AM Best Maintains U.S. Commercial Lines Insurance Outlook at Negative

AM Best has maintained a market segment outlook of negative on the U.S. commercial lines industry for 2021, citing the uncertainty regarding the impact of COVID-19 and its economic fallout, along with the re-emergence of social inflation as courts reopen, as well as other factors that were adversely impacting the segment prior to the pandemic.

Source: AM Best | Published on December 11, 2020

Swiss Re P&C outlook positive

A new Best’s Market Segment Report, titled, “Market Segment Outlook: U.S. Commercial Lines,” notes that the commercial lines industry has shown resilience in a year of abnormally high catastrophe losses. However, primary companies are likely to face firm reinsurance market conditions in 2021, with higher prices, tighter terms and conditions and reduced capacity, impacting underwriting margins. Although these trends may result in further tightening of commercial insurance market conditions, economic factors may limit insurers’ ability to increase prices and enforce stricter underwriting practices while maintaining market share. The industry’s need to address secondary perils, such as wildfire, convective storms and flood, also has been heightened by losses in recent years. The legal battle over who ultimately will share in paying for losses associated with the COVID-19 pandemic is far from over as well.

Commercial casualty insurers still face a number of challenges that had emerged prior to the pandemic, including social inflation, litigation financing, nuclear verdicts and rising loss costs. In certain sublines, such as directors and officers insurance, reduced capacity in recent years has resulted in significant rate increases and tightening terms and conditions. The perception of improved conditions may cause some of that sidelined capacity to re-enter those markets, increasing competition just as, or perhaps before, equilibrium is established between loss cost and rate trends.

According to the commentary, the commercial segment maintained significant strength in its overall risk-adjusted capital position despite these challenges, although the combination of lower exposures, increased catastrophe losses and volatility in investment markets may drive some company’s capital levels lower in 2021. Overall, AM Best expects the segment will maintain a capital position that strongly supports its risks, as well as a favorable level of liquidity.

On balance, the uncertainties related to COVID-19 will produce a challenging operating environment for the commercial segment for 2021. Beyond the pandemic crisis, AM Best does not anticipate that the negative factors facing the industry next year will be resolved any time soon. Climate risk, social inflation and the persistently low interest rate environment now are firmly established secular trends that the industry will have to negotiate well into the future. That said, AM Best believes the segment’s strong risk-adjusted capital base, appropriate enterprise risk management programs and a generally low-risk investment approach should enable the outlook to be revised to stable as the U.S. business climate returns to a more normal position.

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