Chubb Group had the best financial performance in its history in 2022. The company produced record core operating income and continued to capitalize on favourable commercial P&C underwriting conditions around the world. However, CEO Evan Greenberg predicts that loss-cost pressures on price adequacy will persist, as the market is experiencing a reinsurer-led hard market cycle in CAT-exposed property insurance.
For 2022, the company’s $29 billion global commercial P&C insurance business produced growth of 11% in constant dollars. The company, in its annual report, mentioned one of the reasons for this growth is the favourable underwriting conditions they saw in 2022.
“Commercial P&C underwriting conditions remained favourable throughout the year with prices adequate to earn an appropriate risk-adjusted return. At the same time, the loss-cost environment has hardly been benign given inflationary pressures, economic and social, and the impacts of climate change. I expect favourable industry underwriting conditions overall to continue.” said Greenberg, Chairman and CEO.
While conditions remain favourable, some insurers have had to take on more risk amid the hardening reinsurance market landscape, a trend highlighted by Greenberg in the report.
He notes that the reasons for the rise in insurers taking more exposure and volatility on their balance sheets are the rise in reinsurance pricing, reduced terms of coverage, and reduced availability of reinsurance capacity. Given the realities of climate change and the increasing values at risk due to growing urbanization, these conditions are a long-term possibility. Although, Greenberg stressed that Chubb is prepared to take more risk and, consequently, more volatility, so long as the firm is adequately compensated.
Greenberg also mentioned: “I am concerned about a growing public policy problem as a shortage of insurance or reinsurance capacity at reasonable prices is sustained in areas where there is a concentration of values: think Florida or California. If states deny insurers the ability to price and tailor coverage adequately and deny them the flexibility to manage their concentration of risk, insurers will continue to shed exposure, which threatens the availability and price of quality insurance.”
There are limits to how much risk insurers will take even with total freedom to price and tailor coverage, he explained. As the report highlights, climate change is driving insurers to send price signals about the consequences. This may ultimately contribute to individual behaviour changing in terms of where people choose to live and where businesses choose to locate.
Although there is a cost associated with living in extreme CAT-prone areas, governments cannot take steps to force insurers to subsidize this behaviour or do so themselves. On the other hand, argues the report, affordability is a problem for many who simply make the move to a less CAT-prone area. This issue creates both political and social tensions.
2022 was another active year in terms of natural catastrophes. It was one of the costliest on record for the insurance industry. Exacerbated by climate change and urbanization, the re/insurance industry is facing a growing frequency of costly CATs.
The report suggests this should be a part of the new normal, every season of the year is a major CAT season, punctuated by extremes in temperature from hot to cold, moisture from rain and flooding to drought, fire and wind. Industry-insured losses last year were estimated at $120 billion, essentially the same as 2021’s elevated level and above the five-year average of $97 billion.
For Chubb, the figures for total pre-tax CAT losses in 2022 were $2.2 billion compared with $2.4 billion in 2021, with a five-year average of $2.1 billion. “Since underwriting is our basic business, we strive to never allow our underwriting results to destroy book value,” commented Greenberg.
According to the annual report, the current accident year combined ratio excluding catastrophe losses was 84.2%, compared with 84.8% the prior year. Given that CATs are growing in frequency and severity, and have become a year-round occurrence, they should be a natural and expected part of a property and casualty insurer’s operating results.
“While I fully understand the logic, judging an insurer’s results excluding CATs doesn’t make a lot of sense to me. The revenue associated with taking the CAT risk is in the denominator and the losses are excluded from the numerator, so the more levered against CAT exposure, the better the insurer looks,” said Greenberg.
