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AM Best: US Market Outlook Stable Despite COVID-19, Inflation, Catastrophe Pressures

For the property/casualty personal lines segment, there is continued robust risk-adjusted capitalization with sufficient liquidity, driven by the impact of COVID-19 on the economy and equity markets, AM Best says.
  • David Pilla
  • February 2022
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Inflation pressures, low interest rates and catastrophe costs are keeping pressure on U.S. insurance markets but a recovering economy and a business rebound are helping to maintain overall stable outlooks, according to AM Best analysts.

Earnings, positive pricing and capital resilience are evident in U.S. markets despite the prolonged effects of COVID-19 and catastrophe, supply chain and interest-rate pressures among other factors, the analysts said during the “AM Best's 2022 U.S. Market Outlook Briefing—Key Factors to Consider” webinar. The briefing follows publication of AM Best's annual market segment outlook reports on the personal and commercial lines segments of the property/casualty industry, the life/annuity and health industries and the global reinsurance market.

Property/Casualty Lines

For the property/casualty personal lines segment, AM Best is maintaining a stable outlook, said Managing Director John Andre. There is continued robust risk-adjusted capitalization with sufficient liquidity, driven by the impact of COVID-19 on the economy and equity markets, he said. The capital improvement helped the segment to deal with increased catastrophe activity and a return to pre-pandemic frequency trends as well as increased loss cost severity, said Andre. Underwriting actions have helped take some of the volatility out of the homeowners segment as premium growth continued to benefit from pricing activity in loss-affected areas and higher reinsurance pricing, he said.

Related: Insurers Confront Inflation for the First Time in Ages

The improved pricing was needed following events like Winter Storm Uri in Texas and the Southwest, which accounted for nearly $20 billion in insured losses, and Hurricane Ida in the third quarter, with $30 billion in expected losses, said Andre. Secondary loss events are becoming more prevalent and remain a challenge, offset somewhat by more sophisticated industry responses, he said. Inflationary pressures on both the automobile and homeowners segments have grown, causing further increases in loss cost trends, said Andre. He also noted supply chain problems are adding to costs.

AM Best is revising its outlook for the U.S. property/casualty commercial lines segment to stable from negative due to a negligible impact of COVID-19, said Director Jacqalene Lentz. Earlier in the pandemic, commercial insurers faced pressure on premiums as businesses closed, she said. Lentz said there were questions about the ability to pay premiums and business interruption losses. In 2020, AM Best had revised its outlook on the segment to negative, she said.

The impact of the pandemic on results in 2020 and the first three quarters of 2021 has since become more clear, leading AM Best to revise the outlook to stable for some of the largest commercial lines including workers' compensation and commercial property, said Lentz. The AM Best outlook is also stable for excess and surplus, surety and title insurance, she said. The outlook is still negative for commercial auto due to potential loss development, and general liability may see continued pressure on loss costs due to social inflation, said Lentz. There has been a decline in loss frequency that has more than offset an increase in claims severity, she said. “These favorable underwriting trends are expected to continue and the segment overall is expected to maintain its solid, robust risk-adjusted capitalization,” said Lentz.

Life/Annuity Segment

The outlook for the U.S. life/annuity segment is being revised to stable from negative by AM Best, said Senior Director Michael Porcelli. This is due to record levels of capitalization, improved earnings and strong liquidity, he said. An increase in new company formations with high initial capitalizations as well as improved earnings from established companies throughout 2021 resulting from gains in asset portfolios has offset COVID-19 mortality losses, he said. Capital has been cheap so there are opportunities for companies to access debt markets at favorable terms, said Porcelli.

Related: The View to 2022: Insurers Face New Year With Cautious Optimism

There has been robust sales in life and annuities as companies have learned how to sell in the COVID-19 current environment by becoming more innovative, he said. Life companies are experiencing increased mortality but it's not clear how much of it is related to COVID-19 and how much is due to secondary effects, said Porcelli. Low interest rates and the possibility of inflation are negative factors for the segment but insurers have adjusted to the “new normal” of low interest rates, said Porcelli.

Health Insurance Sector

With several years of strong earnings, including record earnings in 2020 due to deferred care related to COVID-19, AM Best is maintaining its stable outlook on the health insurance sector, said Senior Director Sally Rosen. She said AM Best does not expect to see those trends repeating as the rating agency doesn't expect to see another period of deferred care. Rosen said the health insurance segment is also benefiting from the Biden administration's effort to insure more people under the Affordable Care Act. The American Rescue Plan Act only expanded subsidies/tax credits through 2022. The segment is facing inflationary pressures driven by higher costs and effects such as hospital transparency rules, she said. AM Best continues to observe the prevalence of COVID-19 and how utilization patterns unfold, but the industry has shown it can withstand the challenges it faced from the pandemic, she said. The segment could see continued volatility due to the emergence of the omicron variant of COVID-19, said Rosen.

Reinsurance Outlook

AM Best is maintaining its stable outlook for the reinsurance market, said Senior Director Carlos Wong-Fupuy. AM Best expects improvements in pricing and terms and conditions to continue. These positive trends began with large catastrophe losses in 2017 and 2018 and were compounded by secondary perils, he said.

He said AM Best expects the segment to maintain an underwriting result near break-even for the year despite elevated catastrophe losses. Underwriting and pricing actions instituted by the market have offset the higher catastrophe losses. Inflationary expectations and the uncertainty around interest rates, as well as social inflation, COVID-19 effects and supply chain disruptions, are complicating the reinsurance market's conditions, he said.


David Pilla is news editor. He can be reached at david.pilla@ambest.com.



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