively limited y/y core loss ratio progress, by emphasising the conservatism embedded in their initial accident-year 2021 reserving.
KBW concedes that conservative reserving is virtually always better for shareholders, we’re frankly not fans of this inconsistent approach of conveniently-increased conservatism, which adds more opacity and more subjectivity to insurer results.
Still, this cyclical reserving pattern of more conservative initial reserves when P&C rates are higher, and more aggressive reserving when rates are lower is very typical of the industry, and points to continuing future earnings as accident-year 2021 incurred losses are re-estimated.
