This is $21.5 billion more than the $5 billion loss reported in 2021, and despite an 8.4% growth in net earned premiums and a 21.4% decline in policyholder dividends.

The increase in underwriting loss was due to a 13.9% increase in incurred losses and loss adjustment expenses (LAE), as well as a 6.2% rise in other underwriting expenses.

Reasons for the losses, according to S&P Global Market Intelligence, include “a hard market, higher reinsurance costs and ongoing low M&A activity are in the cards for property and casualty insurers in the new year.”

Catastrophe had huge impact

Hurricane Ian and personal lines losses were the main contributors to the industry’s combined ratio deteriorating to 102.7 from 99.7 in 2021. Catastrophe losses accounted for 6.9 points on the 2022 combined ratio, down from an estimated 7.7 points in the previous year.

AM Best estimated that the industry’s accident year combined ratio was 103.2, excluding $3.8 billion of favorable reserve development during the year. The industry’s net income also declined by 31.3% to $42.0 billion, with the surplus declining by 6.7% to $951.9 billion from the end of 2021.

The data for the report is derived from companies’ annual statutory statements received as of March 9, 2023, representing an estimated 96% of the total P/C industry’s net premiums written.

UK insurance industry classed as ‘stable’ by report

However, despite this classification, the report also cautioned that if risks are not appropriately anticipated, it could have a significant impact on companies’ capital.

In addition to natural disasters that are typically modeled, major events like the Covid-19 pandemic and the conflict in Ukraine have had a significant impact on London market companies in recent years, the report noted.

It emphasised the importance of properly evaluating and pricing for risks that are not well or non-modelled because failure to do so could have serious consequences for some companies in extreme situations.

Furthermore, as cyber risk continues to grow in the London market with its significant systemic exposures, assessing the risk of accumulation within this class has become increasingly critical.

According to McKinsey & Company’s recent report on P&C losses, there are four areas that are significantly impacting the insurance space. These are:

• Rates are starting to soften in some lines and harden in others, with rising claims inflation and competition from distributors squeezing profits, but opportunities for investment returns and decarbonisation exist.
• Risks are evolving faster than ever, including NatCats, net-zero transition, and cyber risks, creating a significant opportunity for commercial carriers to address protection gaps and remain relevant.
• Tightening capacity in traditional and alternative reinsurance capital markets poses a challenge, and the full extent and duration of the capacity squeeze are still uncertain.
• To navigate these challenges, commercial carriers need to transform their capabilities and talent, moving from underwriting and claims as an art to a science.

Lack of investment and digital transformation costs

According to Jason Whyte, an insurance expert at PA Consulting, today’s economic climate is slowing down the maturation of the insurtech industry, and the transformation of incumbent companies. “The last 12 months has seen a number of economic pressures, some of which, such as soaring inflation and rising interest rates, the industry has not had to deal with for a very long time,” Whyte says.

“The temptation would normally be to defer major change, but there are too many other pressures to stand still. Suppliers are withdrawing support for old technology, regulators have ever increasing expectations of operational resilience, and other players in the market are innovating. 

“Instead, we expect to see successful insurers take a more hard-nosed approach, streamlining their transformations to focus on getting the fundamentals right while building the flexibility and capability – especially in data – to be able to respond to emerging trends and requirements.”

Digital transformation expert and Director of Digital Leadership at Centigo, David Galea, says the cost of transformation doesn’t just end with new technologies. “Insider intelligence predicts that insurance technology spending in the US and UK will increase by more than 25% between 2023 and 2026,” says Galea.

He adds, “The benefits of digitalisation for the industry are evident for all to see.  The problem is that most insurance organisations (particularly small and medium-sized players) are not equipped to manage these initiatives. Technology is not a magic wand that will make their problems disappear.”