Article img

Inside in Full: 2022 P&C insurance outlook: Good times will not last, and commercial could be the worst

Although it hasn’t snowed in New York City, it definitely feels like the holidays. Or, at least it did until the Omicron variant rudely inserted itself into every room, conversation and cough...

Thanks to the pandemic resurgence, both Christmas and New Year ended up feeling like Groundhog Day.

However, the same cannot be said for the P&C industry, which had more action over the past year than the previous decade or so.

Instead, industry participants and observers had to navigate a mountain of novel issues, including the start-again-stop-again economic recovery, the inexorable rise of inflation pressuring personal auto carriers with elevated severity, the brokerage super-cycle, the so-called hardening market in the commercial lines, and reinsurers yet again holding the line on rates.

Notable catastrophe loss events filled the year from the very beginning, with the Texas freeze in February, to the very end, with the December Kentucky tornadoes, and chief among them was Hurricane Ida, which looks like it could ultimately cost $30bn or more.

In terms of company-specific events of the past year, the sudden collapse of the Aon-Willis merger deal in July shook both the brokerage and the M&A worlds as the US government stepped in to halt the merger. As a result, brokers who had taken advantage of the firms’ fleeing workforce were again pressured to compete for skilled talent.

And in the InsurTech space, the elevated valuations of incoming SPACs and IPOs led to depressed stock performance as promised growth proved unrealistic and capital depletion created pressure. Lemonade’s acquisition of Metromile was a response to neither firm meeting performance and profit expectations and could be a harbinger of things to come.

In summary, 2021 was not a quiet year, and we expect 2022 to also include much variability in each subsector. Immediately below we outline our high-level take, with additional detail on each area below.

Commercial

Commercial lines has been an area of strength through 2021, with pricing increases lasting longer than expected. This generalization was especially true in E&S, which capitalized on the market dislocation. Covid and its variants have suppressed the rebound in loss cost trends – something that we don’t anticipate lasting through 2022. Consequently, we are more cautious on this subsector and believe companies will likely underperform the lofty profitability expectations from earned rates.

Personal

The direction of the personal auto subsector has proved to be the most challenging due to countervailing forces. Personal auto carriers seem to be playing catch-up in a rising loss-cost environment. We believe personal auto carriers will be able to address this trend, and it is likely that by year end would be able to outperform the pessimistic expectations that are in broad currency.

InsurTechs

Could 2022 be the year when this class grows up? The continued decimation of InsurTech stocks may translate into a learning opportunity. Too much time has been spent on the total addressable market, and too little on any semblance of profitability. Over 2022, we expect more consolidation/take-outs that will thin out this herd.

Reinsurance

Although reinsurance buying is interlinked with how commercial carriers react to broader economic forces, this subsector has dealt with consistently higher cat losses, non-cat losses, and trapped capital in ILS. Recent renewals point to the industry experiencing a difficult period imposing higher rates, and we are moderately optimistic that reinsurers will get the rate they need. As such, we are more positive about this subsector.

Brokers

Brokers have clearly benefited from the supercycle, evidenced by the solid organic growth over 2021. However, since there is a strong correlation between their top line and the broader market conditions, we anticipate growth to continue to slow down over 2022, with 2021 possibly standing out as the high-water-mark year.

What did 2021 bring us? Groundhog Day

Last year started with expectations that some of the variability surrounding Covid would eventually die down due to vaccine development and the eventual economic recovery, coupled with a change in leadership in the US.

However, after a modest resurgence in summer post-vaccine availability, the arrival of the Delta variant, and more recently the Omicron variant, has slowed down the chatter surrounding recovery.

The commercial lines subsector is most directly linked to GDP growth and payrolls and, despite an anemic recovery, talked up a robust pricing climate. Compounding this further was an increase in catastrophe losses for the year, with the only the fourth-ever $100bn+ year on record.

Apart from commercial lines, the other big topic was the rebound in loss cost trends surprising personal auto carriers. Homeowners writers were generally more impacted by the continued higher losses in this segment, with the period of elevated cat losses stretching back to 2017.

On the other hand, reinsurers mainly were an afterthought in many discussions over the year. Instead, much focus was spent on brokers, acquisitions, and growth/margin, although discussions have somewhat returned to normal in this subsegment.

2022 timeline: Our take on how 2022 might shape up

H1: Optimism on fumes

January: Although recent reinsurance renewal reports point to a somewhat balanced view, we expect further updates on January 1 renewals, ILS growth and trapped capital.

February: The Q4 reporting season should continue to debate pricing momentum and shifts in loss-cost trends. However, the focus will remain on the underlying loss ratios, attritional losses and reserve development. In addition, catastrophe losses may be higher than initially anticipated from year-end losses.

March-April: Reserve analysis on US statutory reserves and global loss triangles are unlikely to surprise since last year was still relatively benign. As things begin to recover from the Omicron variant, there will be a shift in the discussion between loss cost and broader inflation. The New Year might be a good time for the industry participants to think about consolidation before the hurricane season arrives in the next few months. M&A could consequently pick up.

