The Year in Insurance – A Look Back, A Look Ahead
2023 was an unremarkable year for insurers. And that’s a good thing. Insurers and their shareholders prefer boring predictable results over unexpected volatile shocks. Property & casualty insurance company stocks performed relatively well. In 2023 the S&P Insurance Stock Index rose 6.4 percent. Although below the 24 percent return for the S&P 500, but without the magnificent seven, the broader stock market returned 8 percent growth. The financial results of the property & casualty insurance industry were healthy. The industry lost money ($19.2 billion) on underwriting, with a combined ratio of 101.7 percent, but an estimated $75 billion of investment income contributed to $55 billion of pretax income (not including a surprise from Berkshire Hathaway described below), a 6.5 percent margin. After $10.9 billion of federal income tax, the margin was 5.2 percent.
There were two surprises in the reported 2023 numbers. The first was a decline in the expense ratio, which came in at 24.9 percent, significantly lower than 27.2 percent and 27.5 percent as recently as 2019 and 2020, respectively. For many decades the insurance industry has been struggling to bring down a stubbornly high expense ratio from the 30 percent neighborhood, so the 2023 number was a notable result. The lower expense ratio reflects insurers operating more efficiently and not allowing expenses to rise with premium growth. In 2023 net premiums earned grew by 8.9 percent, from $746 billion to $813 billion. The premium growth was mainly driven by rate increases, principally for personal lines business – private passenger auto and homeowners’ insurance.
The second surprise in the 2023 reported numbers was $49.9 billion in net realized capital gains at a Berkshire Hathaway subsidiary, National Indemnity Company. $49.9 billion may seem like an extraordinarily lot of capital gains, but Berkshire Hathaway is not an ordinary company – it has $381 billion in assets. Unlike other insurance companies whose investment holdings are mainly bonds, Berkshire Hathaway’s investment portfolio is heavily in common stock holdings, with $316 billion in stocks at YE 2023.
Double-digit rate increases for homeowners’ insurance were driven by the occurrence of numerous disasters in the year. Homeowners insurance results especially were impacted by record numbers of natural catastrophes. In 2023 the number of disasters causing at least $1 billion in damage hit a record high 28, substantially higher than the previous record of 22 in 2020. Rate increases for automobile insurance were driven by sharply higher automobile repair costs for parts and labor, outpacing the CPI.
The insurance industry protected its balance sheet in 2023, sharing its pain with higher cessions to reinsurers. In 2023, insurers ceded $100.4 billion to reinsurers, up sharply from $73.0 billion in 2019 and $73.5 billion in 2020.
Chicken Little and Dr. Pangloss
The healthy 2023 insurance industry results, with a modest operating profit and stable surplus estimated to remain approximately $1 trillion, should disabuse those who hold either of two extreme views of the industry – on the one hand that the sky is falling and the insurance industry is in danger of collapsing, and on the other that the insurance industry is swimming in cash, fat, rich, and greedy. Both views are not borne out by the facts. U.S. insurers, many of which have been in business for over a century, are in the business of facing all manner of risks. They absorb risk and harbor no prospects to abandon their craft. With known risks getting more severe and new risks emerging, insurers that plan to go another 100 years will continue to play their role as risk absorbers. Equally inaccurate is the characterization of insurers as rich as Standard Oil. As we have seen, the insurance industry operates on a relatively slim margin.
What, Me Worry?
The magnitude of destruction caused by severe thunderstorms in 2023 was among the most striking developments of the year. In the U.S. there was $66 billion of economic losses from severe convective storms, $33 billion of which was insured. This demonstrates the vital role insurers play in enabling individuals and businesses to recover after a loss. It is also a warning that unexpected, unmodeled losses will happen and will test the mettle of insurers. Among the issues insurers are working on in 2024 are AI, the industry’s image, emerging risk, and tort trends.
AI, like other new technologies, can have positive as well as negative impacts on insurers. To the extent it can automate routine processes, it may improve insurer efficiency and drive down the historically low expense ratio yet further. At the same time AI in the hands of bad actors can be a tool criminals exploit to alter photos and voices in order to commit sophisticated hi-tech insurance fraud.
The insurance industry’s image could use improvement. In rankings of the country’s most admired corporations, there is only one insurer that regularly makes the cut onto the top 10 or top 25 – Berkshire Hathaway, a company that is more of a conglomerate than a pure insurer. “Crusader” consumer activists and billboard personal injury lawyers regularly disparage insurance companies, something that has made recruiting talent to the industry a pressing concern.
For decades insurers have been paying close attention to substances that could trigger the “next asbestos,” with asbestos-related respiratory diseases having cost insurers close to $100 billion. In addition to researchers and modelers studying the potential for chemicals such as PFAS (forever chemicals) to cause disease, researchers study prospects for systemic risk, where losses in one sector metastasize throughout the economy, affecting other economic sectors. For example, the great recession of 2008 started as a subprime lending crisis, and subsequently morphed into a banking crisis, a rout on Wall Street with the Dow 54 percent off its high, and the unemployment rate spiking to 10 percent in 2009.
The profusion of ultra-large court awards in civil litigation, featuring “nuclear verdicts” (those over $10 million) has led to large losses for liability insurers. Plaintiff attorney firms exploit applied human psychology to win outsized court awards. Should this trend continue unaddressed, American businesses may become tied down in expensive unmerited litigation, driving up the cost of goods and services. Lawsuit abuse must be confronted at the federal and state levels.
AI, reputational, emerging risk, and tort trends are real, but need not generate panic. At a recent insurance conference a panel of insurer executives was asked what keeps them up at night. None of the insurers reported excessive nail-biting over any particular issue. Insurers encourage their customers to practice risk management. Insurers themselves are all about risk management. So to the extent both insurers and their customers implement sound risk management, insurers are wearing belts and suspenders. It may not be the best fashion look for an unglamorous industry, but it’s good for insurance buyers, good for insurance providers, and good for the economy.
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