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Ratings agency A.M. Best Co. Inc. on Tuesday revised its outlook on the U.S. commercial lines insurance industry to negative from stable, due to the impact of COVID-19 and related economic slowdown.
While it does not expect commercial insurers to see “significant” claims arising directly from the pandemic, the change to negative reflects concerns about the macroeconomic fallout of physical distancing guidelines initiated to slow the spread of COVID-19, Best said in a report.
“The rapid deterioration of the economy, with unemployment claims skyrocketing and more than 90% of the nation’s population under ‘stay at home’ orders as of this writing, will be felt throughout the commercial insurance segment,” Best said.
Commercial insurers are likely to see lower earnings, as premium revenues decline because of slowing economic conditions, Best said in the report.
Reduced surplus/equity due to lower asset values and the prospect of interest rates staying lower for longer than expected also prompted the change in outlook for the sector, Best said.
“Most insurers indicate that they will continue to implement rate increases where needed to bring rates in line with loss trends, but whether the market will bear these increases is unclear,” Best said.
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, Best said.
While the short-term expectations for commercial lines premium are negative, reduced exposures to losses due to laid-off workers or those working from home, along with fewer customers in stores, restaurants and bars, and fewer miles driven, may reduce losses in line with the decline in premium, Best said.
This may allow underwriting results to remain balanced, the ratings agency said.
However, it expects deteriorating economic conditions to drive higher trade credit losses, while a rise in vacant properties, may also lead to higher losses, Best said.
The ratings agency said it continues to monitor moves by state legislatures to introduce bills that would require insurers to cover business interruption losses related to physical distancing guidelines or government-mandated closures of non-essential businesses.
If any of this legislation were to be enacted, the courts would determine whether the legislation is enforceable or constitutional, Best said in the report.
“The immediate impulse to spread the cost of pandemic-related economic losses to the insurance industry may be understandable. However, we believe that legislative remedies will be tempered by an appreciation of the effect they would have on the availability and affordability of commercial insurance products,” it said.
More insurance and risk management news on the coronavirus crisis here.
A.M. Best & Co. on Wednesday said it will stress-test the balance sheets of its rated insurers to gauge the impact of the coronavirus pandemic fallout on their risk-adjusted capital levels, investment portfolios, reserve adequacy among other aspects.