Global reinsurer Swiss Re has forecasted that the US property and casualty (P&C) industry will experience significantly better return on equity (ROE) in 2023 and 2024 compared to 2022.
Swiss Re expects the ROE to reach 8.0% in 2023 and 9.5% in 2024, driven by higher premium rates and investment yields.
“Compared with 2022 ROE of 2.5%, our 2023 estimate would be the strongest year-on-year improvement since 2009,” the reinsurer noted.
According to Swiss Re, the US P&C industry has been facing challenging market conditions due to low interest rates, increasing claims costs, and natural catastrophes like Hurricane Ian.
However, the reinsurer expects that premium rates will continue to rise, albeit at a slower pace, with commercial liability seeing a slowing rate gain and property and personal lines showing an increase in growth. This growth is expected to be supported by the firming of the market and improved pricing.
The forecast indicates that premiums are likely to grow by 7.5% in 2023 and 5.5% in 2024.
Swiss Re has predicted that the P&C industry’s combined ratio will improve to 100% in 2023 and 98.5% in 2024. This is in contrast to the industry net combined ratio of 102.4% in 2022, which was driven by inflation that raised loss severities across most lines of business.
“We expect the average investment yield to climb to 3.5% in 2023 and 3.7% in 2024 as recurring yields continue to rise. In 2022 portfolio yields were low (2.7%), largely due to negative realized capital gains.”
Swiss Re estimates that there will be an improvement in capital gains by the end of 2023. Although there was a decrease in reinvestment yields in the first quarter of 2023, they still remain higher than rates on maturing securities.
“We estimate the 2023 reinvestment yield at 5.2%. We forecast one more quarter-point rate increase to bring the upper bound of the Fed funds target range to 5.25% this year before ending next year at 3.75%, and the 10-year Treasury yield at 3.7% and 3.2% in 2023 and 2024,” the reinsurer added.
Despite the positive outlook, Swiss Re has warned that reserve adequacy remains a key downside risk. Inflation may cause losses to develop more than expected, resulting in lower ROE and profitability for insurers and reinsurers.
