The U.S. commercial general liability insurance segment gets a negative outlook from A.M. Best, due to concern about social inflation, third-party litigation financing and other factors leading to unfavorable claims trends.

General liability’s purpose makes it vulnerable to a negative outlook under current market conditions. As A.M. Best describe in its new Market Segment report, the broadly designed coverage is meant to protect businesses against claims that their establishments caused physical harm or property damage to third parties. With that in mind, it is concerned that “the COVID-19 pandemic could pressure growth opportunities and lead to heightened claims activity for general liability insurers.”

A.M. Best said the negative outlook also comes from the potential impact of the tough U.S. economy on general liability losses, higher reinsurance costs, and the risk that low interest rates will continue longer than expected.

Insurers are responding to market pressures in the space by pursuing big rate increases, as well as tighter policy terms and conditions, A.M. Best said. That’s helped to a point, letting general liability insurers still grow premiums. A.M. Best said trouble could come, however, with continued economic challenges and if businesses see declining revenues – both of which could stagnate or contract underlying insurance exposures.

Still, A.M. Best said that segment carriers have another positive that’s countering the negative outlook – a strong risk-adjusted capital position of segment carriers.

Worries about social inflation come from a rise in loss frequency and severity due to more lawsuits. Exacerbating this is the use of third-party litigation money, which A.M. Best said “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.”

Third-party litigation financing worsens the impact of social inflation on general liability insurers, A.M. Best explains, because “carriers are incentivized to settle claims out of court to avoid exposing themselves to unpredictable jury outcomes.”

Source: A.M. Best