Best Has Negative Outlook for US Property-Casualty Insurance Segment

Several pieces of white paper with black question marks surrounding the word legislation

January 11, 2021

Several pieces of white paper with black question marks surrounding the word legislation

A.M. Best has assigned a negative market segment outlook to the US commercial property-casualty insurance segment due to uncertainty over business interruption legislation related to the COVID-19 pandemic and the increasing frequency and severity of natural catastrophes.

Writing in a December Best's Market Segment Report, the rating agency said that while it doesn't expect the pandemic to prompt significant commercial property claims activity, it does anticipate "significant litigation expenses stemming from defense costs for denial of coverage claims related to business interruption coverages."

Best said that uncertainty about the pandemic's duration and its impacts, as well as the management of climate-related risk, were key factors in its negative outlook for the US property-casualty sector. Other factors supporting the negative outlook include a long-term trend of higher catastrophe losses over time resulting from secondary perils such as convective storms, wildfires, and floods.

Other factors behind the property-casualty market outlook include the increasing cost of reinsurance with more restrictive terms and conditions and the prospect of interest rates remaining lower than expected for longer than expected, Best said.

Best noted that for property insurers, the escalating frequency and severity of extreme weather-related events have highlighted the interconnectedness of insurance risk, climate-related risk, and profitability. Insurers are beginning to focus on a more holistic approach to climate-related risks by integrating them as part of their enterprise risk management efforts, the rating agency said.

A.M. Best said it believes that in order to stay competitive, property-casualty insurers need to innovate to adapt to the ever-changing needs of their consumers.

The rating agency also said the commercial property insurers will have to determine if they should adjust their risk appetites based on the impact of COVID-19 and recent civil unrest in metropolitan areas.

Best said that its negative outlook is partially offset by the strong risk-adjusted capital positions of insurers in the US commercial property-casualty segment, along with accelerating rate increases and hardening market conditions. But the rating agency said that despite the hardening conditions, the US commercial property market isn't yet in a definitive hard market, as there are sufficient capital and surplus to meet the demand for coverage.

The market is more difficult for buyers, however, as insurers are making underwriting decisions based on profitability rather than seeking market share, driving reduced capacity and cost.

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January 11, 2021