The future trend for insurers to worry about, said Robert Hartwig, is the increasing amount of insured catastrophe losses, with Texas in the bullseye. Increasing numbers of named storms are a challenge, and high populations and developments in harm’s way exacerbate the issue, said Hartwig. He added, “Fortunately, risk mitigation efforts are paying off.”
Hartwig delivered the news during the question and answer period following his 21st, by his count, appearance at the Insurance Council of Texas Property Casualty Symposium on Sept. 1. The event, sponsored jointly by ICT and the Association of Fire and Casualty Companies in Texas (AFACT) for 27 years, was held virtually for the second year running. The annual ICT meeting and speaker program was spread over two days.
Hartwig, formerly chief economist and president of the Insurance Information Institute, is in his sixth year on the faculty of the Darla Moore School of Business at the University of South Carolina, where he is currently clinical associate professor of finance, risk management and insurance. His presentation was an overview of the U.S. property casualty market, with details about the market in Texas.
During his presentation, Hartwig noted that annual insured catastrophe loss costs have averaged $22.2 billion since 1980. Last year’s catastrophe loss costs totaled $67 billion, and 2021 is off to an ominous start with an estimated $30 billion in losses through the first half of this year and another $20 billion in the third quarter. That is a big start for this decade, Hartwig said.
Hartwig, by tradition, lists the top 20 most costly disasters in U.S. history. While Katrina still ranks as number one, 11 of the top 20 most costly insured events in U.S. history occurred between 2010 and 2021. The rough estimate for Hurricane Ida, at $20 billion, will drop Hurricane Rita off the Top 20 list.
The leading event in the first half of this year is the extended freeze, which Aon expects to result in $15 billion in insured losses. Texas and Oklahoma experienced their coldest temperatures since 1989. Dallas temperature got below zero for the fifth time in recorded history of that city, said Hartwig.
Overall, said Hartwig, the industry remains strong. It entered the Covid year of 2020 with strength and averted a worst case scenario that would have occurred had courts not held that insurers pay claims consistent with the “four corners of the contract, nothing more, nothing less.”
Net income for the P/C industry in 2020 was down by 3.7 percent, a level Hartwig considered modest considering the impact the pandemic had on the overall U.S. economy. The industry was able to withstand the 9.0 percent decline in surplus during the first quarter of 2020 and ended the year with record surplus of $898.5 billion. The first quarter of 2021 was rough due to catastrophes, said Hartwig, and Hurricane Ida will also impact insurers’ profitability; still, Hartwig predicted a new surplus record would be set at year-end 2021.
AM Best predicted a 3.8 percent net premium growth for 2020, but by year-end, net premium growth fell below two percent, a lagging growth rate compared to the previous eight years, where growth rates ranged from 2.7 percent in 2016 to 10.8 percent in 2018. Hartwig attributed some of the slower than anticipated premium growth to bookkeeping, as insurers varied in their treatments of the Covid-induced personal auto insurance rebates on their financial statements.
Covid-related auto premium rebates drove a two percent reduction in private passenger auto net written premium in 2020. Hartwig expects the line to bounce back into its normal growth pattern, as the line makes up more than 37 percent of all property and casualty premium.
Covid had no discernible impact on expectations for overall P/C combined ratios in 2020, which AM Best predicted to reach 99.1, but which actually was 98.0. Hartwig attributed the marginally lower combined ratio to fewer miles driven and fewer industrial exposures during the pandemic-dominated year.
Personal lines underwriting performance has deteriorated since 2014 as record catastrophes and rising loss cost trends took their toll, said Hartwig. Improvements in auto combined ratio offset high combined ratios in homeowners. On the commercial lines side, preliminary numbers peg the combined ratio at 101.2, resulting from near-record catastrophes and rising loss cost trends.
