US commercial lines outlook for 2021 negative amid COVID-19 and social inflation

Ratings agency AM Best has maintained its negative outlook on the US commercial lines industry for 2021, citing COVID-19 related uncertainty, its economic fallout, as well as social inflation and rising loss costs.

The agency noted 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, Best said.

The industry’s need to address secondary perils, such as wildfire, convective storms and flood, also has been heightened by losses in recent years, it added. The legal battle over who ultimately will share in paying for losses associated with the COVID-19 pandemic is far from over as well.

AM Best further noted that 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.

Despite these challenges, the commercial segment has maintained significant strength in its overall risk-adjusted capital position, which AM Best expects will 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," the agency said. Beyond the pandemic crisis, AM Best does not anticipate that the negative factors facing the industry next year will be resolved any time soon.

It added: "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."

Overall, AM Best believes the segment’s strong risk-adjusted capital base, appropriate enterprise risk management programmes and a generally low-risk investment approach should enable the outlook to be revised to stable as the US business climate returns to a more normal position.