While Property-Casualty Market Is Stable, Headwinds Must Be Considered

Businesswoman looking into the distance with office building behind her

March 29, 2023 |

Businesswoman looking into the distance with office building behind her

While the collective outlook for the property-casualty insurance industry is stable, there are headwinds facing insurers that buyers should monitor, a new report suggests.

In a March 2023 Lockton Market Update, Proceeding with Caution, Lockton notes that most property-casualty insurers reported positive returns and growth at year-end 2022. Most remain confident in their ability to earn adequate returns, an attitude supported by the fact that they were continuing to carefully deploy capital, maintain underwriting discipline, and set prices in line with the volatility inherent in current cost assumptions, the report says.

While property-casualty insurers remain profitable and enjoy a favorable investment outlook for this year and next, natural catastrophes and economic and social inflation are increasing loss severity, however, Lockton said. In addition, there is a risk of recession over the next 9 to 18 months, which could increase pressure on insurance pricing.

As property-casualty insurers respond to those headwinds, beyond monitoring their responses, some insurance buyers also might want to revisit their risk financing and capital allocation strategies as conditions evolve, Lockton suggests.

This might be a good time for organizations to reconsider their risk tolerance and volatility thresholds, as well as the role of insurance in their risk financing programs, according to Lockton.

Lockton notes that risk selection has become more critical than ever for insurers, so buyers that can exhibit a commitment to loss control—such as by reducing property risks and improving workplace safety—will experience better outcomes at renewals.

The Lockton report describes the market conditions insurance buyers face in several individual lines. Conditions in the property market are difficult, the report says, while liability and cyber-market conditions are mixed and those in the directors and officers and workers compensation markets are currently favorable to buyers.

Lockton cites three major trends shaping the current property-casualty insurance market. One is property-casualty insurers' solid financial results and return to profitability. Those insurers have enjoyed a relatively strong economy that has driven up net written premiums with inflation acting as a secondary rate increase as it amplifies exposure growth, the report says.

Insurers that reported less-favorable results in 2022 were largely those with large personal lines books of business, according to Lockton.

A second factor is insurers' expected future investment income. Thus far, the impact of rising interest rates on insurers' investments has been muted somewhat by the fact that insurers tend to hold on to bonds and other investments for longer periods. That's largely limited the investment return benefits of rising interest rates thus far to new or rollover investments, Lockton says. But that bit of extra income might help limit rate pressures, the report says, while insurers' long-term investment income outlook is favorable.

A third factor—and potential headwind—cited in the report is economic and social inflation. "Insurers and reinsurers have long understood that buyers do not always accurately report property values; to some degree, this has been an informally accepted practice," the Lockton report says. "Amid high inflation, this is no longer the case and reported values are being closely evaluated."

In addition, supply chain disruptions and increased costs for replacement materials and labor continue to extend the timelines for claims resolutions and drive up the cost of claims, Lockton says. "The net impact of this is that valuations have become a significant point of contention for both insurance buyers and underwriters during property insurance renewal discussions," the report says.

At the same time, social inflation continues to take a toll on property-casualty insurers, according to Lockton. The report cites data from the US Chamber of Commerce Institute for Legal Reform indicating that in the decade prior to the COVID-19 pandemic, "nuclear" jury verdicts—those of $10 million or more—increased in both frequency and severity.

Product liability and auto collision suits—which typically affect companies in a limited number of industries—have historically been major drivers of large verdicts, according to Lockton. But now, premises liability claims—which potentially affect businesses of all types—are responsible for a growing share of so-called nuclear verdicts.

"More troubling is that many nuclear verdicts now contain an element of punitive damages," Lockton says. "The net impact is a growing reluctance to take claims to trial, leading to significantly larger negotiated settlements.

"As courts continue to clear backlogs that had developed since the start of the pandemic, social inflation is reemerging as a leading concern for the industry," Lockton says. "And with no meaningful tort reform on the horizon, many industry leaders have suggested that rate increases will need to accelerate for insurers to stay comfortably ahead of loss trends."

Lockton notes that while some property-casualty coverage lines such as workers compensation are stable or, as in the case of some liability lines and cyber insurance, are seeing price increases moderate, challenges in the property market have grown. For the first time in more than a decade, property reinsurance demand exceeds supply, Lockton says.

In the face of current property-casualty market conditions, Lockton recommends that insurance buyers start the renewal process early and focus on loss control efforts to improve the story they can tell underwriters.

In addition, they should take a "flexible, pragmatic strategy" to their insurance programs, considering the potential benefits of changing retentions and program layers, employing alternative risk financing options, and exploring possible options with new insurers, the Lockton report says.

March 29, 2023