The industry has ample capability to absorb individual large loss events but is more vulnerable if there is a confluence of events in a short term. This was evidenced during 2001-2002, which included the September 11, 2001 terrorist attacks, a few hurricane events, large reserve deficiencies and a sharp equity market downturn
Chicago/New York: Wider spread natural catastrophe events and exposures will continue to pressure the financial results of the property and casualty (P/C) industry, Fitch Ratings said on Monday.
However, industry capital strength allows (re)insurers to absorb these volatile earnings losses, as does prudent management of risk aggregations and utilization of the catastrophe reinsurance market.
A core theme of the panel discussion at Fitch’s North American Insurance Conference was that while the P/C market has been tested by a variety of large events recently, it has not seen a “big one” in some time.
The recency of wildfires is top of mind, but hurricanes remain the largest potential source of losses. A direct hurricane hit to Miami, as an example, could generate over $100 billion in losses, while a major earthquake in in Los Angeles or San Francisco has wide uncertainty of outcome and risk.
Property catastrophe rates are relatively high due to frequency and severity of storms, and larger underwriters tend to have diverse portfolios with reinsurance protection.
However, a major Florida hurricane is a larger risk, due to several small specialty insurers in a market that relies on reinsurance heavily amid dependence on state-sponsored Citizens and the Florida Hurricane Catastrophe Fund. Losses exceeding reinsurance limits would imperil many small companies.
Hurricanes have become more variable, with warmer sea surface temperatures driving hurricane strength in the Caribbean and Gulf of Mexico.
Recent hurricanes and storms have affected geographies outside of traditional high-risk areas, including Hurricane Helene’s strength entering Georgia or Hurricane Debbie causing higher insured losses when it entered Quebec, Canada, where flood losses are covered, unlike in the U.S.
The largest single catastrophe events for the U.S. in 2024 were Hurricane Helene and Hurricane Milton, with Fitch estimated combined insured losses of $30 billion-$45 billion.
Convective storms are a larger contributor to overall losses, reaching $50 billion in insured losses over last two years. Losses are affecting the central part of the U.S., as storms and tornadoes are now hitting housing developments in newly built suburbs.
Fires and earthquake economic losses are expected to continue to exceed insured losses. People lacking insurance or who are underinsured relative to property values are driving this disparity, with current economic and replacement valuations likely too low. Earthquake insurance take-up rates are very low, averaging 10% in California.
The industry has ample capability to absorb individual large loss events but is more vulnerable if there is a confluence of events in a short term. This was evidenced during 2001-2002, which included the September 11, 2001 terrorist attacks, a few hurricane events, large reserve deficiencies and a sharp equity market downturn.
A severe equity market correction could pose a risk to capital surplus for the industry, as seen with declining surpluses in 2001, 2008, and 2022 amid equity market corrections.
Social inflation continues to be a concern adding to severity and frequency of casualty losses through mass tortes and higher, “nuclear” jury verdicts, as post-pandemic court volumes continue to normalize.
The industry saw similar trends in the 1970s and 1980s with asbestos litigation and in the 2000s with class-action suits charges. Attorneys and jurors are getting more aggressive and punitive against insurers and companies, with increasing costs translating into higher insurance premiums.
Persistently high inflation and slowing economic growth raise the potential for an unfavorable shift in loss reserve adequacy, led by commercial auto and other liability product lines.
The accuracy of insurers’ loss projections for claims severity tied to inflation and litigation risks in commercial auto and other liability business are key determinants of profitability, given the risk of underpricing long tail lines of business with adverse reserve development that drive increases to casualty reserves.