Your insurance premiums will likely go up in 2022 — if they haven’t already. Amid the COVID-19 pandemic, many insurance companies have seen elevated claims activity. Extreme weather events, pandemic-related claims, civil unrest, and inflationary pressures have put pressure on insurance companies’ profitability.
However, experts believe that insurance companies will bounce back as demand increases and companies adapt to return to their profitable ways. Here are three things to watch for in the industry as we go into 2022.
1. Global insurance demand will go up
According to global insurance provider Swiss Re Group, insurance premium growth across the globe will be above average in the insurance industry compared to the historical average. Growth will increase as businesses and consumers become more risk-conscious coming out of the COVID-19 pandemic.
The company projects global insurance premium growth will be 3.3% in 2022 and 3.1% in 2023, exceeding the long-term trend in the industry. And insurers are in agreement. According to consultant and financial services firm Deloitte, one-third of 424 insurers surveyed expected revenues to be “significantly better” next year.
Specifically, commercial insurance sales are expected to bounce back better than personal lines. Higher demand, specifically in commercial lines, benefits companies with heavier reliance on generating premiums and commercial insurance policies. Chubb ( CB 0.67% ) and Cincinnati Financial ( CINF 1.08% ) are examples of two companies that could benefit from rising demand, as they pull in 43% and 62% of their premiums, respectively, from commercial policies.
2. Insurers’ profitability will recover after a tough year
Insurance companies were hurt in 2020 and 2021 for a variety of reasons. For one, COVID-19 claims hurt many insurers, especially those with life insurance businesses or pandemic-related cancellation policies.
And if those claims weren’t enough, companies were also hurt by higher catastrophe losses due to weather-related damages, which were further exacerbated by inflationary pressures. For example, Allstate and Progressive saw elevated claims during the third quarter this year due to outsized claims relating to damages from Hurricane Ida. The companies also experienced losses earlier in the year related to the Texas freeze.
For Progressive, losses through the first nine months of this year were up 67% from last year, coming in at nearly $1.3 billion. The company faced pressures from inflation and increased driving activity. Allstate’s losses in the first nine months totaled $2.8 billion, up 18% from last year due to similar factors.
Swiss Re Group projects insurance companies will rebound in 2022 and see improved profitability. In addition to higher demand, it projects that underwriting profitability will recover swiftly as insurers react to higher claims and inflationary pressure.
3. Your insurance premiums will go up
Companies will raise premiums due to those elevated claims they’ve seen in the past couple of years. This is a continuation of a trend in the insurance industry of what experts call a “hardening” of the insurance market. This occurs when there is high claims activity and policies are harder to come by. We’ve been in a hardening market since 2019 due to those issues. As a result, insurers have the flexibility to raise rates without losing too much business.
Rate increases have already begun. Progressive CEO Tricia Griffith told analysts during its quarterly earnings call that it would be shifting where it underwrites policies, eliminating states with higher numbers of catastrophes. The company also filed for increases in personal auto rates across the U.S. Through the end of the third quarter, higher rates have gone into effect in 20 states and are up 6% on average.
Allstate’s president of personal lines, Glenn Shapiro, said the company is taking similar actions in response to inflationary pressures. The company has raised rates in eight states by nearly 7% on average through the third quarter. It has plans to increase rates across 12 more states by the end of the year.
Insurance companies’ flexibility in raising rates is one reason why it is one of Warren Buffett’s favorite industries to invest in. These companies should see improved profitability as premiums increase — great news for investors — but not so great for consumers and businesses buying those insurance policies.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.