Best's Special Report: Implications of Business Profiles on Operating Performance

While an insurer’s business profile has a foundational role in its earnings stability and surplus growth, concentration by line of business and geography can be key detriments to a respective company’s profitability, according to a new report released by AM Best.

In its new Best’s Special Report, “Implications of Business Profiles on Operating Performance,” AM Best notes that this concentration aspect is the greatest drag on its business profile assessments, which serve as a key building block in the rating process. Nearly 60% of AM Best-rated U.S. property/casualty (P/C) companies have a concentration sub-assessment of negative, with degree of competition (31%), market position (22%) and product risk (22%) following as less impactful factors.

According to the report, there has been a shift in the risk profiles of individual states due to secondary perils, which have become a major cause of insured losses. “Insurers operating in fewer states or with fewer lines may face greater challenges managing the financial impact of these perils than national insurers that can better diversify their risk,” said Jason Hopper, associate director, AM Best.

Approximately 50% of AM Best-rated companies with a limited business profile have their largest concentration in California, New York, Florida and Texas. P/C companies domiciled in these four states accounted for nearly 35% of this segment’s downgrades from 2021 through 2024. Concentrations, whether by product or geographic, can lead to heightened climate risk, event risk, limited flexibility, earnings volatility, capital pressure and regulatory risk.

However, the report also notes that higher business profile assessments generally correlate with stronger operating performance assessments, demonstrated by a gradual decline in return on revenue and higher volatility in results as business profile assessments worsen.

To access a complimentary copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=353107.

AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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