Rating agency AM Best has opted to maintain its negative outlook on the US commercial lines industry for 2021, citing uncertainty about the economic fallout from COVID-19 and the re-emergence of social inflation as courts reopen.
Analysts noted that the commercial lines industry has shown resilience in a year of abnormally high catastrophe losses.
However, they warned that primary companies are likely to face firm reinsurance market conditions in 2021, with higher prices, tighter terms and conditions and reduced capacity, impacting underwriting margins.
Although these trends may result in further tightening of commercial insurance market conditions, economic factors may limit insurers’ ability to increase prices and enforce stricter underwriting practices while maintaining market share.
The industry’s need to address secondary perils, such as wildfire, convective storms and flood, has also been heightened by losses in recent years and he legal battle over pandemic losses continues to represent a source of uncertainty.
AM Best further notes that commercial casualty insurers still face a number of challenges that had emerged prior to the pandemic, including social inflation, litigation financing, nuclear verdicts and rising loss costs.
But despite these challenges, the commercial segment is considered to have maintained significant strength in its overall capital position, which AM Best believes will strongly support its risks, as well as a favourable level of liquidity.
“On balance, the uncertainties related to COVID-19 will produce a challenging operating environment for the commercial segment for 2021,” the rating agency concluded.
“Climate risk, social inflation and the persistently low interest rate environment now are firmly established secular trends that the industry will have to negotiate well into the future.”
Although AM Best does not anticipate that the negative factors faced by the commercial sector will be resolved any time soon, it does expect the outlook to be revised to stable as the US business climate returns to a more normal position.
AM Best recently announced that it would maintain its stable outlook on the global reinsurance industry for 2021, as positive pricing momentum and tighter terms and conditions continue to offset negative factors.
