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COVID-19 to test US P&C insurance industry's resilience in 2020 and beyond

No aspect of the U.S. property and casualty industry will escape the effects of COVID-19, though they will not be universally negative.

S&P Global Market Intelligence projects in the 2020 U.S. Property and Casualty Insurance Market Report that factors including macroeconomic contraction, government-imposed restrictions, policyholder credits and other measures of relief related to the pandemic will combine to end the industry's decade long run of premium growth in 2020. A potential influx of claims in certain business lines will more than offset benefits from state stay-at-home orders and employer work-from-home allowances, putting an end to the industry's considerably shorter streak of underwriting profitability.

Click here to log into the Market Intelligence platform to read the full 2020 U.S. Property and Casualty Insurance Market Report and access data exhibits.

The report projects a decline in direct premiums written of 1.8% in 2020 as compared with growth rates exceeding 5% in both 2018 and 2019. It would be only the third year-over-year retreat in that measure of business volume since at least 1997.

Our projection for a 2020 combined ratio of 100.7% would be directionally significant after two straight years of results that were marginally below 100%, the level that signifies break-even underwriting. But it would not mark as much of a shift from the 2019 result, which came in at 98.9%, nor from our previous projections. In the 2019 U.S. Property and Casualty Insurance Market Report, we projected that the combined ratio would rise to 99.4% in 2020 from 98.4% in 2019.

While our outlook is always characterized by certain assumptions, risks and uncertainties, those variables are especially magnified given the lack of a precedent for current events. COVID-19 has already triggered an unprecedented level of premium credits by auto insurers, policyholder payment accommodations across the industry, statutory accounting interpretations by the National Association of Insurance Commissioners and legislation intended to broaden eligibility criteria for claims payouts. Dislocation in the financial markets led to massive central bank interventions and a tightening in 10-year Treasury yields to record lows. As June comes to a close, questions about the pace of reopening initiatives amid an increase in positive COVID-19 tests cast newfound doubt about the pace on an eventual economic recovery

The P&C industry entered 2020 with record levels of capitalization, and efforts over a number of years to implement enterprise risk management and information technology modernization initiatives have positioned it in a broad sense to weather the storm.

We expect an uneven emergence between lines of business and within them regardless of how quickly the economy picks up, however. Business mix by product, geography, customer segment will be among the critical determinants.

Personal lines

The plunge in miles driven by American motorists resulting from stay-at-home orders shined attention on the private auto business, which traditionally ranks as the largest U.S. P&C segment.

Virtually all private auto carriers responded to a dramatic decline in claims frequency in late March and early April by extending premium credits, discounts and dividends. Select carriers, most notably the group led by State Farm Mutual Automobile Insurance Co., also acted to provide rate relief on forthcoming new and renewal business.

The nature of the credits, the specific and diverse ways in which individual carriers have accounted for them, and the uncertain outlook for future driving patterns add an unprecedented level of volatility and variability to a line that typically serves as a source of stability for the industry. S&P Global Market Intelligence projects a decline in direct premiums written of 4.3% in 2020, which assumes a certain portion of industry accounts for the credits as reductions in premium along with the effects of the temporary rate actions taken by State Farm and Berkshire Hathaway Inc.'s GEICO Corp., the No. 1 and 2 U.S. private auto insurers.

Partially offsetting our expectation for sharply lower loss ratios, which presumes a normalization in results over the course of the year from the lows of the early spring, are projections for meaningful upticks in expense and policyholder dividend ratios. Those reflect the manner in which some carriers have opted to accounted for or deliver their premium credits along with the potential for some build in allowance for doubtful accounts to the extent economic pressures keep customers from paying their premiums once forbearance periods end. Our projections assume that the vast majority of the industry will extend premium credits of approximately 15% over a period of three months.

All told, we project a private auto combined ratio of 93.1% in 2020, a significant improvement from the result of 98.8% in 2019. But with a normalization in trends anticipated in 2021, including the gradual sunsetting of the recent improvement in claims frequency, we anticipate that the private auto combined ratio will rise to 98.7% in 2021.

The homeowners business, meanwhile, has experienced more indirect effects that are multiple steps removed from the pandemic, itself. Our outlook assumes upward rate pressure in catastrophe-exposed markets to reflect trends in the reinsurance market. As reinsurers brace for COVID-19 losses in other business lines and continue to face loss-creep from 2017 hurricanes, the Florida residential property market confronted an especially challenging June 1 renewal period.

Our personal lines projections include a decline in 2020 direct premiums written of 1.6% and a combined ratio of 94.6%.

Commercial lines

Most every business has been interrupted to at least some extent in 2020, but our outlook assumes that the language used in business owners' and commercial package policies will minimize the extent to which U.S. insurers will be helping to mitigate the financial fallout.

Terms that require physical damage for business interruption coverage to be triggered will be tested repeatedly in court, suggesting meaningful levels of defense costs for the industry even if the language ultimately holds up. Our outlook discounts the potential for legislation mandating retroactive business interruption coverage to take hold given the vigorous opposition the industry has promised.

We expect the commercial multiperil line to experience an elevated combined ratio in 2020 to reflect those limited instances where business interruption is not fully precluded and additional costs associated with litigating a heavy volume of claims.

Our outlook for the workers' compensation line, meanwhile, presumes broad impact from legislation. Various state legislatures have introduced and/or passed measures providing conclusive presumptions of workplace contraction of COVID-19 to certain categories of workers. The types of occupations covered vary from bill to bill, with some limited to essential medical personnel and front-line workers and others incorporating other essential workplaces such as public utilities, grocery stores and pharmacies.

How costly conclusively presumed COVID-19 claims ultimately prove remains subject to many variables, including the severity of individual cases, the potential long-term health effects and the number of claims filed. Concurrent observations of a sharp downturn in other types of claims may help mitigate the impact, though the severity of the economic downturn and the duration of work-from-home accommodations will have much to say about the resilience of that trend.

Shrinking employer payrolls, changes in worker categories and sharp downward pressure on premium rates after several years of highly favorable underwriting results are expected create significant headwinds for growth. We expect a drop in workers' comp direct premiums written of 12.4% in 2020, though some industry predictions incorporate even larger declines.

A number of other commercial insurance business lines continue to experience pricing momentum as carriers respond to rising losses and social inflation, the trend of growing jury verdicts and other adverse legal outcomes that represented the biggest challenge to certain liability lines prior to the onset of the pandemic. Delayed court dockets may temporarily forestall a worsening in social inflation in 2020, but the pandemic creates an entirely new set of risks and potential claims for plaintiffs' attorneys to pursue.

We project the commercial lines combined ratio to rise to a nine-year high of 107.5% in 2020, headlined by the focus on claims in business interruption, workers' comp, travel insurance, credit and event cancellation coverage. Losses in certain lines that have ranked among the sector's strongest performers in recent years such as surety and mortgage guaranty will also rise.

Our post-2020 outlook assumes continued headwinds related to legal trends and potential COVID-19 claims. We anticipate that ultra-low interest rates will provide additional reinforcement for disciplined underwriting and the use of emerging technologies to reduce claims costs and back-office expenses.

Methodology

Our projections represent the product of a sum-of-the-parts analysis of line-of-business-level results for private carriers in the P&C industry modeled largely on the Insurance Expense Exhibit to annual statutory statements. While S&P Global Market Intelligence does not project results for individual carriers or P&C groups, certain significant company-specific activities help inform the line-of-business level outlook.

Macroeconomic inputs reflect consensus estimates compiled by The Wall Street Journal and the outlook published by the Congressional Budget Office in January.

The outlook is subject to change periodically and as events warrant.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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