AM Best has revised its outlook on the US commercial lines industry to negative from stable due to the impact of COVID-19, but has maintained a stable outlook on US personal lines.
The rating agency does not expect significant claims activity in commercial lines owing directly to the pandemic, although virus-related losses will likely be seen in the event cancellation and travel insurance lines.
However, the ensuing economic slowdown will be felt throughout the commercial insurance segment, with unemployment claims already skyrocketing and more than 90% of the US population under stay-at-home orders.
Analysts explained that the negative outlook revision accounted for the expectation of lower premiums due to the slowdown, as well as reduced surplus and equity as a result of lower asset values, and the prospect of subdued interest rates for longer than expected.
While the short-term expectations for commercial lines’ premium are negative, reduced exposures to losses may bring losses down in line with the decline in premium, allowing underwriting results to remain balanced.
AM Best also expects deteriorating economic conditions to drive higher trade credit losses, while a rise in vacant properties, which are historically more prone to loss than occupied premises, may drive higher losses.
Another consideration is the potential for government intervention in establishing causes of loss for business interruption, despite a lack of coverage-triggering events or specific exclusions that would preclude policies from responding to these claims.
Legislators in several states have drafted legislation that would require insurers to cover business interruption losses related to physical distancing guidelines or government-mandated closures of non-essential businesses.
AM Best does expect an adverse effect on companies’ underwriting results, as it believes that expenses are unlikely to decline as rapidly as premiums.
But the longer-term potential for the economy may still be in doubt, as unemployment and GDP will remain challenged through 2020.
As such, a number of major industry sectors, including construction, retail, hospitality and transportation, will face difficult conditions into the second quarter at a minimum, analysts warned.
Despite this uncertainty, AM Best is keeping its stable outlook on the personal lines segment due to a number of factors, including reduced catastrophe activity that is benefiting the homeowners segment.
Other beneficial trends include profitable underwriting performance in the private passenger auto line of business, increased data analytics supporting underwriting and pricing decisions, and strong risk-adjusted capital positions among personal lines carriers.
That said, the stable outlook assume that companies in the US personal lines segment will continue to respond appropriately to market challenges, including the current pandemic and elevated level of uncertainty.
