Rising reinsurance rates, shrinking capacity, inflation and secondary perils are putting primary carriers under pressure

AM Best has revised its market segment outlook to negative from stable on the US personal lines insurance segment following significant deterioration in the reported results of personal automobile insurers, along with other factors that include rising loss cost severity, pricing pressures and elevated reinsurance costs.

Given inflationary pressures that are impacting loss costs and deteriorating loss ratios, AM Best now expects personal auto insurance segment results to worsen. As a result, AM Best has revised its outlook on the US personal auto segment to negative as well.

At the same time, reinsurers are further re-evaluating their portfolios and risk tolerance levels, and the recent uptick in inflation, especially the rising cost of materials and labour, combined with supply chain issues and shortages, is adding to the rising trend in reinsurance costs for cedants.

Many primary companies are attempting to manage this trend with increases in net retention levels.

“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,” said Richard Attanasio, senior director, AM Best.

“Primary carriers may struggle to pass these higher costs through to their customers due to hurdles from regulatory restrictions in certain states.”

Secondary perils are hitting retentions

The report also notes that so-called secondary perils such as tornadoes or wildfires have become just as problematic as high-profile events such as hurricanes and earthquakes.

Depending on the structure and pricing of reinsurance programs, losses associated with these events often fall within companies’ net retentions.

Risk-adjusted capitalisation positions among personal lines insurers remain robust and can provide some cushion to manage the challenges ahead, but economic uncertainty has led to depressed consumer and business sentiment, as well as market volatility, creating uncertainty on the asset side of the balance sheet.

Equity market downside risk has increased markedly and the increased interest rates will create pressure on the market value of bonds as well. Widening credit spreads add to pressures for balance sheet values and investment income.

“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 adopt 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,” said Attanasio.