U.S. commercial lines insurers will continue to be tarnished by an A.M. Best negative outlook, thanks to COVID-19 economic uncertainty, social inflation and other challenges.

A.M. Best first revised its outlook for the segment to negative from stable in April, in the wake of COVID-19’s early spread. The ratings agency notes in its Dec. 7 market segment update that some conditions have improved, but it argues potential volatility remains in multiple ways.

In terms of COVID-19, A.M. Best said that the new surge in coronavirus cases threatens to undo efforts to manage pandemic damage implemented earlier in the year.

“Government assistance to businesses and their furloughed employees helped offset some of the economic damage associated with far-reaching shutdown orders. Throughout most of 2020, legal challenges to business interruption claim denials and actions to expand workers’ compensation presumption rules generally favored insurers,” A.M. Best said. “However, as the pandemic has continued, with cases reaching record peaks and with a second federal aid package in 2020 seeming less likely, there may be some additional pressure on these policy provisions.”

A.M. Best said that California’s expansion of workers compensation presumption rules in September could hurt insurers in the long run. Another point of concern: recent litigation regarding business interruption claim denials that has been allowed to proceed in North Carolina, Texas and other jurisdictions.

“The legal battle over who will ultimately share in paying for losses associated with the pandemic is far from over,” A.M. Best observed in its sector update.

Considering that small businesses have seen some of the largest business interruption impacts, A.M. Best added that commercial lines carriers focused mostly on small businesses “will see the largest negative impact on premium.”

Social Inflation and More Renew Threat

A.M. Best points out that commercial casualty insurers were facing a number of new challenges before the pandemic, including social inflation, litigation financing, nuclear verdicts and rising loss costs.

Insurers got a break of sorts with these issues in the early stages of the pandemic, with courts closed or operating with limited capacity. As well, A.M. Best said that the economic uncertainty “helped drive faster and lower settlements.” But in 2021, as relative economic stability returns, A.M. Best predicts these issues will regain focus and importance.

The year 2021 “will likely witness a reemergence of the trend toward increased attorney involvement in claims, as well as higher demands and jury awards, particularly where anti-corporate sentiment is strong and large awards are viewed as a form of economic or social justice,” A.M. Best observes in its market segment report.

As well, A.M. Best expects primary commercial insurers in 2021 to deal with higher reinsurance prices, tighter terms and conditions and reduced capacity that will impact underwriting markets, thanks to a hardening reinsurance market.

A.M. Best said that the trends could further tighten commercial insurance market conditions, but economic trends could limit carriers’ ability to raise prices “and enforce stricter underwriting practices while maintaining market share.”

Even with all of these pressures, A.M. Best said that there will likely be some elements that at least partially offset the bad, including strong risk-adjusted capital levels, a mostly favorable pricing environment, continued lower loss frequency and likely post-pandemic expense efficiencies that become permanent.

Source: A.M. Best