Elevated loss activity and equity market volatility this year has led to a drop in net income and a decline in policyholders’ surplus for P&C insurers, says AM Best’s new Best’s Market Segment Report.
The report says that the drop in net income and the decline in policyholders’ surplus has occurred despite a growth in premiums over 2021 and the first half of 2022. It says that like the broader P/C market, mutual insurers also continue to face market challenges, including rising inflation, supply chain shortages, active weather events, and more costly reinsurance.
In the first half of 2022, the population of P/C mutuals recorded negative net income following $12.0 of net income in the same prior-year period, as well as a $12.3m underwriting loss. These results followed a year-over-year net income drop of 17.5% in 2021 and additional underwriting losses.
At the same time, AM Best said that net premiums written have continued to grow, as they have each year since 2010. Net premium growth in recent years has benefited from insurers placing a higher emphasis on rate adequacy, particularly in the personal auto lines as it has a disproportionate impact on the segment, and increasing reinsurance costs, which have been exacerbated by an elevated degree of weather-related events, specifically in the form of secondary perils.
Lauren Magro, financial analyst at the company, said: “For the personal auto lines, the pandemic created a favourable financial shock and considerable improvement in incurred loss ratios in 2020. However, in 2021, the loss ratio deteriorated by 8.6 percentage points for private passenger auto liability and 16.5 points for auto physical damage, likely influenced by a return to normal frequency and a rise in severity due to inflation, supply chain pressures and labour shortages.”
The report notes that the homeowners’ loss ratio improved in 2021, but the improvement was more of a return to historically normal levels and was not enough to offset the volatility in the personal auto line’s loss ratios.
At year-end 2021, P/C mutual insurers’ surplus stood at $422.3bn, a 10% increase from the end of 2020, aided by positive equity market performance during the year. However, at the midpoint of 2022, surplus has dropped back to $381.3bn, largely negating the previous year’s gain.
