Watching developments in the property and casualty (P&C) insurance lines over the last couple of years has been like watching a landslide, where a slight change in an unstable environment can cause the higher ground to shift, starting a chain reaction of compounding issues that destabilize the ground below.
For first-party risks, increasing prices on materials and supply chain disruptions had a compounding effect on insurance claims costs.
In 2022, inflation was the catalyst. For first-party risks, increasing prices on materials and supply chain disruptions had a compounding effect on insurance claims costs. On the casualty side, social inflation continued to lead to disproportionately high claims.
Property reinsurers cut capacity
As reinsurers lost their footing, particularly after Hurricane Ian, they made wholesale cuts in property reinsurance capacity, resulting in both substantial price increases and larger retentions for many retail insurers. Retail insurers began overhauling their property insurance portfolios, reducing capacity and driving a hard property market for consumers that, in many ways, surpassed hard conditions experienced in 2020.
For property insurance, these hard conditions have prevailed throughout 2023. With the combination of inflation, Maui wildfires and convective storms, the industry will close 2023 with more than $100 billion of insured property losses, despite what may end up being a mercifully calm Atlantic hurricane season. A possible silver lining could be that the restructuring of reinsurance treaty retentions throughout the year will leave the capital base poised to generate meaningful returns. If that occurs, additional capital could come into the property insurance marketplace and help mitigate the hard property market in 2024.
This is not, however, to suggest the return of solid footing.
Casualty treaty reinsurers telegraph concerns
Heading into 2024, casualty treaty reinsurers are telegraphing concerns around social inflation and rate adequacy in the liability lines. If investment and reinsurance capacity falls out of the liability lines, the current “moderate” rate environment could be pushed into harder conditions.
From an economic standpoint, news headlines drive a sense of uncertainty amid war in Ukraine, conflict in the Middle East and a slowing Chinese economy. Yet the P&C industry remain well capitalized with $1,018.6 billion in policyholder surplus and increasing yields as of June 14, 2023 according to AM Best. While the markets aren’t yet willing to adopt the cash flow underwriting concepts of the early 1990s, the improved investment yield undoubtedly will continue to help carriers’ bottom lines.
Despite the shifting terrain, in the near term, we don’t expect material or sudden changes in the market – for better or worse.
Despite the shifting terrain, in the near term, we don’t expect material or sudden changes in the market – for better or worse. The property market will try to lean into the hard market for as long as possible (which could be increasingly difficult if new money comes into the market on January 1). With a constricting capital base and current insurers remediating their liability portfolios, the casualty market might attempt to drive rate increases.
The bright spot: Financial lines
On a brighter note, the financial lines, including cyber, appear to be on steady ground in a soft market. It would likely take a couple of considerable claims or a troubled financial market for the financial lines to begin to slip significantly toward a hard market.
Thank you for your interest in this edition of Insurance Marketplace Realities and we look forward to working with you in navigating a dynamic market.
Here are some highlights from our 2024 predictions:
Disclaimer
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
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