Fitch: Inflation Tied to Claims Severity Boosts U.S. P/C Insurers’ Reserve Risk in Casualty Lines

Fitch Ratings said it expects the U.S. property/casualty insurance industry to generate modest underwriting improvement in 2024, following poor auto insurance results and inordinate catastrophe losses in 2023.

Persistently high inflation and slowing economic growth, along with an expectation for GDP to drop to 1.2% in 2024, raise the potential for an unfavorable shift in loss reserve adequacy that clouds the earnings picture, led by commercial auto and other liability product lines, according to Fitch.

“We anticipate that a higher proportion of individual companies will report unfavorable loss reserve development in this environment,” the ratings agency said. “However, few insurers are expected to have material capital deterioration from forthcoming loss reserve weakness, with capital for issuers expected to remain within ratings expectations.”

According to Fitch, the accuracy of insurers’ loss projections for claims severity tied to inflation and litigation risks in commercial auto and other liability business will determine if the P/C industry will reach its streak of 18 consecutive years of favorable calendar-year loss reserve development in 2024.

In aggregate, the P/C industry has generated modest calendar year reserve development of roughly 1% of earned premiums for the last five years, including 2023. The industry’s long-run trend of reserve adequacy reflects balance sheet conservatism and improvements in information systems, claims processes and loss modeling over time.

Loss reserve experience varied by product line. While segments including fidelity & surety, medical professional liability and special property reported reserve redundancies over the last five years. However, workers’ compensation represented over 90% of all industry-favorable development from 2018-2022, averaging 14% of the segment’s calendar year earned premiums for this period, according to Fitch.

“The sector outlook for US P/C insurance for 2024 is neutral for both commercial and personal lines,” Fitch said. “We expect results to be stable to improving, with a gradually emerging recovery in personal auto, continued stability in commercial lines underwriting and investment income growth.”