AM Best has revised its 2022 market segment outlook for the U.S. property/casualty commercial lines insurance industry to stable from negative, despite some near-term challenges including inflation, an uneven economic recovery and continued pressure on jury awards and settlement costs.
The stable outlook reflects AM Best’s expectation that “on balance the segment will remain profitable, its risk-adjusted capital position will remain sound and the segment will be resilient in the face of these near- and longer-term challenges.”
AM Best analysts cited the relatively modest negative impact of the COVID-19 pandemic, continued strong pricing momentum across the segment and favorable rulings to date on many business interruption coverage disputes.
According to Best’s report, “Market Segment Outlook: U.S. Commercial Lines,” the heightened level of economic uncertainty and the potential impact of the pandemic were keys to the revision of the commercial lines outlook to negative in April 2020.
However, the effect of the pandemic on the performance of the commercial segment has been modest over the past 18 months, with better underwriting results in 2020 than in 2019 on a normalized basis. Additionally, litigation related to denial of coverage for business interruption claims generally has been resolved in favor of insurers.
In light of greater clarity about the impact of the pandemic, AM Best said it also has revised its market segment outlooks to stable for several key commercial lines of business, including workers’ compensation, commercial property and surety.
Rates for most of the major commercial lines of business rose throughout 2020 and into 2021, with workers’ compensation as the main outlier. AM Best said it expects commercial lines rates to keep rising, although the rate of growth is likely to slow through 2022. Also, the rating analysts added, there is some uncertainty about whether “recent rate increases, particularly in general liability and other casualty lines, have brought pricing in line with loss costs.”
Higher inflation amid supply chain issues and labor shortages could continue to pressure the prices of goods and materials upward; however, AM Best analysts said they expect that the segment will have the capital to manage through any temporary increases in prices as an earnings issue.
Countering the tailwinds expected to support continued profitability in 2022 are issues that have carried over from pre-pandemic times, including social inflation. According to AM Best, this is a particular issue for casualty lines, “as these trends impact not just future claims but also require continual re-evaluation of existing claims reserves.”
AM Best also cautions about rate reductions in states, intensifying competition, and possible judicial and legislative actions that could affect the workers’ compensation line.
North Carolina Suit Could Signal Change in COVID Claims Disputes
AM Best said it anticipates seeing a return of the negative trends in social inflation and litigation financing, as public attention shifts from the pandemic back to other issues.
The commercial segment also faces the issue of climate risk. The variability in the commercial lines’ reported results in recent years is primarily a reflection of the variability in catastrophe losses each year, according to the report. “The segment has been subject to an increase in the frequency of more severe events, driven not just by climate risk but also by demographics and rising costs to repair and replace damaged property,” the report says.
Source: AM Best
Topics Trends Commercial Lines Business Insurance AM Best Property Casualty
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