AM Best is maintaining its negative market segment outlook on the U.S. personal lines insurance segment for 2023, primarily due to significant deterioration in reported results for the personal auto lines of business.
The personal lines outlook, which was recently revised to negative in September 2022, indicates that AM Best expects market trends to have a negative impact on companies operating in the segment, but it does not mean that all companies operating in the segment have a negative outlook.
In its new Best’s Market Segment Report, “Market Segment Outlook: U.S. Personal Lines,” AM Best notes that the personal auto liability and physical damage lines of business represent approximately two-thirds of the segment’s results.
Overall results for the personal lines segment, and in particular, personal auto insurers, have been significantly impacted negatively by rising loss cost severity driven by inflationary pressures, as well as difficulties in maintaining rate adequacy amid a restrictive regulatory environment.
Through the first nine months of 2022, personal auto liability and physical damage loss ratios deteriorated relative to year-end 2021. Given the persistently high loss costs, a return to underwriting profitability for the auto segment over the near term appears highly unlikely.Rich Attanasio, senior director, AM Best
The report also states that elevated reinsurance costs and potential reinsurance capacity constraints also have hampered personal lines insurers. With Hurricane Ian, as well as above-average catastrophe activity and rising secondary peril losses throughout the U.S. in recent years, reinsurers are continuing to re-evaluate their portfolios and risk tolerance levels.
Rising reinsurance costs can pressure cedants’ operating performance and balance sheet strength if lower levels of reinsurance protection result in higher net probable maximum losses or net retained losses are significant enough to erode surplus. Primary carriers may struggle to pass these higher costs through to their customers given the regulatory hurdles in some states.
Given these pressures, innovative use of technology and data analytics to strengthen underwriting, claims handling and ratemaking remain key to reaching profitability targets. Carriers that are slow to address the challenges ahead or do not have the means, expertise, or technological capabilities to keep pace with changes in the segment likely will face ratings pressure.