Déjà Vu: P/C Insurance Challenges for 2021 Look Much Like 2020’s, Says AM Best

February 25, 2021

The U.S. property/casualty insurance (P/C) industry could experience déjà vu in 2021 in terms of financial results.

Many factors that insurers encountered in 2020 likely will continue to impact the financial performance of the U.S. property/casualty (P/C) industry in 2021, with last year’s results reflecting a still-firm commercial lines pricing environment and higher-than-average catastrophe activity, according to AM Best.

A new Best’s Market Segment Report, titled, “P/C Industry Maintains Strong Capital in the Face of 2020 Challenges,” states that despite the high level of catastrophe losses in 2020, AM Best expects the P/C industry’s combined ratio to increase just slightly to 99.3 for the year, as reduced frequency in auto lines and improved pricing offset catastrophe experience.

Overall, AM Best said it believes that the trends that had been affecting the results of commercial lines insurers before the pandemic, including social inflation, rising reinsurance costs and secondary catastrophe events such as wildfires and convective storms, will remain in 2021.

Pandemic-Related Business Interruption, Cyber Top Business Risks for 2021: Allianz

3 Ways COVID-19 Will Continue to Impact Insurance Industry in 2021

AM Best Upgrades E&S Outlook; Praises Resiliency, Clear Terms Amid Pandemic

Fitch Sees ‘Modest’ Homeowners Insurance Underwriting Loss for 2020

The report contends that “proactive underwriting actions” in the personal lines industry “significantly diminished the adverse impact of catastrophe and COVID-19 losses in 2020,” but warns that ongoing economic pressures and the prevailing low interest rate environment will remain headwinds throughout 2021.

Ultimately, the authors write, skills the P/C industry brought to bear in facing, and for the most part, meeting the challenges of 2020, will be needed again in 2021.

Combined Ratios

For most P/C lines of business, a rebound in auto accident frequency and severity is likely to lead to an expected combined ratio of 99.8 for 2021.

Many P/C insurers reacted to the COVID-19 pandemic with premium adjustments to cover the months during which the most severe restrictions were in place. Commercial lines premiums experienced offsetting impacts from higher rates, but lower payroll and sales. As a result, AM Best said it expects that net premiums written for the P/C industry will increase just 1.8% for 2020, the slowest growth in the past five years. However, with an increase in economic activity expected for 2021, a boost in industry net premiums written is likely.

Due to the deterioration in underwriting and investment performance in 2020, AM Best projects that pre- tax operating income for the year will drop by 15% to $51.1 billion, with net income falling by 21% to $48.8 billion. In 2021, a modest deterioration in underwriting results and a slight improvement in investment results are likely to generate marginally higher pre-tax operating income.

Litigation related to COVID-19-driven business interruption claims in the United States has thus far generally favored insurers, but if recent cases in several states are broadly applied it could result in greater actual loss payments in 2021, according to the report.

AM Best’s forecast for 2021 does not presume any significant increase in business interruption payments related to the pandemic in the year, although loss adjustment expenses are expected to remain above historical levels as these cases proceed through the court system.

Sector Outlooks

In December, A.M. Best maintained its negative outlook for U.S. commercial lines insurers due 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 noted in its Dec. 7 market segment update that some conditions have improved, but it argued potential volatility remains in multiple ways.

In January, the ratings agency kept its stable market segment outlook on the U.S. personal lines insurance segment for 2021, citing the segment’s strong risk-adjusted capitalization and profitable underwriting performance in private passenger automobile, as well as underwriting actions benefiting the homeowners segment.

Moody’s Investors Service also offered a personal lines market outlook for 2021 of stable, reflecting auto carriers’ “robust underwriting results amid lower claim frequencies, and homeowner carriers’ prudent response to natural catastrophes.”

E&S Outlook

Last week, A.M. Best announced it had upgraded its outlook for the U.S. excess & surplus lines insurance sector citing its resiliency in the face of pandemic challenges. A.M. Best revised its outlook for U.S. E&S to Stable from Negative.

“Despite the widespread impact of COVID-19 on the U.S. economy, and uncertainty as to how long the pandemic will last, the E&S segment’s ongoing profitability and premium growth signal opportunities for surplus lines carriers to successfully operate,” A.M. Best said in its latest market segment outlook for the sector.

Topics Property Casualty AM Best

Was this article valuable?

Here are more articles you may enjoy.