High losses in both homeowners and auto lines prompted AM Best to maintain a negative outlook on the U.S. personal lines segment while the rating agency also maintained a positive outlook for the delegated underwriting authority enterprises segment, AM Best analysts said in a market outlook briefing.
AM Best analysts reviewed the state of the U.S. insurance industry’s major segments and the global reinsurance as well as what the rating agency foresees in 2024 in an online briefing. The event followed publication of AM Best’s annual market segment outlook reports on the U.S. property/casualty personal and commercial lines segments; the U.S. life/annuity and health industries; the global reinsurance market and the DUAE market.
It’s too early to gauge the fallout from Vesttoo Ltd. bankruptcy filing following the insurtech’s role related to questionable letters of credit impacting its fronting arrangements, said Greg Williams, senior director, DUAE, AM Best.
The DUAE segment encompasses managing general agents, managing general underwriters, coverholders and program administrators, among others.
The Vesttoo failure was well-publicized and is working its way through some of the bankruptcy proceedings. Williams said the most exposed fronting carrier was Clear Blue Insurance Co. but it is encouraging that Clear Blue was able to replace the capacity that was with Vesttoo efficiently and in a short amount of time.
Clear Blue recently sued Aon plc in New York state court for alleged damages connected with letters of credit issued by Vesttoo involving Aon and its White Rock entity.
Some capacity might be scared off but it is encouraging that there is capacity out there, Williams said.
Lloyd’s made some adjustments in collateral management in the wake of Vesttoo, he said. In addition to capacity considerations, there are regulatory concerns that might play out over the near term, Williams said.
“We’ll keep close tabs on it and then we’ll update our outlook if we need to,” he said. “It seems like from what we’re seeing, strong franchises with good underwriting discipline are able to find the capacity.”
The Vesttoo affair may lead to a flight to quality for reinsurers, which have available capital, he said.
The fronting market has taken off, driven by reinsurance appetite, Williams said.
AM Best is maintaining its market segment outlook for the DUAE segment at positive, citing its sustained growth and performance on a global basis and the ongoing ability to address underserved and emerging risks.
An additional factor partly contributing to the positive outlook is the technology and talent within the segment that continue to drive innovation, according to a new Best’s Market Segment Report, titled, “Market Segment Outlook: Delegated Underwriting Authority Enterprises”.
DUAE players have expanded their share of premium across the broader insurance market, while new entrants grow in number, he said.
In 2022, AM Best identified more than 650 operating managing general agents that generated direct premiums written of over $65 billion in the United States alone, up nearly 15% from the prior year, Williams said.
AM Best doesn’t expect the same level of growth over the next year as rates continue to moderate, but the DUAE growth rate should continue at a healthy rate, he said, adding that AM Best believes there will be sufficient capacity to support this growth.
A continued negative outlook for the U.S. personal lines segment is due to a deterioration and poor results in both the personal auto and homeowners lines, said Joseph Burtone, director, P/C personal lines.
Auto liability physical damage accounts for about two-thirds of the segment’s results, Burtone said. Given high loss costs and increased net retention for homeowners carriers, a return to profitability over the near term appears highly unlikely, he said.
Efforts to address rate adequacy are not easy to accomplish, he said. Insurers have sought to get adequate rates but with loss cost severity, the ability to stay ahead of current trends has been a challenge although significant rate increases have been approved in some jurisdictions.
Loss-cost severity has been driven by higher fatalities and repair costs, higher used car prices, supply chain issues, labor market disruptions and rising medical costs along with overall inflation, Burtone said.
A recent trend toward more destructive loss activity has continued with events like Hurricane Idalia in Florida, wildfires in Hawaii, severe weather in the Northeast and severe conductive storms including wind, hail and tornadoes, particularly in the Midwest and South, aggravated by climate and demographics, Burtone said.
The growing threat of secondary peril losses is highlighted by the most recent tornado activity in Tennessee and is taking a cumulative toll on insurers, he said.
Reinsurance market concerns and higher insurance retentions are a challenge, particularly for insurance with geographic concentration. AM Best believes reinsurance pricing will remain a headwind for the personal lines segment, he said.
Risk-adjusted capitalization remains good for most carriers despite losses and rising interest rates are increasing yields, Burtone said. But the capital cushion of some companies has eroded due to persistent underwriting losses.
In the U.S. commercial lines market, AM Best is maintaining its stable outlook for 2024 due to strong pricing in most major lines except workers’ compensation and most recently, directors and officers and cyber, said Michael Lagomarsino, senior director, P/C commercial lines.
AM Best is seeing strong performance in workers’s comp, which it expects to continue in 2024 despite ongoing competitive pressure and modest rate reductions, he said. There are some concerns over rising medical and wage inflation and the impact on claims severity, which AM Best anticipates will remain as manageable over the near term, he said.
While AM Best anticipates continued pricing divergence across lines of business, it’s AM Best’s expectation that the majority of segment carriers will remain disciplined and pricing will keep pace with, or exceed loss costs and maintain rate adequacy in the aggregate, he said.
In certain areas, carriers will deploy capacity cautiously while maintaining rate discipline, as seen recently in the excess and surplus market, a trend AM Best anticipates to continue in 2024, Lagomarsino said.
AM Best changed its outlook on E&S to positive in November in recognition of its growing importance in the commercial lines market, he said.
Commercial lines are seeing ongoing competitive pressures and claims inflation on rising loss cost severity from social inflation in a post-COVID environment as court backlogs clear. There is also an increase in the number and size of nuclear verdicts as well as the growing influence of litigation financing and a significant increase in liability claims costs, Lagomarsino said.
This raises concerns particularly in long-tail casualty that is impacted by social inflation, he said.
Lagomarsino said AM Best will look closely at any signs of reduced rate increases or rate declines that might bring into question rate adequacy across a broader spectrum of lines of business.
The global reinsurance industry has seen strong technical profitability partly offset by by its dependence on results from investments markets that are often volatile, said Carlos Wong-Fupuy, senior director, global reinsurance.
Reinsurers have realigned their risk portfolios, putting pressure on primary carriers, Wong-Fupuy said. While there is a temptation to get back to more volatile layers, this isn’t going to happen any time soon.
High interest rates, inflationary pressures and social inflation have pressured some companies.
Wong-Fupuy noted that in U.S. casualty, after a number of reserve strengthening actions this year, there has been more caution about how to expand the casualty book. The general insurance environment is attractive but there is much caution from investors. Available capital is not the same as deployed capital, he said.
Reinsurers have been well-capitalized, especially the larger ones, and AM Best this year is forecasting a significant recovery compared with a large decline last year. Wong-Fupuy said the big question is how much of that capital is going to be retained within the segment or returned to shareholders as there is strong pressure to return capital to shareholders.
The role of third-party capital has been evolving from that of a direct competitor to more of a partnering role with traditional reinsurers, Wong-Fupuy said. It’s important for the large players to have an insurance-linked securities platform.
As reinsurers cut property exposure and expand into other lines, it is important what they find in terms of retro capacity or partnerships with ILS capital, he said.
There are always different types of investors, some with a long-term horizon and others looking for short-term opportunities. Some of the ILS announcements AM Best has seen in the past few months have referred to very short-term opportunities, Wong-Fupuy said.
AM Best is maintaining a stable outlook for the global reinsurance industry as reinsurers’ capital positions have been recovering significantly, after capital declines last year amid rising interest rates and unrealized investment losses, Wong-Fupuy said.