A.M. Best Maintains Stable Outlook for US Commercial Lines Sector

A.M. Best has maintained a stable outlook for the US commercial lines insurance sector, citing its strong underwriting performance through the COVID-19 pandemic and the current economic volatility.

In a new Best's Market Segment Report, "Market Segment Outlook: U.S. Commercial Insurance," the rating agency suggested that sharply higher rates on new fixed-income investments should bolster profitability across all US commercial lines but particularly in the casualty business. While positive pricing momentum is past its peak, it will also be a positive factor, Best said.

In addition, the COVID-19 pandemic's reduced impact on commercial lines insurers continues to be felt, Best said, in part through the many favorable rulings insurers have won on business interruption coverage disputes.

However, US commercial lines insurers face more pronounced headwinds entering 2023 than they did a year ago, according to Best, and they will face pressure to sustain adequate pricing and to prepare for the contraction of market opportunities and the potential for increased litigation.

"This is being driven by stubbornly elevated inflation, reflecting supply-chain disruptions and increased commodity and labor costs that are driving loss costs in the property lines," a Best statement said. "Social inflation costs, which include jury awards and litigation expenses, are expected to rise, affecting the casualty lines in terms of prospective underwriting and reserve margins."

The potential for a recession in 2023 is another potential negative factor facing US commercial lines insurers, Best said. A recession could include disruptions in important economic segments and workforce dislocation, according to the rating agency, potentially affecting some professional liability and other lines.

"The stable outlook reflects our expectation that, on balance, the segment will remain profitable, its risk-adjusted capital will remain sound, and the segment will be resilient in the face of these near- and longer-term challenges," Michael Lagomarsino, senior director at A.M. Best, said in the statement.

The Best report also notes that US commercial lines insurers have reported strongly positive underwriting results through this year's third quarter and are expected to continue to do so.

"Segment earnings have also benefited from lower catastrophe losses for the commercial lines in 2022, notwithstanding the severity of Hurricane Ian in the third quarter, as well as from higher underlying underwriting gains and net favorable prior year reserve development," Best said.

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