AM Best has kept its market segment outlook for the commercial lines segment in the United States stable, citing its strong underwriting performance during the COVID-19 pandemic and ongoing economic volatility.
Sharply higher fixed-income reinvestment rates will boost profitability across all commercial lines, particularly in the casualty business. According to a new Best’s Market Segment Report titled “Market Segment Outlook: U.S. Commercial Insurance,” positive pricing momentum, though past its peak, is also a positive factor. Furthermore, the pandemic’s diminishing impact on commercial lines insurers is still felt, owing to almost universally favorable rulings on many business interruption coverage legal disputes.
However, headwinds are clearly more pronounced in 2023 than they were a year ago, and commercial lines insurers will be pressed to maintain pricing adequacy while also preparing for market contraction and potential increased litigation. This is being driven by persistently high inflation, which reflects supply-chain disruptions and increased commodity and labor costs, which are driving property loss costs. The cost of social inflation, which includes jury awards and litigation expenses, is expected to rise, affecting the casualty lines in terms of prospective underwriting and reserve margins.
Another important and potentially damaging factor is the growing fear in some quarters of an economic recession in 2023, which could result in disruptions in important economic segments and workforce dislocation, with an impact on certain professional liability segments and other lines.
“The stable outlook reflects our expectation that, on balance, the segment will remain profitable, its risk-adjusted capital will remain sound, and the segment will be resilient in the face of these near- and longer-term challenges,” AM Best senior director Michael Lagomarsino said.
According to the report, commercial lines insurers have reported positive robust underwriting results through the third quarter of 2022 and are expected to continue doing so, owing to strong net premiums earned on the heels of prior year rate increases and continued growth in net premiums written. Despite the severity of Hurricane Ian in the third quarter, segment earnings have benefited from lower catastrophe losses for commercial lines in 2022, as well as higher underlying underwriting gains and net favorable prior year reserve development.