Fitch Forecasts 2024 Improvement in US P-C Insurance

According to Fitch Ratings, the US property-casualty (p-c) insurance industry is poised for modest underwriting improvement in 2024. This follows a challenging period in 2023 marked by poor auto insurance results and substantial catastrophe losses. Fitch believes that persistently high inflation and a projected slowdown in economic growth, with gross domestic product expected to drop from 2.4 percent in 2023 to 1.2 percent in 2024, could introduce uncertainties in loss reserve adequacy, particularly affecting commercial auto and liability product lines.

Fitch anticipates that individual companies may experience unfavorable loss reserve development in this economic climate. However, the rating agency believes that few insurers are expected to face significant capital deterioration due to future loss reserve weakness, maintaining capital within ratings expectations.

The accuracy of insurers' loss projections, particularly related to claims severity influenced by inflation and litigation risks in commercial auto and liability business, will determine the industry's ability to sustain its 19-year streak of favorable calendar-year loss reserve development in 2024. Additionally, it will play a crucial role in determining if unusual adverse reserve development persists in personal auto business, Fitch said.

Over the last 5 years, the p-c industry has recorded modest calendar year reserve development of approximately 1 percent of earned premiums, including 2023. Fitch attributes the industry's consistent reserve adequacy to balance sheet conservatism and advancements in information systems, claims processes, and loss modeling over time.

Loss reserve experience has varied across product lines, with segments like fidelity and surety, medical professional liability, and special property reporting reserve redundancies. In contrast, workers compensation has represented over 90 percent of all industry-favorable development from 2018 to 2022, averaging 14 percent of the segment's calendar year earned premiums, Fitch said.

While workers compensation loss reserves likely remain redundant, uncertainties arise regarding insurers' ability to maintain large redundancies in a weakening pricing environment. Despite benefiting from a long-term trend of declining claims frequency, a substantial increase in medical inflation could impact reserve strength in this segment, said Fitch.

The commercial auto liability and other liability (occurrence and claims made) segments have reported significant unfavorable calendar year reserve development in each of the last 5 years, according to Fitch. Other liability (occurrence) reported reserve deficiencies averaging 7 percent of segment earned premiums from 2018 to 2022 and commercial auto averaged 6 percent. On an accident year basis, these segments showed weakness in the 2015–2019 period, with potential for further weakness in the 2022 and 2023 accident years due to recent economic and social inflation, Fitch revealed.

Fitch also highlighted that the personal auto line, traditionally a source of reserve stability, has faced challenges in recent years. Despite its historical modest reserve redundancies, slow recognition of sharp increases in claims severity from pandemic-related supply chain shortages, higher parts and labor costs, and greater litigation exposure led to large underwriting losses and adverse reserve development in 2022 and 2023.

While underwriting changes and significant premium rate increases are expected to foster better personal auto performance in 2024, Fitch noted that reserve deficiencies may continue to emerge in this segment over the near term.

Fitch's overall outlook for the US p-c insurance industry in 2024, encompassing both commercial and personal lines, remains neutral, expecting stable to improving results and continued stability in commercial lines underwriting and growth in investment income.