With commercial lines insurers expected to post their lowest full-year combined ratio in 15 years, along with double-digit straight-line premium growth, Moody’s Investors Service has issued a stable outlook for the US commercial lines sector.
The outlook report, “2023 Outlook Stable on Solid Underwriting Results Despite Further Claims Inflation,” highlights the negative effects that slowing commercial insurance price growth and persistent claims inflation could have on underwriting profits. However, analysts expect price growth to continue to decline in line with loss costs, auguring for continued strong underwriting results in 2023.
Moody’s stable outlook is a view of the sector’s dynamics, which essentially means that credit fundamentals will hold in the sector over the next 12-18 months. However, this is not a rating outlook, the report said. In other words, it does not represent the sum of potential upgrades, downgrades or graded ratings that include issuer-specific characteristics.
Year-to-date, the total combined ratio for the 20 largest U.S. non-life/casualty insurers is 94.4 through the first six months of 2022, according to Moody’s. This is 2.5 points below the full-year combined ratio for the same group for 2021 and 7.1 points below 2020.
“If the combined ratio were to remain around 94 for the rest of 2022, it would mark the lowest full-year combined ratio for this cohort of insurers since 2007,” the report said.
The report notes that the top 20 U.S. P/C insurers included in the combined ratio analysis are carriers that generate more than half of their premiums through commercial lines, including diversified carriers such as Travelers, Liberty Mutual and Nationwide that also write significant personal lines. The personal results of these diversified insurers have been hurt by rising auto parts and labor costs, as well as higher replacement vehicle prices. Homeowner results for those with policies centered in the Midwest were hurt by losses from high winds and hail. However, excluding the results for passenger cars and homeowners, the total combined commercial lines ratio for this cohort would likely end in the low 90s range in 2022, depending on catastrophe losses for the rest of the year, according to Moody’s analysts.

Analysts used premium growth for the first half of 2022 for the same top 20 commercial carriers to forecast direct premiums to grow 10 percent for the full year of 2022. Without tying a specific number to a premium growth prediction for 2023, the report notes that even if economic growth slows through 2023, there will be enough growth in the economy and employment to support increased commercial exposures, raising premiums along with further rate hikes.
While the overall report says premiums are keeping pace with rising loss costs, it points to some potential factors that could throw a wrench into the stable outlook. For example, commercial property insurers are “increasing coverage levels and rates, but generally not enough to cover higher construction costs,” the report said.

Healthcare inflation is another factor that could destabilize the sector. “While core inflation rose sharply in 2022, health inflation remained relatively subdued. If health inflation were to increase in line with the CPI, commercial insurers could experience underpricing and adverse reserve development in their casualty lines, particularly commercial general liability, workers’ compensation and commercial auto liability.
Insurance company representatives from The Hartford and W.R. Berkley Corp. also said health care inflation trends warrant close attention during separate presentations at the Keefe, Bruyette & Woods Insurance Conference last week, but both carriers said their companies are on top of the trends.
As for workers’ compensation, “most national carriers have fee schedules with health care providers that hold costs that are generally lower than the retail, consumer medical trends you see,” said Christopher Swift, CEO of The Hartford.
“In other words, if you’re looking at a broad-based medical index that’s at, say, 5 percent, we could be two to three points lower than we are with our rates for medical providers and even pharmacies.”
“It’s always a guarded area. We’re watching it closely,” he said, noting that the carrier generally rates and reserves a 5 percent trend nonetheless. “If that 5 percent trend doesn’t show up when the reserves leak, then voila, that reserve is released,” he said, describing the approach as prudent and deliberate. “I think we’ve been ahead of the curve, but if health inflation really shoots up, we’re going to have to adjust prices. We will have to consider a new growth rate in certain lines and end up charging the customer more because of that health inflation. But I don’t see it on the horizon. Not really,” he said.

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Robert Berkley Jr., president and CEO of W.R. Berkley, said health care inflation is likely to rise, commenting on trends in pharmaceutical costs and other health care facilities. “There’s been a lot of talk domestically, but we haven’t really seen much coming out of Washington that’s tangible that’s trying to curb pharma inflation … In terms of the balance of the medical article, I think you don’t have to look very long or hard to see the challenges facing the health system in this country. And there are many, many health systems across the country that are suffering, at least financially.”
“Ultimately, even if there is a delay, this issue will have to be resolved. And certainly part of the solution is likely to be rising costs,” he said.
While health inflation lags behind broader inflation, “that is likely to change. So we consider that in how we think about the price of our product. And it’s certainly something that we think the wider industry needs to actively grapple with,” Berkley said.