Unpacking the FIO Report: Why P&C Insurer Surplus Shrank for the First Time in 10 Years

Inspecting the FIO’s Newest Snapshot of the P&C Insurance coverage Sector

The Federal Insurance coverage Workplace (FIO) of the U.S. Division of the Treasury not too long ago launched its 2023 Annual Report on the Insurance coverage Business. A federal statute requires the FIO to publish an annual report on the prior yr’s leads to america insurance coverage trade.

The Congress established FIO as a part of the Dodd-Frank monetary reforms enacted into regulation following the 2008-2009 monetary disaster. The company’s activity is to observe all features of the nation’s insurance coverage sector, figuring out dangers contributing to future instability in america insurance coverage markets. Insurance coverage trade professionals right here in Massachusetts will discover it value reviewing the small print of the FIO’s newest annual snapshot, significantly the property and casualty (P&C) sector.

Overview of the FIO’s 2023 Insurance coverage Business Report

The Federal Insurance coverage Workplace’s (FIO) 2023 Annual Report on the Insurance coverage Business supplies a complete evaluate of U.S. insurance coverage corporations’ monetary efficiency and situation in 2022.

The report is organized into the next key sections:

• Introduction: Offers background on the FIO’s tasks and summarizes main actions for the reason that prior yr’s report.
• Part II – Business Monetary Efficiency: Analyzes the 2022 monetary outcomes for all times and well being (L&H), property and casualty (P&C), and well being insurers. This part notes that market volatility, inflation, and rising charges weighed on efficiency. Premium progress continued however slowed, whereas the trade noticed its first surplus contraction since 2008, pushed by capital losses. P&C insurers confronted challenges from greater enter prices, catastrophes, and value of capital. Nevertheless, tight asset-liability matching and give up protections supported liquidity and capital power. The part additionally examines funding and credit score tendencies, inventory efficiency, capital markets exercise, decrease M&A quantity, cyber insurance coverage, and offshore reinsurance. It concludes with an trade outlook.
• Part III – Conclusion: Summarizes anticipated areas of focus for the FIO within the coming yr primarily based on the tendencies and points highlighted all through the report.

Unpacking the FIO’s Newest Evaluation of the Property & Casualty Insurance coverage Sector

The FIO report signifies the P&C sector noticed direct premiums written attain a brand new report of $876 billion in 2022, a ten% enhance over 2021. Nevertheless, underwriting profitability declined final yr as a consequence of greater loss ratios, particularly for private auto strains. The loss ratio for the general P&C sector jumped to 66.4% in 2022 from 62.4% the prior yr. Funding earnings rose as a consequence of greater rates of interest, however capital positive aspects decreased considerably. Because of this, web earnings for the P&C sector dropped 31% in 2022, and the return on common fairness fell to only 4.3% final yr.

When it comes to monetary situation, the report confirmed policyholders’ surplus declined in 2022 for the primary time in over a decade, attributed primarily to unrealized capital losses. Leverage ratios elevated however stay inside historic ranges. Liquidity metrics weakened considerably, although cashflows did keep optimistic. The credit score high quality of P&C insurer investments improved barely, however different funding holdings are nonetheless sizable at 8.5% of the full funding portfolio.

P&C Premiums Reached New Highs in 2022

• Direct premiums written for P&C insurers totaled a report $876 billion in 2022, rising 10% over 2021 ranges. This marks the second consecutive yr of robust premium progress for the sector.
• Premiums for private strains rose 8%, whereas business strains elevated 11% in 2022. For the primary time in over a decade, business strains premiums exceeded private strains.
• A number of elements drove progress:
  • Many strains of enterprise, however particularly private auto, had fee will increase accepted
  • Costlier supplies and labor prices from excessive inflation
  • Larger publicity to catastrophic dangers
  • Stronger pricing in business strains

