US Property & Casualty outlook: Personal lines are healing, commercial lines face uncertainty

There's momentum in the US P&C insurance industry. Strong premium gains, easing claims cost inflation and higher investment returns are boosting industry results after a difficult period. We expect personal lines to drive improved profits, with segment underwriting results having already started to close the gap with commercial lines. We also provide a review of personal auto inflation. Based on data from industry rate filings, we estimate that the March CPI over-estimates personal auto insurance inflation by 9 percentage points (ppt). This results in 23 basis points (bp) and 28bp over-estimates of headline and core CPI, respectively. We forecast industry return on equity (ROE) at 9.5% in 2024 and 10.0% in 2025, close to cost of capital between 10-11%. We forecast premium growth of 8.0% and 5.0%, in 2024 and 2025, respectively.

• Our outlook for 2024 remains decidedly more favorable than 2023, with continued strong premium growth and easing inflation pressures.
• We raise our premium growth estimate to 8.0% for 2024 (from 7.0%) and forecast 5.0% growth in 2025.
• We forecast industry ROE of 9.5% in 2024 and 10.0% in 2025.
• Personal lines are the key driver of growth this year; commercial lines remain bifurcated, with strong property growth offset by weak liability growth.
• Higher yields resulted in a 31% higher investment return y-o-y.

We see higher industry ROE in 2024 as personal lines' margins improve. We continue to forecast industry ROE at 9.5% in 2024 and 10.0% in 2025, near its cost of capital and up from 3.4% in 2023.¹ Despite a disappointing 2023 result, the industry has momentum. In 4Q23 ROE was 9.0%, and an early review of 1Q24 earnings indicates that 2024 is on track to be a much-improved year. 2023 underwriting results were weighed down by the impact of persistent inflation and elevated insured losses from severe convective storms, despite a relatively benign hurricane season. Industry underwriting losses of USD 23 billion in 2023 were roughly in line with 2022 (loss of USD 22 billion), while investment income was up USD 16 billion, supporting an improved but still sub-par result. Momentum is backed by premiums and claims trends, and also stronger investment returns. In 4Q23, net premiums earned increased by 12%, while net claims incurred rose by only 2%. We expect this differential to persist in 2024. We see a risk that social inflation could negatively impact industry ROE by weakening favorable reserves development. Reserve releases in 2023 contributed only 0.2 percentage points (ppt) of combined ratio benefit on estimated full-year premiums earned, the weakest since 2005.

Table 1: US P&C insurance sector outlook

We continue to expect the combined ratio to improve, led by personal auto. We forecast the industry net combined ratio at 98.5% in 2024 and 2025, much improved relative to 102.2% in 2023. Underlying improvement is already evident in statutory data: the 2023 industry net combined ratio was a 0.5 ppt improvement from 102.7% in 2022, despite natural catastrophes adding 8.7 ppt to the loss ratio (up from 7.3 ppt in the prior year).² We also expect loss severity to ease as average US headline CPI inflation declines to our forecast 2.7% in 2024, and on to 2.4% in 2025. This sets the stage for improved underwriting results as rate gains outpace claims costs. Personal lines will be the key positive driver: the loss ratio was 17 ppt above commercial lines in 2023, but the gap started to narrow in the second half. Commercial lines face margin pressures after a period of relatively favorable underwriting experience on a calendar-year basis, but results remain strong so far. Workers' compensation releases continue to offset unfavorable reserve development in commercial auto and general liability lines (see Figure 3).

Table 2: Premium growth and loss ratios by line of business, 2023

Personal lines set to drive growth again in 2024; commercial lines to be led by property. We forecast P&C direct premiums written (DPW) growth of 8.0% in 2024 and 5.0% in 2025, after a close-to 10% annual gain between 2021 and 2023. Both personal auto and homeowners' premiums grew by more than 13% in 2023, driving overall industry growth of 9.3% (see Table 1). Personal auto rate increases exceeded 6% in each of the 16 months through March 2024.³ In contrast, commercial lines growth is weakening as rate increases subside. There was a 6% gain in 2023, down from nearly 10% in 2022. Fire & Allied premiums grew strongly at 16%, but Other Liability premiums were roughly flat. Growth in Occurrence lines was offset by shrinking Claims-Made premiums (see Table 2).⁴ We forecast that US real GDP, an exposure proxy, will grow by 2.2% in 2024 and 1.9% in 2025, with risks to the upside.

Setting the record straight on personal auto pricing: premiums are rising fast, but not that fast. The motor vehicle insurance CPI measure quoted in headlines – 22.2% year-on-year in March – probably overstates the average increase actually paid by consumers. Our thinking is based on three factors. First, motor vehicle CPI is much higher than comparable measures of personal auto insurance inflation. It is more than twice as high as the other official measures of personal auto insurance inflation published by the BLS and BEA,⁵ which estimate inflation of between 6-9% in February and March 2023. It is also higher than the SRI calculation based on industry rate filings: 14% in the 12 months to March.⁶ Second, CPI does not account for consumers switching carriers since it follows a sample of policies over time.⁷ LexisNexis shows that annual policy retention started to decrease in early 2022, around the time that CPI started diverging from other measures of auto insurance inflation. Third, motor vehicle CPI inflation y-o-y is higher than growth in personal auto premiums. This would imply a reduction in personal auto insurance exposure. We do not believe this to be the case after a year in which real GDP grew 2.5% and light vehicle sales rebounded to 15.5 million. If we take rate filings data to represent "actual" motor vehicle insurance inflation, we estimate that motor CPI added an extra 23bp to headline and 28bp to core CPI in March.⁸

Figure 1: Personal auto insurance inflation series (y-o-y, percent change)

Figure 2: Personal auto direct premiums written (y-o-y, percent change) 

Likely to decelerate in line with disinflation, but reserves remain a concern for long-tails. The lines with the strongest premium growth – property and personal auto – will likely benefit most from disinflation. We forecast a deceleration in property lines claims costs (ex-cat) as construction prices rise by an estimated 0.5% in 2024 and 2.5% in 2025, after surging by 6.7% in 2023 and 17.5% in 2022. We also expect disinflation to improve personal auto margins. In the March US CPI data, used car prices fell 2.2% while repair costs increased 11.6%. Liability, in contrast, will likely receive least benefit from economic disinflation, given the nature of claims. Additionally, less favorable reserve developments (see Figure 3) and social inflation disproportionately impact liability lines.

Figure 3: P&C industry calendar-year reserve development, 1986-2023 

We expect investment yields to rise to 3.7% in 2024 and 4.1% in 2025, from 3.4% in 2023. Most of the increase will be driven by recurring investment income, which at USD 65 billion in 2023 was 31% higher than in 2022, benefiting from higher yields across all maturities. We expect reinvestment yields to remain above average yields on maturing securities. In 2025, higher realized capital gains should be an additional tailwind for investment results. We currently forecast the upper bound of the Fed funds rate target range to decrease in three steps during 2024, from 5.5% to 4.75%, before declining to 3.5% by the end of 2025. This is our baseline, but we see potential for fewer cuts. We forecast the 10-year Treasury yield to end 2024 and 2025 at 4.2%, with risks to the upside.