April: Reinsurers may once again try to talk up the April 1 renewals. The Tropical Meteorology Project at Colorado State University will release the season forecast in April, anticipating an active hurricane season based on the preliminary forecast. On personal lines, discussions will continue to center on whether loss cost trends are normalizing. InsurTech results will demonstrate whether they remain loss leaders to deliver growth expectations, or whether there is a bit of mea culpa?

H2: Make or break

June: The 2021 hurricane season was active, although we did not have a blockbuster loss. The start of the hurricane season will once again bring back the discussion on exposures and probable maximum losses.

July/August: Mid-year renewal discussions will depend on outsized losses. In addition, the anticipation (or apprehension?) of the annual Monte Carlo Rendez-Vous begins. Finally, rate increases will likely start petering out on the commercial lines side as the economy continues to be depressed.

September: Initial indication from Monte Carlo will outline the remainder of the year related to reinsurance pricing, third-party capital and innovation in the insurance industry.

October/November: Pressure on rates will intensify on the commercial side. Personal results will look steadier due to the short-tail nature.

December: In the absence of an active hurricane season, reinsurance renewal commentary will also begin to turn pessimistic.

Below we discuss these sub-segments in greater detail:

1. COMMERCIAL – Things will take a turn for the worse

The 2022 economic outlook appears to be dealing with a lack of clarity due to the recent emergence of the Omicron variant, which ties into the continuation of supply-side constraints.

GDP forecasts call for a slowing down to the 4%-ish range vs. an expected 5.6% for 2021. The unemployment rate similarly continues to decline in the 4% range, although a lot of the growth has come in professional and business services, transportation and warehousing, construction, and manufacturing.

The chart below shows the correlation between GDP and industry premiums and suggests that a continued slowing of growth could impact industry premiums.

Looking at the economic picture another way, the number of unemployed declined by 542,000 to 6.9 million as per November BLS numbers, although still above pre-Covid levels. On the other hand, the number of new entrants (unemployed people who have not previously worked) declined by 97,000, and the number of long-term unemployed was little changed at 1.1 million (32.1% of the unemployed).

The unemployment rate for 2022 is forecast to drop to 3%, but it remains unclear how Omicron changes this number. In theory, an improving economy is a leading indicator of commercial insurance companies’ ability to pursue top-line growth and vice-versa. However, what also matters is the unequal distribution in these numbers. Are the numbers improving in the true engines of the broader economy or more focused in the services sector, which are concentrated in nature?

The commercial insurance segment is heavily dependent on how the small-business sector functions and, in recent months, has declined after attempting a rebound. If small business optimism continues to trend down, this would be a negative indicator for commercial insurers. 

Commercial insurance pricing data has shown signs of plateauing

As shown in the charts below, pricing, although still up, has begun to plateau. With a less than stellar economic outlook as discussed above and an uptick in loss costs, we posit it would be tough for commercial insurers to continue chasing rates.

We have heard a lot about how the industry has gotten rate-over-rate. 2022 is when earned rates should start having a meaningful impact on raising industry returns. However, we remain unconvinced that the improvement will be across the entire sector. Specialty insurers, including E&S insurers, will likely perform better. 

Consequently, we project overall combined ratios beginning to rise from 2022 through 2024 as underlying loss costs pick up. As a result, we are not convinced that rates discussed on the conference calls will translate into true ROE improvement.

This pressure on ROE will be from a combination of changes in a slowdown in pricing and a return to a normalized loss environment as the court system opens up.

Reserve releases will also begin to trend down, as a pickup in loss trends results in commercial insurers taking a wait-and-see approach for recent accident years. With interest rates remaining low, a pickup in combined ratios will not be offset by investment income, and ROEs will stay in single digits. Consequently, the good times are over in the commercial sector, and the market should brace for declining results, particularly in the second half of 2022. 

 2. PERSONAL INSURANCE – Things might not be as bad as they appear

Personal lines results can be segmented into personal auto and homeowners. Personal auto is the predominant piece, taking up close to 40% of total industry premiums vs. 15% of the industry for homeowners. That is one reason why overall personal lines results are more dependent on personal auto results.

Personal auto initially seemed to be coasting in 2020 due to a pullback in driving and a resultant decline in loss cost trends. In fact, some of the auto carriers reported some of the best results in 2020. The graph below illustrates this, with frequency declining over 2020 and slowly rebounding over 2021. 

But as things started to open up, the emptier roads and highways caused more reckless driving and resulted in an uptick in severity, which offset the improvement in frequency. Making matters worse over 2021 was the supply chain and chip shortage, which worsened car repairs and replacement costs. The used-car market also seized up with unheard-of jumps in pricing, as seen in the Manheim index.

Miles driven declined meaningfully and will rebound slowly over 2022, resulting in a more normalized loss-cost environment for personal-auto insurers. 

We disagree with the premise that personal auto results will continue to collapse over 2022. Personal auto players have continued to play catch-up with rates over the past several months. Additionally, personal auto is a short-tailed line where most carriers write six-month policies. Finally, the recent surge in the Omicron variant could muddy the personal auto environment short-term, but we anticipate results to continue to recover longer-term.

