Opinion: 2024 market outlook: A case for optimism

Hunter Johnson

The past two years have been incredibly difficult for business owners.

A once-in-a-generation pandemic, 40-year high inflation, numerous weather and climate disasters, and a changing labor market that is difficult to access have all contributed to the challenges faced by small businesses across the United States.

Unfortunately, the commercial insurance property and casualty market has not been immune to these conditions, as carriers have struggled to remain profitable and, in turn, passed rates on to consumers. 

The U.S. commercial property and casualty market for 23 straight quarters has been in a sustained period of increasing rates and decreased availability to desired coverage terms, limits and products – known as a hard market. It’s the longest hard market the industry has seen since the casualty insurance crisis of the 1980s, and the first since the period following the dot-com bubble of the early 2000s.

Unfortunately, the industry has yet to experience the critical inflection point where premium growth rates surpass claims costs. Carriers continue to grapple with the aftermath of costly natural catastrophes, persistent inflation and increased litigation costs. The biggest challenge carriers are battling, though, is unreliable models and statistical sets to help them accurately predict weather events. 

Changes to the climate and underlying weather conditions that we’ve never seen before have recently shown that existing weather models – which rely on historical weather data and trends – are unreliable. The most illustrative example from the past quarter was Hurricane Otis, the Category 5 hurricane that hit Mexico’s western coast and the tourist town of Acapulco in late October. The storm’s strength was completely unanticipated by any predicative weather models.

In the afternoon of Oct. 24, the storm was considered a relatively mild tropical depression with wind speeds of 45-50 miles per hour and meteorologists expecting it to make landfall in the early morning hours but not to be strong enough to cause significant damage. However, in just a 12-hour period, wind speeds intensified by over 120 mph, and the storm hit the coast of Mexico and the town of Acapulco as a Category 5 hurricane with sustained winds of over 165 mph.

It’s not just coastal areas that are seeing new and more severe claims that predictive models are struggling to keep up with. Through Sept. 1, the United States had already experienced 24 separate weather and climate disasters – defined by the National Oceanic and Atmospheric Administration as events that generate $1 billion in damages. That’s over double the 40-year average of 8.5 events tracked between 1980 and 2020.

What is different about the events this year is that 12 of the disasters were caused by severe convective storms and not historically well-known modeled events, such as hail, wildfire, hurricane, flood, etc.

Convective storms, a category of storms that includes lightning and straight-line winds, were responsible for $34 billion in losses last quarter alone, $16 billion more than in years past, causing additional strain on carrier profitability, according to Swiss Re Institute’s latest Sigma Research Report.

But even with the strain on the market and carriers’ challenges to profitability due to weather events like those above, there is optimism in the industry for a more stable market in 2024.

1. In the past several years, carriers have been successful in increasing rates, and drastically reducing coverage terms to help with future underwriting profitability. We have not seen the impacts of these changes yet, but there is hope that rates have increased enough to account for future expected losses.
2. As new underlying climate conditions are input into existing weather models and carriers utilize new technologies, the quality of predictive weather models could improve. That would help carriers better account for future events.
3. Insurance companies typically invest in low-risk, fixed-income assets that perform significantly better in high-interest-rate environments. Increased carrier investment income is expected to remain strong and assist in offsetting claims losses.

If carriers are able to return to a more profitable position in 2024, particularly with regard to property, consumers may finally start to see some signs of relief with a more normalized environment leading to carrier competitiveness, expanded appetites and, hopefully, more stable renewal conditions.

As we wait this current cycle out, insureds can focus on presenting themselves as a desirable risk for insurance carriers to underwrite – working with their strategic partners to implement tools and strategies to help prevent controllable liability losses.

Hunter Johnson is vice president of Alliant Insurance Services Inc., specializing in workers’ compensation, alternative risk financing and complex risk placement. He can be reached at hunter.johnson@alliant.com.