AM Best has revised its US private insurance market outlook from stable to negative, following a significant deterioration in reported results from private motor insurers.
Other important factors include the increasing severity of loss costs, pricing pressures and higher reinsurance costs, Best says.
It notes that the auto industry’s liability and physical damage components together account for about two-thirds of the segment’s results.
The previous stable outlook reflected Best’s expectations that private auto insurers would return to profitability in 2022.
Best stated, “Given inflationary pressures impacting cost of loss and deteriorating loss ratios, we now expect the performance of the personal auto insurance segment to deteriorate.”
Best has also revised the outlook for the segment to negative.
The report suggests that reinsurers are re-evaluating their portfolios and risk tolerance levels as inflation contributes to the rising trend in cedant reinsurance costs.
Many primary companies are trying to control this trend with net retention increases, Best says.
Richard Attanasio, senior director at AM Best, noted: “Increasing reinsurance costs can put pressure on operating performance and balance sheet strength if lower levels of reinsurance protection result in higher net probable maximum losses or net retained losses significant enough to to excavate the surplus.”
“Primary airlines may struggle to pass on these increased costs to their customers because of hurdles from regulatory restrictions in certain states.”
The report also notes that secondary hazards, such as tornadoes or wildfires, have become as problematic as high-profile events such as hurricanes and earthquakes.
Depending on the structure and pricing of reinsurance programs, losses related to these events often fall within companies’ net deductions, Best confirms.
Personal insurance insurers’ risk-adjusted capitalization positions remain robust and may provide some cushioning to meet future challenges, the report said.
However, it adds that economic uncertainty has led to depressed consumer and business sentiment and market volatility, creating uncertainty on the asset side of the balance sheet.
Attanasio added, “The top-performing auto and homeowners insurers have invested significant resources in technology to improve their underwriting and pricing tools.”
“The carriers that are slow to adapt to the challenges ahead or lack the resources, expertise or technological capabilities to keep up with evolving market trends are likely to come under pressure.”