Ongoing severe inflation, escalating claims costs, record natural disaster losses and skyrocketing capital costs are creating one of the most unstable property-casualty insurance markets in years, according to a number of studies released this week.

2022 was the eighth year in a row the U.S. suffered at least 10 catastrophes causing over $1 billion dollars in losses, according to a new white paper, “Hard Market Cycle Arrives: Inflation, Natural Disasters, and More Straining Property Insurance Markets," by the American Property Casualty Insurance Association (APCIA) and University of South Carolina Associate Professor Robert Hartwig.

Among other factors, losses were driven by U.S. inflation hitting a 41-year high of 8% in 2022, peaking at 9.2% last June. Meanwhile, the price of single-family residential home construction materials has climbed 33.9% since the start of the pandemic, while trade services are up 27%, APCIA reported.

“The U.S. property-casualty insurance industry is facing significant pressure from rising economic inflation, legal system abuse, supply chain constraints, increasing catastrophic weather driving up losses, and historic cost increases for reinsurance and other forms of capital," said Karen Collins, APCIA vice president, property and environmental. “The combined effects are resulting in the hardest market cycle in a generation."

“This unusual combination of challenges has created a perfect storm resulting in a significant deterioration in personal lines loss results in 2022, according to Fitch and S&P Global Market Intelligence," Collins said. “Commercial and personal property lines customers, particularly those in high-risk regions, may feel the effects of recent, elevated cost trends."

“The growth of population, housing, and businesses in hazard-prone areas are exacerbating the effects of climate change, leading to more frequent and severe catastrophe losses," Collins continued. “The higher costs of capital and reduced reinsurance capacity are further exerting upward pressure on insurance rates and may result in stricter underwriting in catastrophe-exposed markets."

Insureds in some markets are seeing premium increases north of 50%, creating problems for agents and insureds alike, according to the “2023 U.S. Property Market Outlook" by RPS, pointing to the recent reinsurance renewal period at the beginning of the year as having a major impact at a time when insurers were already facing cost pressures.

“The average insurance carrier that deploys catastrophe business is looking at 30% to 80% increases in its reinsurance costs," said Wes Robinson, national property president at RPS. “This would be tough to bear at the best of times, but with the recent pressure on underwriting results in the direct market, many insurers have no choice but to pass these increases on to their insureds."

The effects of the hard market are compounded by significantly worse key financial results for U.S. p-c insurers in 2022 compared to a year earlier, according to preliminary results from Verisk, a leading global data analytics provider, and APCIA.

The industry experienced a $26.9 billion net underwriting loss in 2022, more than six times the $3.8 billion underwriting loss in 2021, the report said. The underwriting loss was the largest the industry has seen since 2011. Also, net income fell to $41.2 billion in 2022, compared to $62.1 billion a year earlier—a 33.6% decline.

“The insurance industry is being hammered by increasing input costs, natural catastrophes, legal system abuse, and resistance in some states to adequate rates," said Robert Gordon, senior vice president, policy, research & international for APCIA, in a press release. “Insurers suffered a 14.1% increase in incurred losses and loss adjustment expenses (16.6% in Q4), contributing to a more than $76 billion contraction in insurers' surplus at a time when loss exposures are rapidly growing."

“Hurricane Ian and the effects of inflation resulted in major losses for property insurers last year, while accident severity continued to plague personal and commercial auto lines," said Neil Spector, president of underwriting solutions at Verisk.

Underwriting losses pushed the combined loss ratio for p-c markets up to 104%, according to a preliminary estimate by AM Best, the APCIA report says. That was the first underwriting loss since 2007.

Global economic turbulence is also having an impact on market capacity. “After similarly suffering significant losses in recent years, broader capital markets have also been pulling back, impacting catastrophe bonds and insurance-linked securities," APCIA said. “With higher interest rates, investors have alternative investment options that may provide higher investment returns, while the strong dollar has also made global reinsurance much more expensive for U.S. insurers, further constricting domestic capacity."

“The last time we saw this level of capital dislocation was during the 2008-2009 global financial crisis. At the same time, the sector is experiencing its most acute, cyclical price increases since the 2001-2006 period if not before," said David Flandro, head of analytics at Howden, in the firm's latest report. 

Howden separately noted that, for property catastrophe reinsurance—which has been the hardest hit line this year—the global rate-online index rose an average of 37%, the largest year-over-year increase since 1992.

For agents, the challenges facing the market mean that conversations around risk placement strategies are going to get much more difficult, the RPS report noted.

“These conversations need to be started early—as early as possible really—because renewals are becoming a much more complicated process," Robinson said. “Insureds need to be made aware that they will be facing increased premiums at renewal and they could be quite large in some cases."

“They need to be educated about the reasons for these increases, but most importantly, they need to be made aware of what to expect so they can plan accordingly," he added. “Bad news late is always worse than bad news early."

Will Jones is IA editor-in-chief.