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US mutual P&C insurers record $31bn of underwriting loss

Companies such as State Farm Mutual Automobile Insurance Company have faced higher claims, inflation, and higher losses (File photograph)

Mutual property and casualty insurance companies in the US recorded $31 billion in underwriting losses in 2022 despite a solid rise in premiums, according to a recent AM Best report.

Higher claims and inflation were to blame, the ratings agency wrote in Secondary Perils, Inflation Underlie Volatile Operating Results for Mutuals.

Breaking it down, AM Best said in the report that net premiums written were up 9 per cent in 2022, while the pure loss increased 20 per cent and policy dividends dropped 32 per cent.

Net losses totalled $11.2 billion.

In 2022, US mutual property & casualty insurers reported a combined ratio of 109.9, far above the five-year average of 103.1.

“Mutual insurers felt the effects of inflation, particularly on the personal automobile and property lines, starting in the second half of 2021. Throughout 2022, claims costs continued to rise, with inflation reaching multi-decade highs,” the report said.

“Many insurers made adjustments to inflation guard factors, but the rapid onset of these trends made it difficult for rated mutuals to avoid the effects.”

Social inflation has had a significant effect on these insurers.

Costs rise faster than the rate of overall inflation as a result of more litigation, changes in views on liability, big awards, the slowing of legal processes and an ending of some reforms that have capped awards.

In another publication, AM Best refers to the reptile theory, in which attorneys rile up juries to get them angry at the defendants and get them to believe that they are protecting society as a whole with bigger awards.

The publication also cited litigation financing, where third parties provide funding for an aggrieved to make a legal claim with an agreement in which the backer will share in any award.

“Many mutual companies concentrated in casualty lines have strengthened their current loss and loss adjustment expense reserves to better prepare them to withstand these effects of social inflation,” the ratings agency wrote in the report on US mutual property and casualty insurers.

“Claims handling is also being enhanced by technology and partnerships with external vendors that can provide services related to telematics, drones, aerial imagery and more.”

Other factors beyond inflation were also relevant in 2022.

Last year, the US experienced 18 climate and weather-related disasters with economic loss of more than $1 billion. The total loss from these disasters was $165 billion, making 2022 the third costliest ever.

“Given ongoing rate actions to address economic inflation, premiums are likely to keep rising. However, there will be some offset from reinsurance costs, which are expected to stay elevated over the near term,” said Lauren Magro, financial analyst, AM Best.

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Published September 15, 2023 at 7:59 am (Updated September 15, 2023 at 7:16 am)

US mutual P&C insurers record $31bn of underwriting loss

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