AM Best assigns negative outlook to US general liability market

AM Best has assigned a negative market segment outlook to the US commercial general liability insurance segment, owing to unfavorable claims trends driven by social inflation and other factors such as third-party litigation financing.

General liability insurance is a broad form of commercial insurance coverage that protects policyholders against claims that their businesses caused bodily injury or property damage to third parties.

With its Best’s Market Segment Report, “Market Segment Outlook: US General Liability Insurance,” AM Best notes that the negative outlook also takes into account, albeit to a lesser extent, the possibility that the COVID-19 pandemic could pressure growth opportunities and lead to heightened claims activity for general liability insurers.

Other factors supporting the negative outlook include: near-term concern about the potential impact of difficult macroeconomic conditions in the US on general liability losses; increasing cost of reinsurance, with tighter contract terms and conditions; and the prospect of interest rates remaining lower than expected for longer than expected.

According to the report, insurers have responded to these and other pressures by seeking significant rate increases and tighter policy terms and conditions. Significant rate increases to date have allowed general liability insurers to continue to grow premiums; however, if the US economy continues to suffer and businesses see declining revenues, underlying insurance exposures could stagnate or contract. Another factor partially offsetting the negative outlook is the strong risk-adjusted capital positions of segment carriers.

Social inflation includes a number of litigation- and claims-related factors that benefit claimants and refers to a rise in loss frequency and severity because of an increase in litigation. These trends have become more pronounced recently due to the growing use of third-party litigation financing that allows for more lawsuits and the increase in severity as changing jury demographics and anti-corporate sentiment has resulted in more liberal awards to defendants. The increase in third-party litigation financing further exacerbates the impact of social inflation on general liability insurers, as carriers are incentivized to settle claims out of court to avoid exposing themselves to unpredictable jury outcomes. The report reviews these topics and other key issues affecting general liability lines and the steps insurers are taking to mitigate rising claims activity and improve results.