US P&C market can overcome costly Q1 nat cats to hit FY targets: Swiss Re

The US P&C insurance business remains on track to post profit sufficient for a 8% ROE in 2023 despite a rocky first quarter, the  Swiss Re Institute has said.

“Despite a difficult first quarter, we still expect improvement in US P&C industry ROE this year and next, on higher underwriting and investment income,” authors said.

There's work to be done to hit the mark. First quarter results were burdened by 20% growth in loss cost, well in excess of premium growth, pushing the industry to a 102.6% combined ratio, a $7.5 billion underwriting loss, and a mere 3.6% ROE, all of which “highlights the downside risks to our forecast.”

The compounding effect of inflation on heightened nat cats took the blame for the Q1 earnings miss, but also lays the groundwork for improvement through end-year: carriers have cut cat-zones and inflation may tame, analysts said.

“Insurers are responding to elevated natural catastrophes and inflation with rate increases when possible and exits when not,” authors wrote. California, Florida and Louisiana are the test grounds for the market’s margins.

Market exits and new business suspensions have focused on homeowners, but underwriting restrictions have extended to commercial property and personal auto as well, authors noted.

The economics of it are clear: Swiss Re cites Bureau of Economic Analysis and Federal Reserve data showing the replacement cost of residential structures up 42%4 from end-2019 to 2022, contributing to a 51% increase in direct incurred claims, while earned premiums have only risen by 24%.

“Overall, we still expect rate increases through 2023 with inflation, natural catastrophes and geopolitical uncertainties exerting upward pressure on claims and operating costs,” authors said of outlook across all lines, not just cat-driven.

Rate gains will drive premium growth, especially as rates play catch-up in personal lines, authors forecast.

Swiss Re for now is standing by its forecast that total nominal premiums will grow by 7.5% in 2023 and 5.5% in 2024, driven by rate gains in personal lines and commercial property. The liability market has been flat on tamer rate trends while D&O and cyber have decelerated or even reversed more notably.

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