ALIRT Research – State of the Underwriting Cycle as of 9M2023 Financial Filings

State of the Underwriting Cycle:  The Firming/Hard Market Celebrates 6 Years

In our 30+ years of studying the U.S. P&C insurance market we have frankly never experienced a hard pricing cycle quite like the current one.  As shown on page 9, we are now in the 24th consecutive quarter of firming/hard pricing.  That’s six years of cumulative year-over-year rate increases (not to mention changes to policy terms & conditions, which act like rate), compared with average “hard market” lengths since the 1980’s of more like 2-3 years. 

We consider what may be different this time by perusing the current market conditions of three sectors:  personal lines, commercial lines, and specialty. 

Personal Lines

In his introductory commentary to Hanover’s 9 Month 2023 analyst call, CEO John Roche stated the following:

“We have updated our models and are reassessing our property aggregations to ensure we are not overly exposed in specific geographic areas in light of the increased property valuations and changing weather patterns.  Additionally, we are achieving substantial decreases in exposure beyond policy-in-force reduction from the product changes and risk prevention actions we are implementing.

Longer term, we will continue our diversification efforts to emphasize Personal Lines growth in lower-concentration states.  We also expect small commercial and specialty exposure and policy counts to grow much faster than Personal Lines, and ultimately, to reduce the relative share of Personal Lines business in our overall mix.

A similar strategic sentiment might have been lifted from any number of U.S. P&C personal lines insurers.  The concluding sentence says it all:  for those U.S. insurers with product line diversification, the best decision may well be to deemphasize personal lines business altogether and pivot to more profitable general and specialty commercial lines coverages.

What are some of the “product changes and risk prevention actions” that Mr. Roche alludes to?  Outside of outright personal lines exits (by line or geography), they include the following:

  • Sharp price increases (in Hanover’s case, estimated 2023 homeowners price hikes of 28%),
  • A more aggressive approach to homeowner non-renewals based on specific underwriting criteria,
  • An overall review and reevaluation of geographic exposures and property concentrations,
  • Increasing all-peril and wind and hail deductibles,
  • A transition to actual cash value schedules for roofs in certain states and on specific risks,
  • 3rd party input into the consideration of climate influence against cyclical weather patterns.

While the foregoing has focused on the homeowners line, the personal auto line is also under close scrutiny at many insurers. 

For instance, Hanover acknowledges that loss severity remains elevated here as well (the lingering effects of economic and, in places, social inflation), both as regards property and bodily injury claims.  Hanover cites a 14% price increase in its auto line, continuing hard market trends there. 

The fallout from personal lines losses, especially as regards property claims in the face of rising extreme weather-related perils, has been pronounced.  This includes insolvencies and/or ratings downgrades below the critical A.M. Best A- level.  Negative ratings outlooks are also on the rise, with regional insurers especially impacted.[1]  But it’s not only regionals.  In fact, the ratings of major personal lines insurers such as Allstate, Farmers, Nationwide, and State Farm have also been either downgraded or placed on a negative outlook.  Surely a shot across the bow for the entire personal lines industry.

Of perhaps greater concern has been the growing incidence of more aggressive claims practices.  ALIRT has heard on numerous occasions from distribution clients of unprecedented instances of claims denials/policy non-renewals based on the flimsiest of pretexts (non-renewal based on a towing claim?).  It is precisely the desire to quickly reshape/downsize personal lines exposures – especially at insurers facing greater financial/ratings pressure – that can contribute to such claims-paying behavior.

Final mention should be given to substantial layoffs at any number of personal lines insurers over the past six months, which admittedly could be due to a number of reasons.  However, bottom-line pressures due to elevated losses over time is almost certainly one of them.

Commercial Lines

Commercial lines business, on the whole, saw improved pricing/terms & conditions earlier than did personal lines in the current cycle and is therefore experiencing an ongoing upswing in profitability.  Of course, the commercial lines sector is less monolithic than personal lines.  It includes lines that never experienced rate hardening (workers comp), while others saw sharp increases early but have since eased considerably (e.g., professional liability, higher layer excess liability, cyber), while others remain problematic (e.g., cat-exposed property and commercial auto).

