In a recent report, Fitch Ratings anticipates a challenging year for the U.S. property casualty insurance (P/C) industry in 2024, marked by modest underwriting improvement following a tough 2023 with poor auto insurance results and significant catastrophe losses.
Persistently high inflation and a slowing economy, with GDP expected to drop from 2.4% in 2023 to 1.2% in 2024, pose significant challenges, particularly in commercial auto and other liability lines.
Fitch warns of a potential unfavourable shift in loss reserve adequacy, clouding the earnings outlook for insurers.
The report suggests that individual companies may experience unfavourable loss reserve development, but widespread material capital deterioration is not expected, with most issuers projected to maintain capital within ratings expectations.
The accuracy of insurers’ loss projections, particularly in the face of inflation and litigation risks in commercial auto and liability business, will play a crucial role in determining whether the industry can sustain its 18-year streak of favourable calendar-year loss reserve development in 2024.
Additionally, it will influence whether adverse reserve development persists in the personal auto business.
Over the last five years, the P/C industry has seen modest calendar-year reserve development of approximately 1% of earned premiums. This trend reflects balance sheet conservatism and improvements in information systems, claims processes, and loss modeling.
However, reserve experience varies across product lines, with workers’ compensation historically showing significant redundancies. Yet, the sector faces uncertainty in maintaining these redundancies in a weakening pricing environment.
The commercial auto liability and other liability segments have reported significant unfavourable calendar-year reserve development in the past five years, with potential weakness in the 2022 and 2023 accident years due to economic inflation and rising social inflation from increased litigation activity.
The personal auto line, traditionally a source of reserve stability, faced challenges in 2022 and 2023, driven by pandemic-related supply chain shortages, higher costs, and increased litigation exposure.
While underwriting changes and premium rate increases are expected to improve personal auto performance in 2024, potential reserve deficiencies may persist in the near term.
Fitch Ratings maintains a neutral outlook for both commercial and personal lines in the U.S. property/casualty insurance sector for 2024.
Stability and potential improvement in results are anticipated, with a gradual recovery in personal auto, continued stability in commercial lines underwriting, and growth in investment income.
