Fitch holds a neutral fundamental sector outlook for the U.S. P/C sector in 2022. U.S. property/casualty (P/C) insurers are poised to generate statutory underwriting profits and steady earnings in 2022, despite challenges from higher inflation and a likely reduction in contributions from investment gains.

Rising inflation and supply chain constraints affected 2021 claims in property and automobile segments, with higher costs for building materials, auto parts and skilled labor. If higher inflation patterns persist, profitability and reserve strength would be expected to weaken in longer-tail segments, including workers’ compensation and other liabilities.

Evolving catastrophe risk exposures will add volatility to P/C insurers as well. Global insured losses from natural catastrophes mounted in 2021 with unusual first quarter winter storm losses, up to $40 billion in estimated losses from Hurricane Ida, and potential for up to $10 billion in losses from an active California wildfire season. As a result, (re)insurers are increasingly reducing capacity in catastrophe-prone regions, leading to further price increases.