Given that business-as-usual is unlikely to return soon due to the coronavirus pandemic, U.S. property/casualty insurers will continue to face challenges related to virus-related insurance losses and premium volume declines in 2021, according to Fitch Ratings.
The operational and risk management challenges of managing workforce flexibility, limiting risk aggregations and reducing claims exposure through clarity of policy terms will endure beyond the pandemic and become "new normal" longer-term drivers of the industry, contend analysts James Auden and Christopher Grimes, authors of "The Next Phase: U.S. Property/ Casualty Insurers."
The analysts estimate that incurred losses from coronavirus claims have reached approximately $8 billion for North American publicly-traded insurers to date and approximately $23 billion, including large global (re)insurers.
However, Fitch warns that settlement litigation in some segments could take years and ultimate insured losses will depend on uncertain factors, including: the duration of the pandemic, extent of economic shutdowns from potential future waves of large-case outbreaks, the timing of a return to more normal business and social activity, and the speed and strength of the economic recovery.
Higher pricing following recent losses, compounded by fear and uncertainty of pandemic-related claims, has led to tighter underwriting terms and conditions in many areas, with commercial lines rate increases unseen since 2003. The Council of Insurance Agents & Brokers quarterly Commercial P/C Market Index Survey reported a renewal rate increase of 10.8% for the second quarter.
While changes in market conditions do boost the potential for profit improvement when pandemic-related losses subside, larger underwriting profits are required to generate adequate returns to offset investment income declines as a result of persistently low interest rates.
"Sharp changes in commercial lines pricing and underwriting conditions provides the industry with a chance for profit improvement when pandemic-related losses subside, though premium revenues in some segments face pressure from exposure reductions tied to economic disruption," the authors add.
According to the report, business interruption (BI) claims are a large source of uncertainty. Even though insurers seem to be winning in courts with their argument that BI requires causation from physical damage to property is largely succeeding in court rulings, the industry remains "vulnerable to future adverse judicial and retroactive legislative actions" in BI and other segments, Fitch advises.
Fitch analysts are also watching directors and officers (D&O), employment practices liability and various errors and omissions coverages where claims from allegations of negligence tied to poor loss prevention or preparation for a pandemic are possible. D&O losses may be influenced by future business bankruptcies and a return to economic growth.
Also, the report cautions that personal automobile and workers' compensation lines that are currently generating favorable results are likely to "show future deterioration from a return to more normal claims trends and competitive pressures on rates."
In workers' compensation, while virus-related catastrophic claims have been relatively limited, Fitch sees a risk of permanent disability claims going forward. "A slower economic recovery and more persistent unemployment levels could have a more lasting impact on workers' compensation loss experience ahead," the report says.
The reality that many aspects of "normal" business and social interactions are unlikely to fully return creates challenges in assessing and pricing risk for insurers. "The pace of economic recovery and return to more normal activity will influence claims frequency trends in segments with large recent declines, including automobile and workers' compensation," according to the report.