AM Best has revised its market segment outlook on the U.S. commercial lines industry to negative from stable, owing to the impact of COVID-19 and the ensuing economic slowdown. Concurrently, AM Best is maintaining its stable outlook on the U.S. personal lines industry.
In a Best’s Market Segment Report on its commercial lines insurance market outlook, AM Best states that it does not expect significant claims activity in commercial lines owing directly to the pandemic, although increased virus-related losses are expected in the event cancellation and travel insurance lines. However, the rapid deterioration of the economy, with unemployment claims skyrocketing and more than 90% of the nation’s population under stay-at-home orders, will be felt throughout the commercial insurance segment.
Key factors weighed in the outlook revision to negative include:
- Expectation of lower premiums as a result of slowing economic conditions, resulting in lower earnings;
- Reduced surplus and equity as a result of lower asset values; and
- The prospect of interest rates remaining lower than expected for longer than expected.
While the short-term expectations for commercial lines’ premium are negative, reduced exposures to losses—due to laid-off workers or those working from home, along with fewer patrons in stores, restaurants and bars and fewer miles driven in many segments of the commercial auto line—may bring losses down in line with the decline in premium, allowing underwriting results to remain balanced. We expect deteriorating economic conditions to drive higher trade credit losses. Additionally, a rise in vacant properties, which are historically more prone to loss than occupied premises, may drive higher losses.
Another area AM Best continues to monitor 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 expenses are unlikely to decline as rapidly as premiums. Once the immediate crisis is past, the longer-term potential for the economy may still be in doubt. AM Best expects that unemployment and GDP will remain challenged through 2020. A number of major industry sectors, including construction, retail, hospitality and transportation, will face difficult conditions into the second quarter, at a minimum.
Despite the uncertainty created by the COVID-19 outbreak, AM Best is keeping its stable outlook on the personal lines segment due to reduced catastrophe activity that is benefiting the homeowners segment, 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. AM Best’s stable outlook assumes that companies in the U.S. personal lines segment will continue to respond appropriately to market challenges, including the current pandemic and elevated level of uncertainty. However, should risks fall materially outside of current expectations or the pandemic impacts materialize more profoundly for this segment, however, the outlook would be revised.
To access the full copy of the U.S. commercial lines market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=296096.
The market segment report for the U.S. personal lines market outlook can be accessed at http://www3.ambest.com/bestweek/purchase.asp?record_code=296054.
AM Best is hosting a webinar, titled, “COVID-19 Implications for US Insurance and Reinsurance Markets,” on Thursday, April 9, 2020, at 10 a.m. EDT. During this event, AM Best analysts will discuss U.S. insurance sector and global reinsurance outlooks, as well as discuss additional rating considerations. To register, please go to www.ambest.com/webinars/covid19.