P/C Insurers Show 2020 Underwriting Profits Despite COVID-19: Fitch

Despite considerable operating challenges in 2020 from the global COVID-19 pandemic, U.S. property/casualty (P/C) insurers saw a statutory underwriting profit for the third consecutive year, with an average 99% combined ratio, according to Fitch Ratings in a new report.

In addition to the fallout from the pandemic, U.S. P/C insurers faced a deluge of catastrophe events, including several hurricane landfalls, California wildfires, a Midwest derecho and claims from civil unrest, which added substantially to the 2020 industry loss ratio, said the report titled “U.S. Property/Casualty Market Update: Results Stable Despite 2020 Challenges; Hardening Market Boosts Profit Opportunity.”

This higher catastrophe loss experience was offset by core loss ratio improvement in commercial property and liability lines as a result of “substantial recent price increases and re-underwriting efforts, as well as sharp improvement in personal and commercial auto results tied to reductions in claims frequency in the pandemic-induced economic downturn,” the report explained.

While industry policyholder surplus dropped sharply in Q1 2020 from equity market turmoil, asset markets rebounded and operating earnings materialized resulting in a record surplus increase to $914 billion at year-end, added Fitch.

Underwriting Performance in 2021

Fitch predicted that new claims related to the coronavirus pandemic would gradually subside in 2021.

“Underwriting performance is anticipated to improve in 2021, largely due to continued positive pricing momentum in commercial lines, barring another year of substantially higher than historical norm catastrophe losses,” said the report, noting that the combined ratio is projected to shift downward to 96%-97% in 2021.

“Market surveys indicate that pricing continues to increase at a level unseen since 2003, the last true commercial lines hard market,” continued Fitch.

“Rate increases are driven by past larger catastrophe losses in property lines, poor experience tied to claims severity and rising litigation-related costs in liability segments, and the introduction of considerable claims uncertainty tied to pandemic-related losses.”

Pandemic Claims Uncertainty

Several product segments have pandemic-related commercial insurance claims, which are likely to be subject to litigation that will take several years to resolve, such as business interruption and professional liability, including directors and officers, errors and omissions, and employment practices liability coverage, said Fitch.

“To date, the industry largely has been successful in maintaining that physical damage to property is required to trigger a BI loss. However, individual litigation outcomes remain a source of uncertainty, given the remaining large volume of outstanding claims and suits.”

Fitch said, the long-term health effects of the coronavirus and success of vaccination efforts are not fully known. The potential longer-term effects, “particularly for healthcare industry workers, could prove a source of greater future workers’ compensation losses.”

On a more positive note, Fitch explained, insurers may experience favorable 2020 accident-year reserve movement tied to underestimating benefits from claims frequency declines in such segments as automobile insurance, workers’ compensation and general liability.

Further, considerable uncertainty remains regarding ultimate costs and consequences for the industry of the pandemic, said Fitch, which recently reported that the coronavirus would cost approximately $9 billion in incurred losses for 50 publicly traded North American re/insurers.

When including Lloyds of London and large European multinational insurers, losses total more than $30 billion, said Fitch, noting that additional incurred losses are likely to be reported in the coming year, but at a reduced volume compared with 2020.

Other highlights on U.S. insurers in the Fitch report include:

• Insurers may experience favorable 2020 accident-year reserve movement tied to underestimating benefits from declining claims frequency in segments such as auto and workers’ compensation.
• All catastrophe losses added approximately 8 points to the 2020 industry loss ratio versus a historical norm of 4.5 points.
• Workers’ comp remained highly profitable due to continued strong favorable reserve development. Further, workers’ comp experienced the most abrupt premium decline tied to the sudden change in employment and continued weak pricing trends.
• The loss ratio in personal and commercial auto declined by 8 and 7 percentage points, respectively, as a result of sharp claims frequency declines during 2020.
• Commercial auto rates rose last year by an average of 10%.
• Long-tail liability segments, including umbrella business, experienced the highest rate increases of any segment in 2020. Commercial property increases averaged 13% for the year.
• Other liability lines were the only major segment to see increasing premium growth as price increases accelerated in response to past poor experience and the uncertainty of pandemic-related claims in multiple areas.
• Homeowners and commercial property loss ratios increased by 9 and 8 points, respectively.