U.S. commercial lines insurers must now carry an outlook downgrade from A.M. Best due to fallout from the coronavirus pandemic.
The decision by A.M. Best to revise its outlook for the segment to Negative from Stable stems from “concerns about the macroeconomic fallout of the physical distancing guidelines that have been initiated to slow the spread of COVID-19,” according to the ratings agency.
To be clear, A.M. Best said it doesn’t expect major claims activity due to the pandemic itself, except for specialty areas such as event cancellation and travel insurance. Rather, it expects the resulting economic decline, skyrocketing unemployment claims and the ongoing “stay at home” orders to affect the broader commercial insurance segment longer term.
A.M. Best said the outlook change stems specifically from expectations of lower premiums due to slowing economic conditions and the resulting earnings declines, reduced surplus and equity as a result of lower asset values, and the prospect of interest rates remaining lower than expected for longer than expected.
Lower premiums will come from “declines in receipts, payrolls and miles driven” among other factors, A.M. Best said.
Regardless of the coronavirus-related trends and the outlook change to Negative, A.M. Best emphasized that insurers can come out relatively unscathed.
“Despite the change to Negative, insurers that can maintain pricing and underwriting discipline while sustaining lower premium income may achieve a stronger market position when economic conditions improve,” A.M. Best said.
The ratings agency noted that most insurers have said they will continue to use rate increases as needed to bring rates in line with loss trends. But at this point, it is unclear whether the market will be able to take those increases.
“The unprecedented circumstances that have resulted in the economic slowdown make it difficult to anticipate the speed at which the economy will recover as stay-at-home orders are lifted – or even how long they will have to remain in place,” A.M. Best said. “Adding to the challenge is the as yet unclear effect of the government stimulus efforts intended to help businesses offset the impact of the shutdown.”
A.M. Best’s full report is “Market Segment Outlook: U.S. Commercial Lines.”
Source: A.M. Best