From Rising Social Inflation to Storm-Battered Capacity, the P&C Market in 2024 Could Be Déjà Vu All Over Again

Economic uncertainty, rising claim costs and an increase in weather-driven losses aren’t exactly the market trends that we’d have selected to take with us into the coming year, had we been given the option. However, it looks like these are the conditions that we will be stuck with for a while. As 2023 draws to a close, all these trends are expected to have a significant impact on the P&C market well into 2024.

This puts the onus on carriers and risk managers alike to work together to understand and mitigate the associated risks. Let’s examine where these trends and developments are going and what that will mean for the market as we look ahead.

Economic Trends: GDP Rising, Inflation Holding Strong

The growth in gross domestic product (GDP) is a good indicator for exposure growth in the P&C industry.

The consensus estimate of GDP growth is 2.1% for 2023 and 1.0% for 2024, which shows we can have negative impact exposure growth. Some good news on this front is that GDP released in July was 2.4%, largely due to increased consumer spending and business investments — good signs for our industry.

Inflation running at 3.7% as of September 2023 is concerning, but there is some hope of easing inflation trends for 2024. Inflation impacts insurance costs in many ways, from rising building material costs increasing property claims to the ways that medical inflation drives loss severity for workers’ compensation. Accordingly, high inflation rates continue to be a concern for the market.

From an underwriting perspective, risk selection and pricing continue to be impacted by inflation as well. Inflation compounds, meaning that a $500,000 claim in 2020 would, as of Q2 2022, be worth $587,995 — an 18% increase as compared to less than three years ago.

While there are signs that inflation may be slowing, the resulting increased prices are clear.

Litigation Trends: Social Inflation Continues to Drive Up Casualty Claims Costs 

Insurers’ claims costs are still increasing above general economic inflation, driven by shifting social and cultural attitudes.

In the 2022 study Social Inflation and Loss Development, issued by the Insurance Information Institute in partnership with the Casualty Actuarial Society, it is estimated that social inflation accounted for $20 billion or ~14% of losses between 2010 and 2019, with regards to auto liability alone.

Litigation funding, in which a third party not otherwise connected to the case provides funds to the plaintiff in return for a portion of the jury award, is further driving up claim costs today.

Nuclear verdicts have continued to increase in recent years. They are happening more from a liability standpoint, causing major concerns about underwriting capacity and the pricing adjustment needed to address the severity of the claims.

In a recent report entitled Corporate Verdicts Go Thermonuclear, PR firm Marathon Strategists found that median nuclear verdicts increased from $21.5 million in 2020 to $41.1 million in 2022, representing a 95% increase. The largest verdicts have also been growing, rising from $1.1 billion in 2020 to $7.3 billion in 2022.

This is a continuing trend; in the five years leading up to the pandemic, the industry saw an increase in both the sum of these verdicts (up 178%) as well as their median award (up 41%). And the numbers just continue to rise: Since 2009, there have been 191 “thermonuclear” verdicts (over $100 million), including four that were over $1 billion.

Environmental Trends: The Frequency of Storm Losses Impacts the Market Forecasts

The year 2023 was another record-breaking one for catastrophes, with 23 weather events surpassing $1 billion as of September.

Sadly, that itself is expected, but what was not expected was the shift in frequency of losses from severe convective storms (and related perils). The sheer number of these losses far outweigh the traditional hurricane and wildfire frequency by 18 to one, making them appear as the attritional losses of the CAT world. Geographically, these storms are widespread and difficult to predict.

Historical experience with hurricanes, earthquakes and fires has led to robust building standards in CAT-prone areas, and it may be prudent to continue this trend with convective storm.

At the same time, it would only be appropriate that we pay close attention to the heat index as it continues to rise across the country, as the effects of severe heat and drought are yet to be fully recognized across the insurance industry.

The impact of these perils should also be considered in our long-term forecasts.

The Bottom Line: 2024 Will Look Like 2023

In terms of cost, terms and conditions, and capacity for property, we are likely to see things stay the same in 2024 as we saw them in 2023, and these trends will also impact the casualty lines of business as well.

Underwriting discipline has rippled through all levels of the industry, but capital will likely continue to be available for well-balanced risks — although at a cost. Portfolios that are in significantly catastrophe-prone areas will continue to challenge the industry, and capital availability and cost will make insured retention of risk more prevalent.

In the midst of these challenging times, carriers can support insureds through unbundled risk control services, risk management tools and complementary products. Savvy risk managers will leverage all the capabilities and services that their carriers have to offer to make the most of these partnerships.

As costs continue to increase, budgeting funds appropriately for proper maintenance and employee training on all levels will be more important than ever.

Building maintenance, sidewalk maintenance, water leak and damage control, safety and security procedures, fleet maintenance and other risk control initiatives will help organizations to mitigate risks and control costs.

Carriers can provide assistance through their risk control services for risk mitigation efforts and the review of new operations or processes before implementing them at a property.

In addition to leveraging the risk control team, organizations can work with carrier partners to identify any advanced analytics and AI that might be helpful in managing risk and cost. Carriers can also advise on best practices for contract management with third-party vendors for their services and proper risk transfer through appropriate wording in applicable contracts.

Additionally, all risk managers should review their insurance coverage for terms and conditions and look for alternative deductibles or SIR (self-insured retentions), as well as structured (working fund) programs.

Overall, the insurance industry continues to adjust and find ways to bring value to our shareholders while also enhancing and expanding services to our clients. While a delicate balance exists depending on the issues, market and line of business, we are a vital and fundamental part of the economy as we protect property and lives against insurable risk. &