Workers’ compensation is seeing a sharp rise in Covid-related claims. In Texas, TDI reported 861 Covid workers’ comp claims in July, up from 359 in June. There have been over 50,000 reported Covid-related workers’ comp claims in Texas since March 2020, including 269 fatalities. Most of these claims were from high risk occupations, such as healthcare workers, social workers, first responders and correctional officers. Hartwig also noted that there have been 513 vaccine-related workers’ comp claims reported in Texas since mid-December 2020.
The insurance industry’s investment income continues to suffer due to low interest rates. Hartwig predicted 2021’s investment results will continue the low earnings trend, and he sees interest rates remaining low at least through 2023. He equated investment losses to having the same effect on the industry as a hurricane. “It puts more pressure on underwriting,” said Hartwig.
Hartwig’s presentation regularly includes a double line graph depicting direct premium growth plotted alongside nominal GDP growth. Before 2020, the lines nearly coincide, demonstrating that insurance premium tracks the overall economy. While there was a sharp decline in the GDP last year, even dipping into negative growth, premium growth slowed but never turned negative, he said.
Unemployment peaked in April 2020 at 14.7 percent, an astonishing increase, said Hartwig, compared with two months earlier when the unemployment rate was 3.5 percent, the lowest point in 50 years. By the end of the second quarter of 2021, the unemployment rate was 5.9 percent, with expectations that it will reach 4.1 percent, what the Fed considers full employment, by the end of 2022.
Texas unemployment lags the feds’, said Hartwig. Texas lost 1.4 million jobs in March 2020 and has recovered 1.2 million, or 82 percent of them. Still, the state’s unemployment rate as of July was 6.2 percent. Among the large states, Texas has recovered the highest share of its jobs lost since lockdown, leading Florida, which has recovered 75 percent of its lost jobs; California, 58 percent; New York, 55 percent, and Illinois, 58 percent. Hartwig concluded from this data that P/C recovery of insurable exposures in Texas is running ahead of the pace nationally.
Job gains in Texas, said Hartwig, are broad based, with growth in leisure and hospitality leading the way with 20,600 new jobs in July. Travel across the U.S. is lagging, said Hartwig, noting TSA as his source for low passenger numbers.
With the national debt climbing to $27.75 trillion by the end of last year, Hartwig issued an inflation alert. “Large deficits that increase as a share of GDP are, at some point, unsustainable and inflationary.” Insurers’ concern about inflation is a rate inadequacy concern, he said.
Used car prices, said Hartwig, rose to the highest level ever in June 2021. New car sales have suffered due to lack of available super conductors. Lumber prices moved up rapidly. These are cost drivers for insurance, said Hartwig.
Looking at the claim trends, Hartwig noted that personal lines auto claim frequency was down, but severity was up. This was true across the U.S; Texas’s trend for severity is below that of the rest of the country, but not enough for bragging rights.
Fewer miles are being driven, said Hartwig. Americans drove 229 billion fewer miles in 2020 than in 2019. Combined loss ratios for auto liability and physical damage were already trending down since 2016, said Hartwig. Hartwig attributed the improved loss ratio somewhat to rate increases in the line.
Pricing pressures are intensifying in commercial lines, said Hartwig. Overall, commercial rates were up 8.3 percent as of the end of the second quarter this year. While cyber is not a large line, it has experienced larger increases than other lines. Hartwig pointed to the increasing number of known data breaches and records exposed as drivers of increased rates in the line. “Insurers are reassessing exposure,” said Hartwig, noting that rate increases in cyber were overdue. Ransomware attacks were up 62 percent in 2020, compared with 2019.
Hartwig turned to social inflation and litigation trends. Average jury awards have been rising, he said. “A lot of jackpot justice going on out there.”
Covid-related lawsuits are on the decline, with fewer being filed because court decisions in business interruption disputes have almost universally been decided in insurers’ favor, said Hartwig. Courts are finding that the presence of virus particles is not a physical loss.
Insurers have won full dismissals in 95 percent of federal court cases involving Covid and 70 percent of state court cases.
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