Underwriting Efficiency Suffered in 2022

• Underwriting profitability declined considerably for P&C insurers final yr. The mixed ratio rose to 102.7% in 2022 from 99.7% in 2021. A ratio above 100% signifies underwriting losses.
• Elevated loss ratios had been the most important driver of worsening underwriting outcomes:
  • Total direct loss ratio jumped to 66.4% in 2022, up from 62.4% in 2021
  • The loss ratio for private auto strains reached 80.1% in 2022, a 10-year excessive
  • Provide chain points led to greater restore prices, affecting losses
• Disaster losses from main occasions like Hurricane Ian contributed however weren’t sharply above 2021 ranges.
• Favorable prior-year reserve improvement continued however slowed in 2022.

Funding Outcomes Declined however Remained Worthwhile

• P&C’s web funding earnings rose 27% to $71 billion in 2022, aided by greater rates of interest.
• Nevertheless, web realized capital positive aspects fell 90% to only $2 billion final yr as unrealized losses mounted.
• Internet funding positive aspects remained optimistic however totaled 43% beneath 2021 ranges.
• Shorter-duration P&C funding portfolios benefited extra from rising charges than longer-duration life insurer portfolios.
• P&C insurers decreased fairness allocation barely in 2022, probably as a consequence of risky markets.

Surplus Dropped in 2022 However Leverage Ratio Stabilized

• On account of underwriting losses and funding declines, P&C policyholder surplus decreased 6.6% in 2022 – the primary annual drop in over a decade.
• Unrealized capital losses of almost $98 billion eroded surplus in 2022 after giant positive aspects in prior years.
• Internet earnings fell 31% to $43.5 billion in 2022. Return on common fairness dropped to 4.3%.
• Leverage ratios edged up however remained comparatively secure over a 10-year interval.
• Loss reserves elevated at a slower 7.8% tempo in 2022 however remained satisfactory.

The P&C trade’s Liquidity Positions Weakened Barely however Remained Robust

• P&C liquidity was impacted by inflation, driving up claims prices quicker than premium progress.
• Cashflows remained optimistic however slowed, with profit funds up 20% in 2022, far outpacing the 7% premium enhance.
• Nevertheless, short-term investments grew round 7% yearly over the past ten years, supporting liquidity.
• Excessive-grade bonds remained the core of portfolios, averaging 95% of holdings over the past ten years.
• Unaffiliated property persistently remained 2 instances the excess stage over the past ten years, limiting affiliated funding threat.
• The present liquidity ratio dropped however remained sturdy at 139% in 2022, aided by asset-liability matching practices.

Cyber Insurance coverage Continued Its Enlargement however Nonetheless Made Up Solely a Small Portion of the P&C Market

• Direct premiums written for cyber insurance coverage totaled $7.2 billion in 2022, a 51% enhance over 2021. Nevertheless, cyber insurance coverage nonetheless includes lower than 1% of the full P&C insurance coverage market.
• Progress linked to continued however slowing cyber insurance coverage premium fee will increase:
  • Common worth hikes estimated round 62% in 2022: Slower than giant will increase in 2021
• Cyber insurance coverage market stays extremely concentrated:
  • High 10 writers maintain 52.3% market share in 2022
  • High 25 writers mix for over 86% of market share

Implications for Massachusetts P&C Insurers

The FIO report supplies essential insights into the persevering with challenges dealing with P&C insurers nationwide.

• Inflationary pressures will persist, driving up loss prices
• Disaster losses probably will proceed to rise in frequency and severity
• Financial uncertainty might result in market volatility
• Ongoing tightening of credit score circumstances with greater rates of interest

Right here in Massachusetts, we face extra regional issues:

• Disaster exposures are growing, with extra frequent extreme storms in New England
• Heightened cyber dangers in our tech-heavy state
• Longer timelines for regulatory approvals of wanted premium fee will increase

A replica of the free 77-page FIO report might be obtained by clicking beneath:on the Insurance coverage Business

Annual Report on the Insurance Industry, Federal Insurance Office, U.S. Department of the Treasury, September 2023