Good Riddance to 2023

Natural catastrophes and hefty inflation in repair costs made 2023 a year to forget for P&C insurers. On to 2024!


Every once in a while, a football team plays a game so bad that the coaches declare they aren't even going to do film review with the players. The coaches are just going to bury the film in a closet. I have that sort of feeling about 2023 for the P&C industry.

While the U.S. economy, in particular, was much stronger than expected in 2023, and while many individual companies made progress on innovation initiatives, the P&C industry as a whole took a beating.

2022 was bad enough: It produced a net combined ratio of 102.7% in the U.S., generating a net underwriting loss of $26.9 billion, the worst since 2011. And 2023 was worse: Triple-I and Milliman estimate that the net combined ratio was 103.8%.

Deloitte says in its year-end report that firms simply haven't been able to raise premiums fast enough to keep up with rising loss costs. It says the cost of construction materials for single-family homes soared 34% since the start of the pandemic, while the price of contractor services jumped 27%. In April, Deloitte says, motor vehicle repair costs were 20% higher than a year earlier.

Because of heavy losses in natural catastrophes in 2022, reinsurance rates for P&C insurers soared 30% in 2023, on top of a 15% surge in 2022. And the hits kept on coming: Estimates are that natcat claims in 2023 again exceeded $100 billion just in the U.S., even though the Atlantic hurricane season was relatively benign. The main culprit: severe convective storms, which have been steadily growing as a problem, apparently linked to the warming climate.

So enough with 2023. Let's treat it like the debacle my Steelers had against the Cardinals in a game I attended a month ago and just move on. 

What does 2024 have in store for us?

Let's look first at the external factors.

I don't see any reason to think the trend in natcat claims reversing, especially because we've entered an El Nino weather pattern. That tends to mean warmer temperatures, which increase the risk of wildfires and severe storms.

We'll still face loads of geopolitical risks -- the continuing war in Ukraine, the mess in the Middle East, U.S.-China tensions, with the ever-present possibility of a Chinese invasion of Taiwan. Any one of those could trigger at any time, with all sorts of economic implications. And who knows what could happen during the U.S. presidential campaign and election this year? I sure don't.

Inflation seems to have abated, yet interest rates, while they will likely decline, will still be higher than in recent years. Insurers will feel less pressure on repair costs while reaping the benefits of high interest rates in their investment portfolios.

The broader economy is always a question. Presidents always do everything they can to goose the economy in reelection years, but the U.S. economy's growth will certainly slow from its recent torrid pace. The only question is, by how much?

In any case, because the P&C industry's growth tends to lag the economy as a whole, the strong 2023 for the U.S. economy should mean a good year for P&C premiums.

Now, the issues that are internal to companies and the industry.

I suspect that auto rates will catch up with costs late this year, or at least get a lot closer than they are now. But there seems to be much more pushback from regulators about homeowners rates, so I think that mess will continue for some time, at least in the Gulf Coast states and in California, where conditions are so bad that insurers are pulling out of the markets. The Deloitte report says the combined ratio for homeowners insurance in the U.S. in 2023 was likely 105%, making that the sixth year in the past seven with a combined ratio north of 100%, so there's lots of work to be done. The recent insurance reforms in Florida are drawing good initial reviews, but that system is so broken that recovery will take years. 

I'd love to declare 2024 the Year of Operational Efficiency, but I think that'd be going too far. Instead, I think insurers will continue the progress they've been making, especially in underwriting and claims -- there's nothing like combined ratios of more than 100% to get firms focused on cutting costs. The pace won't be as fast as I'd like, but there will be real progress at many companies. Generative AI will play a big role.

I'll even go out on a limb and say I think a new wave of insurtech will take shape. The first wave seems to have played out, with most of the disappointingly few winners acquired and some of the bigger ideas discredited -- such as peer-to-peer insurance and the bold ambitions of the full-stack start-ups. Investment in insurtech was less than $1 billion in the third quarter, the first time in years a quarterly figure had been that low. But there's still so much white space for innovators to go after -- especially if you hold out any hope for a Year of Operational Efficiency. And entrepreneurs have learned some valuable lessons. This time around, you'll see more focus on business discipline and profits and less on growth at all costs. (I'll write much more on the new wave of insurtechs in coming weeks.)

You'll also see more companies -- both start-ups and incumbents -- lean into what we at The Institutes (where ITL is an affiliate) are calling "Predict & Prevent." I've been pleased to see how many leaders in the industry are talking about how insurers can use all their data and expertise to prevent claims from ever happening, rather than focusing on the traditional "repair and replace" model, where insurers come in after a loss and help clients recover.

Here's hoping we see a lot more of that sort of innovative thinking in 2024 and don't experience anything close to what happened in whatever that year is I'm trying to forget.

Happy New Year!