U.S. property/casualty (P/C) insurers maintained a modest underwriting profit in 2020 despite substantial catastrophe losses and tremendous uncertainty tied to the coronavirus pandemic. The industry is positioned for improving results in 2021 given favorable pricing trends in multiple commercial segments and anticipation of fewer pandemic-related losses, which is supportive of individual ratings, Fitch Ratings says.
Near-term P/C results will be influenced by the pace in which auto claims frequency rises and outsized profits normalize as the economic recovery unfolds and whether claims severity trends in numerous liability segment continue to persist.
P/C insurance remained a source of credit stability amid chaotic events in 2020, demonstrated in the full-year statutory financial statements. Fitch estimates that net written premiums for the industry grew by 2.5% in 2020 versus 3.4% a year earlier, which will most likely remain under 3.0% for 2021. Natural catastrophe losses remain the largest source of underwriting volatility for insurers, as severe winter storms have generated potential record first-quarter catastrophe losses.
The substantially higher catastrophe-related insured losses in 2020 were attributed to the coronavirus pandemic, an active hurricane season, California wildfires and instances of civil unrest. However, industry underwriting performance marginally improved for the year to a 98.7% combined ratio from 99.0% in 2019. Fitch projects further improvement for 2021, with the combined ratio expected to fall below 97%.
This relatively unchanged industry aggregate result is a function of wider counterbalancing swings across product lines when compared to year-over-year accident year (AY) results. Positively, a sharp decline in claims frequency from reduced driving led to a reduction in the loss ratio for private passenger auto liability, the industry’s largest individual segment, by 9 points to below 70%, the lowest loss ratio in over 30 years.
Similarly, Commercial Auto, a segment that has underperformed for nearly a decade, reported a 9 point AY loss ratio improvement on similar frequency benefits. Conversely, property segments experienced materially weaker results with the Homeowners AY loss ratio up 10 points and commercial multiperil 5.5 points higher.
Workers’ Compensation reported a 4-point loss ratio increase to approximately 75% on declining premium volume and pandemic-related loss uncertainty but remains highly profitable from continued strong reserves. Other Liability lines have seen sharp premium growth from rate increases that accelerated in 2020 without evidence of meaningful performance improvement, partly due to uncertainty from pandemic-related litigation activity.
In other Liability, occurrence business posted an essentially unchanged AY loss ratio in 2020, while Claims Made, a broad range of professional liability exposures, reported a 1-point loss ratio increase to 70%.
Concerns regarding weakness in industry loss-reserves emerged over the past several years. However, the 2020 combined ratio was boosted by 1.1 loss-ratio points of favorable calendar-year reserve development similar to 2019. The bulk of favorable development came from workers compensation with 15 points of favorable development for the third consecutive year in 2020. Personal lines segments also experienced slightly favorable development.
Conversely, liability lines continue to report adverse prior-period experience tied largely to claims severity issues and rising litigation and settlement costs. The Commercial Auto liability and Other Liability lines incurred unfavorable development of seven points and nine points in calendar-year reserves, respectively, in 2020.
Reserve adequacy issues for the 2020 AY will hinge on uncertainty of loss estimates for pandemic-related business interruption and longer duration liability claims, which are offset by significant potential benefits from underestimating losses from favorable frequency trends in multiple lines, including automobile and workers compensation.