Our examination of rate filings also indicates this change where rates are beginning to get closer to mid-single digits. As personal auto companies pursue rate adequacy over top-line momentum, we expect this trend to continue. 

On the homeowners front, losses from cat and non-cat claims impacted results, and consequently, the rate picture was more uniform, as shown below. However, do recall that homeowners is a smaller portion of the personal lines pie. 

Consequently, when looking at total personal lines industry results, we expect consistent rate action to continue to impact the personal auto loss results. Our internal model projects improved results over the next three years. 

 Beyond the established personal auto and homeowners writers, our view on InsurTechs is cautious optimism.

InsurTechs, which compete primarily in the personal lines space, have experienced a rollercoaster year, with optimistic SPACs and IPOs followed by poor performances on firm balance sheets and in the stock market.

Some of the year's biggest stories were centered on InsurTech firms, and short interest has been laser-focused on InsurTechs. We can expect more consequences from shareholders as firms continue to miss overly ambitious goals and possibly continued consolidation following the Lemonade-Metromile acquisition.

The stock reaction may also result in more realistic expectations for this cohort and could be viewed as an early sign of maturity.

3. REINSURANCE – Less talked about, but remains resilient

The 2021 hurricane season was highly active, producing 21 named storms, seven of which became hurricanes. Swiss Re has estimated that the economic impact from hurricanes and other weather-related events in 2021 amounted to $101bn.

The very early 2022 hurricane season forecast from Colorado State University’s Tropical Meteorology Project shows no respite with estimates at 13-16 named storms, six to eight hurricanes and two to three major hurricanes.

The chart below illustrates that losses have worsened for the industry over the longer term, and recent years have been highly active.

Yesterday, Inside P&C’s news team noted that the January 1 renewal was okay and generally hit the right notes, without not getting to the anticipated levels. This has somewhat become a rite of passage where the market heads into January 1 with extreme optimism, eventually walking out with a more realistic outcome.

The chart below shows the latest rate-on-line data as per Howden. 

 The January 1 cat ROL globally rose by an average of 9% vs. 2021 at 6%. Howden, in its report, noted that this was the most significant year-over-year increase since 2009. This uptick was mainly due to the active 2021 catastrophe year, which was only the fourth year on record to net over $100bn in losses.

Some of the pricing uptick also reflected the travails of the ILS market. Cat treaty rates collapsed from 2013 onwards as the amount of alternative capital surged, but since 2018 capital has been flat on a nominal basis and with significant amounts trapped, deployable capacity is much lower than in prior renewals. This has led to a precipitous fall in available retro capacity and a surge in pricing that has in turn impacted first-tier reinsurance pricing.

4. BROKERS – Could the super-cycle peter out?

The (re)insurance brokers were the talk of the town for several months during the Aon-Willis proposed merger, which was eventually abandoned due to regulatory issues.

Beyond that, the (re)insurance brokers have benefited from the broader improvement in market conditions which we termed the super-cycle, which had consistent gains in organic growth and margins from late 2020 through the majority of 2021.

However, in Q3 2021, organic growth for the group began to flatten out vs. Q2 2021. Nevertheless, most brokers have continued to point out the strength in organic growth going forward, with many proclaiming that they see no signs of an impending slowdown. 

 We acknowledge the strong growth, partially built upon the solid commercial insurers' pricing momentum. But insurance brokers are the first derivative of market cycles, and a slowing economy and a slowdown in rates could result in these numbers moving to single digits by the end of 2022.

Consequently, we would anticipate that 2021 was a peak year in organic growth and margins, and 2022 results (second half) might end up being softer than initially expected.

STOCK PERFORMANCE 2021 vs. 2020:

When looking at the stock performance for the group brokers, commercial (specialty) led 2021 while Bermuda reinsurers were in the middle, followed by personal auto. InsurTech and Florida domestics had the worst performance for the year. 

In summary, we expect 2022 to be a marginally softer year for commercial carriers, brokers, and InsurTechs. While elevated natural catastrophe levels seem more common, reinsurance firms seem more prepared for elevated loss cost trends. Thanks to Omicron, personal auto carriers may be off to a rockier start but will find firmer footing as the year progresses.

Inside P&C provides unparalleled market intelligence on the entire US P&C market – from small commercial and personal lines right through to reinsurance and Bermuda. Redeem your complimentary 14-day trial for more premium content from Inside P&C.

VISIT INSIDE P&C

See more
See less
Share fluctuations
Sompo
31.0
USD
-3.2%
Tokio Marine
30.2
USD
-3.1%
MS&AD
26.5
USD
-2.5%
Hannover Re
43.4
USD
-1.6%
IGI
12.5
USD
-1%
Ryan Specialty
54.0
USD
-0.7%
WTW
272.0
USD
-0.6%
Truist
37.2
USD
-0.6%
Brown & Brown
84.9
USD
-0.4%
AXA
36.5
USD
-0.4%
QBE
11.3
USD
-0.4%
RenaissanceRe
24.8
USD
0%
See more
See less
Upcoming events