AM Best has assigned a negative market segment outlook to the US commercial property insurance segment, citing uncertainty over Covid-related business interruption (BI) legislation and increasing frequency and severity of natural catastrophes.
While AM Best does not expect significant claims activity in commercial property due to the pandemic, it does foresee sizeable litigation expenses stemming from defence costs for denial of coverage claims related to BI coverages.
Uncertainty about the duration of the pandemic and its impacts, as well as management of climate-related risk, are key drivers in the negative outlook.
Other factors supporting the negative outlook include increasing cost of reinsurance, with tighter contract terms and conditions and the prospect of interest rates remaining lower than expected for longer than expected.
AM Best says commercial property insurers will also have to determine if changes to their risk appetites are warranted based on the impact of COVID-19 and recent onset of civil unrest in metropolitan areas.
Factors partially offsetting the negative outlook include the strong risk-adjusted capital positions of segment carriers, along with accelerating rate increases and the hardening market conditions.
AM Best notes that, despite hardening conditions, the US commercial property market is not yet in a definitive hard market state, as there is enough capital and surplus to meet the demand for coverage. However, it is a much more difficult market for buyers to navigate.
Insurers are making underwriting decisions based on profitability concerns rather than market share desires, which is driving reduced capacity utilization decisions, and directly impacting the cost of capacity.
AM Best says finding a balance between ensuring profitability and managing the financial stability may begin to get tougher for companies if more-extreme weather patterns continue to emerge.
