In 2021, the insurance industry experienced a US$3.8 billion net underwriting loss, after a $5.2 billion underwriting gain in 2020, as incurred losses and loss adjustment expenses grew 11.1 per cent while earned premiums only grew 7.4 per cent. The combined ratio deteriorated as well, to 99.6 per cent after 98.6 per cent in 2020.
The deterioration in underwriting results was driven by growth in non-catastrophe losses, especially for personal auto. The insured losses from catastrophes in 2021, including Hurricane Ida in September, remained significant, even though associated net incurred losses and loss adjustment expenses declined to $56.3 billion in 2021 from $61.4 billion in 2020.
The industry saw a slight increase in net income after taxes to $61.9 billion, from $60.3 billion a year prior, helped by growth in investment income and in realized capital gains. A combination of factors, including significant unrealized capital gains, propelled policyholders’ surplus to a new record of $1,032.5 billion. Insurers’ rate of return on average policyholders’ surplus, a measure of overall profitability, declined to 6.4 per cent from 6.9 per cent in 2020.
Surplus growth driven by capital gains on investment
“Although insurers’ net earned premium increased 7.4 per cent and surplus topped a trillion dollars, losses and loss adjustment expenses (LLAE) grew at an even faster rate to 11.1 per cent in 2021, causing an underwriting loss for the year,” said Robert Gordon, Senior Vice President, Policy, Research & International for APCIA. “Insurers’ combined ratio increased to 99.6 per cent, and investment yields dropped to their lowest level since at least 1960. Net non-catastrophe LLAE increased 17.1 per cent, excluding development of LLAE reserves. Insurers’ surplus growth was driven in part by $109.2 billion in capital gains on investments, although some of those gains may have already significantly deteriorated with the strong headwinds in the bond and equity markets in early 2022. While the industry balance sheet is strong enough to meet the commitments to insureds, it is facing emerging challenges from the significant and increasing impact of catastrophic weather events, cyber risk and significant price and social inflation/lawsuit abuse.”
“Last year brought strong premium and surplus growth as the economy recovered from COVID-19,” said Neil Spector, president of underwriting solutions at Verisk. “Importantly, this capital cushion bolsters insurers’ ability to respond to future claims as well as looming uncertainties in capital markets, global political risks and record inflation. In these complicated times, access to accurate underwriting data and advanced analytics will help equip insurers with the tools they need to weather the storms facing them.”
Fourth Quarter Sees Continued Growth in Net Written Premiums
The industry’s net income fell to $19.7 billion in fourth-quarter 2021 from the record $25.1 billion in fourth-quarter 2021, and the annualized rate of return on average surplus fell to 7.9 per cent from 11.3 per cent a year prior. The 7.9 per cent is close to the 30-year average of 7.8 per cent for rates of return.
Net written premiums rose $13.8 billion, or 8.9 per cent, compared to 2020. Net underwriting gains declined to $1.8 billion from $4.9 billion in fourth-quarter 2020, and the combined ratio deteriorated to 100.0 per cent from 98.2 per cent a year prior.