According to a new Best's Market Segment Report titled "Market Segment Outlook: U.S. Commercial Lines," the heightened level of economic uncertainty and the potential impact of the pandemic were key drivers in the commercial lines outlook being revised to negative in April 2020. However, the impact of the pandemic on commercial segment performance has been minimal over the last 18 months, with better underwriting results in 2020 than in 2019. Furthermore, litigation involving denial of coverage for business interruption claims has generally been resolved in favor of insurers. In light of increased clarity about the pandemic's impact, AM Best has revised its market segment outlooks for several key commercial lines of business, including workers' compensation, commercial property, and surety, to stable.
Rates for the majority of the major commercial lines of business rose throughout 2020 and into 2021, with workers' compensation being the notable exception. AM Best anticipates that interest rates will continue to rise, though the rate of growth will likely slow through 2022. Higher inflation as a result of supply chain issues and labor shortages could continue to push up the prices of goods and materials; however, AM Best anticipates that the segment will have enough capital to manage any temporary price increases as an earnings issue.
Issues from pre-pandemic times, such as social inflation, are expected to counteract the tailwinds expected to support the commercial lines segment's continued profitability in 2022. This is especially problematic for casualty lines, as these trends affect not only future claims but also necessitate ongoing re-evaluation of existing claim reserves. AM Best anticipates a return of negative trends in social inflation and related issues, such as litigation financing, as public attention shifts away from the pandemic and its consequences and toward other issues.
Climate risk is also a concern for the commercial sector. The variability in commercial lines reported results in recent years is primarily due to the variability in catastrophe losses each year. The frequency of more severe events has increased in this segment, driven not only by climate risk but also by demographics and rising costs to repair and replace damaged property.
Overall, the stable outlook for the U.S. commercial lines segment reflects AM Best's expectation that the segment will remain profitable on a net basis, that its risk-adjusted capital position will remain strong, and that the segment will be resilient in the face of these near- and longer-term challenges.
To obtain a complete copy of this report, go to http://www3.ambest.com/bestweek/purchase.asp?record code=315229.
To watch a video with AM Best Director Jacqalene Lentz discussing the commercial lines market segment outlook in the United States, go to http://www.ambest.com/v.asp?v=ambpccloutlook1221.
AM's leader In an online briefing scheduled for Thursday, December 9, 2021 at 2:00 p.m. EST, Best analysts will review 2022 market segment outlooks for the major segments of the US insurance industry and the global reinsurance industry. Please visit www.ambest.com/conferences/USMB2022 to register for the briefing.