AM Best has revised its market segment outlook from stable to negative on the U.S. personal lines insurance segment following a significant deterioration in the reported results of personal automobile insurers.
Other major factors include rising loss cost severity, pricing pressures, and elevated reinsurance costs, says Best.
It notes that the liability and physical damage portions of the auto line of business together account for approximately two-thirds of the segment’s results.
The previous stable outlook reflected Best’s expectations that personal auto insurers would return to underwriting profitability in 2022.
Best stated, “Given inflationary pressures impacting loss costs and deteriorating loss ratios, we now expect personal auto insurance segment results to worsen.”
Respectively, Best has revised its segment outlook to negative as well.
The report suggests reinsurers are re-evaluating their portfolios and risk tolerance levels, as inflation is adding to the rising trend in reinsurance costs for cedants.
Many primary companies are attempting to manage this trend with increases in net retention levels, says Best.
Richard Attanasio, senior director at AM Best commented, “Rising reinsurance costs can pressure operating performance and balance sheet strength if lower levels of reinsurance protection result in higher net probable maximum losses or net retained losses that are significant enough to erode surplus.”
“Primary carriers may struggle to pass these higher costs through to their customers due to hurdles from regulatory restrictions in certain states.”
The report also notes that secondary perils, such as tornadoes or wildfires, have become just as problematic as high-profile events such as hurricanes and earthquakes.
Depending on the structure and pricing of reinsurance programs, losses associated with these events often fall within companies’ net retentions, affirmed Best.
Risk-adjusted capitalization positions among personal lines insurers remain robust and can provide some cushion to manage the challenges ahead, states the report.
However, it adds that economic uncertainty has led to depressed consumer and business sentiment and market volatility, creating uncertainty on the asset side of the balance sheet.
Attanasio added, “The best-performing auto and homeowners’ insurers have invested significant resources into technology to improve their underwriting and pricing tools.”
“Those carriers that are slow to adapt to the challenges ahead or don’t have the means, expertise or technological capabilities to keep pace with the evolving market trends will likely face pressure.”
