AM Best revises U.S. personal lines outlook to negative
Personal auto lines have become a drag on the entire sector as inflation and loss cost severity continue to hammer insurers.
Growing loss costs severity, rate adequacy challenges, increasing reinsurance costs and deterioration of personal auto results have pushed AM Best to revise its outlook for the U.S. personal lines insurance sector from stable to negative.
The rating agency was holding a stable outlook for the sector despite a difficult 2021 in anticipation that personal auto insurers would see better underwriting results this year. However, inflationary pressures have led to deteriorating loss ratios and growing loss costs in the auto sector.
Through the first half of this year, the loss ratio for private passenger auto liability was up more than 11 percentage points, settling at 71.5 compared with 60.1 during the same period in 2021. The auto physical damage loss ratio deteriorated approximately 16 points during 2022’s first half, AM Best reported.
AM Best Senior Director Richard Attanasio noted it appears highly unlikely personal auto lines will improve underwriting profitability this year.
“Many carriers continue to pursue rate adequacy in response to post-pandemic lockdown frequency and severity levels, but their ability to stay ahead of current trends has been a challenge,” Attanasio said in a release. “The timeliness and effectiveness of sought-after rate increases have been varied based on regulatory jurisdictions.”
Telematics and usage-based insurance might help address issues around loss frequency as insurers can measure driving behavior in real time and implement programs such as per-mile coverage, according to AM Best.
“The best-performing auto and homeowners’ insurers have invested significant resources into technology to improve their underwriting and pricing tools. Those carriers that are slow to adapt to the challenges ahead or don’t have the means, expertise or technological capabilities to keep pace with the evolving market trends will likely face pressure,” Attanasio said.
However, these innovations are unlikely to improve the segment’s outlook in the near term, according to the rating agency.
Secondary perils & growing reinsurance costs
Further, secondary perils such as tornadoes and wildfires are becoming just as troublesome as high-profile hurricanes and earthquakes, according to AM Best, which reported: “Depending on the structure and pricing of reinsurance programs, losses associated with these events often fall within companies’ net retentions.”
This situation is moving reinsurers to examine their portfolios and risk appetites. Inflation and its impact on costs for materials and labor, coupled with supply chain issues, are fueling growth for reinsurance costs.
“Rising reinsurance costs can pressure operating performance and balance sheet strength if lower levels of reinsurance protection result in higher net probable maximum losses or net retained losses that are significant enough to erode surplus,” Attanasio said. “Primary carriers may struggle to pass these higher costs through to their customers due to hurdles from regulatory restrictions in certain states.”
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