That said, insurers – and especially their reinsurer counterparties – are not ready to sound the all-clear on this sector of the U.S. insurance industry.  In fact, there has been a rising chorus of concern from industry executives that casualty business has loosened its discipline prematurely and that current pricing/reserves may prove deficient in the face of economic and social inflation trends that remain under-appreciated.

Commentary from Peter Zaffino, CEO of AIG, on that group’s 3Q2023 analyst call is instructive:

“Related to casualty liability and the excess casualty market, in particular in the United States, the level of narrative has increased over the last several years, driven in part by multiple mass tort events as well as rising economic and social inflation.  The latter has been fueled by an exponential increase in third-party litigation funding, average severity trend increases and a precipitous rise in jury awards following the lull during the pandemic.”

Insurers cannot reverse social and economic inflation.  However, we are in control of how we predict and respond to the impact of these changes to the forward-looking landscape, including how we manage our underwriting through coverage provided, limits deployed, attachment points and pricing. Our business is not immune from social inflation, but we anticipated it early, and we took action.”

As hinted at here, we believe that the industry has had a longer runway dealing with the casualty side of the business and continues to take the necessary steps to address any on-going concerns with inflation and the sharp rise of extreme weather losses.  These steps include increasing attachment points, restricting limits, better risk selection and pricing, and tightening up policy terms & conditions; in essence, “predicting and responding” to a somewhat new normal inflationary and higher frequency property loss environment.  The industry’s success in doing so is precisely the cause of easing rate pressure now.

Specialty Lines

We view specialty lines as a catch-all category for business written both in the admitted and especially surplus lines market that has more control over policy design and rate, and which employs marketing channels that enable more refined targeting of customers (such as managing general agencies, program managers, and other wholesale outlets).

If the personal lines sector is facing a near crisis, and the broad commercial lines sector in healthy repair mode, the specialty sector is currently in the cat bird’s seat as regards growth and profitability.  We turn again to 3Q commentary from Hanover’s John Roche to shine a light on the relative attractiveness of this sector:

“Longer term, Specialty continues to represent a robust growth opportunity for our company.  This business provides important diversification for our overall portfolio, and consequently, reduces our property and CAT exposures, all while providing our agent partners with robust comprehensive product offerings, highly valued capabilities and additional growth prospects.

We fully expect our Specialty portfolio to return to upper single-digit growth starting in the first quarter next year, as we benefit from increased market penetration in most segments and growth in newer product offerings, including Specialty, GL and E&S business.  We also expect additional lift from our newest initiatives, including expansion in the wholesale channel, which is already delivering solid growth.”

Hanover is far from the only regional insurer that is pivoting towards specialty insurance offerings (often in conjunction with a reduction in personal lines appetite – at least for the time being).  And these is addition to the many legacy as well as new entrants into the specialty market, as both insurers and wholesale distributors proliferate in the face of the rate opportunity combined with private investment capital attracted to the specialty model.


Taking all of this together, we are not surprised to see the overall rate cycle exactly where it is at present; i.e. with year-over-year premium increases down substantially from several years ago but now in a multi-quarter holding pattern.  After all, personal lines business represents approximately 50% of the country’s net written premium and given the current turmoil in that sector, the need for further and perhaps substantial price remediation within both the personal auto and homeowners lines is obvious.  This will not be accomplished overnight, especially as reinsurers reduce their support for this business and broad uncertainty about future frequency and severity trends persists.

This rate pressure, however, is being offset by improvements in broad commercial lines pricing and apparent adequacy within specialty lines, exemplified by the on-going rush of capacity into the latter sector.  Already supply is beginning to outpace demand in a number of lines of business, which should continue to temper – or even reverse – rate hikes.

This is not to say the hard market cycle will not continue well into 2024, which we believe it will.  Only that there appear now glimmers of light at the end of the tunnel for insurance buyers.

[1] For more, see ALIRT’s October 23rd release Badger Mutual Faces Severe A.M. Best Downgrade – Regional Property/Auto Insurers Under Pressure

David Paul, Principal

ALIRT Insurance Research

(860) 764-0681 (direct)

(860) 683-2070 (general)


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