Published by Jon Nordin
Is the sky falling in 2020??? For many business owners, it certainly feels like it is! Alarming increases in Property & Casualty insurance rates are pouring salt in the wounds already opened with disruptions caused by COVID.
This is the hardest insurance market many businesses have seen in over 20 years, especially those that maintain a fleet of vehicles, have a severity potential or are in a perceived “tough” class of business in the minds of underwriters.
The Council of Insurance Agents & Brokers reports the following Q2 benchmarking trends in renewal rates for the five major lines of coverage:
- Workers Compensation: 0.7%
- Commercial Property: 13.3%
- General Liability: 6.8%
- Commercial Auto: 9.6%
- Umbrella: 20%+
While Workers Compensation decreases have often offset increases in other lines of coverage in recent years, it would seem this line reached an inflection point in Q2 2020. The modest 0.7% average increase is the first recorded increase in Workers Comp in 21 quarters, and there is evidence to suggest this line will further harden in 2021. Rate pressure is being influenced by many factors, including the following:
- Medical inflation driving rising loss severity
- Decreased wellness and increased co-morbidities
- More workers 65+ drives up severity
- Employers hiring inexperienced workers has increased loss frequency
- Overall claim frequency is decreasing, while high severity claims (e.g. motor vehicle accidents and head injuries) are on the rise
- Low interest rates put pressure on carrier investment income
- Uncertain impacts of COVID-19 and resulting economic downturn
The Property marketplace continues to harden after the industry experienced record catastrophe years in 2017, 2018 and 2019. The rolling three-year combined ratios and continued negative outlook of an active hurricane season, wildfires and riot/civil commotion claims indicate continued rate pressure. Coastal and other “CAT” (Catastrophe Exposed) properties are reporting average rate increases of 20-30% and higher (even with minimal loss history).
The upward rate creep in General Liability continues. 2019 was the 6th consecutive year of underwriting losses for the industry, with a combined ratio estimated at 104%. Medical inflation has remained high and is a significant driver of loss severity. Increased litigation funding, aggressive plaintiff attorney activity, and corporate mistrust among jurors surrounding social justice have all led to higher verdicts. Bottom line: losses are greater than rate increases, and the expectation is that the hardening GL market will continue into 2021.
The Commercial Auto market continues to be the loss-leader for the industry. The 2019 combined ratio estimate of 107% is the 9th consecutive year of underwriting losses. Distracted driving remains the biggest contributing factor towards the frequency of claims. Repair costs with embedded vehicle technology, aging driver workforce, aggressive plaintiff attorney activity, and social inflation all lead to higher severity and frequency losses in this line.
The most alarming trend is the historic one-year rise of Umbrella pricing. While the national average may be reported at 20% in Q2 2020, many businesses are seeing much, much higher. A business with a fleet of vehicles and claims activity may see a renewal increase of 200-300% or more. While we cannot point exclusively to the legal system in the US as the reason for this, it is certainly the biggest factor driving carriers to pull capacity and increase pricing in this line. Social Inflation, Litigation Funding and lack of investment income for carriers all play a big role as well.
We reference the term Social Inflation, which is defined as, “a rise in tort litigation from changes in legal theories or shifts in societal attitudes regarding corporate responsibility and the duty of care for a reasonable person.” This trend has led to an increase in the compensatory award median every year since 2011. Third party litigation funding, the practice of an unrelated party advancing legal fees or lending directly to a plaintiff for a share of the verdict or settlement, continues to increase severity and nuclear settlements. In turn, this leads to claimants being more likely to take claims to trial, refuse initial settlements, seek more expensive treatment, and participate in class action suits.
The insurance industry is among the most regulated industries in terms of their investment options with premium volume. At higher interest rates, Umbrella pricing can be discounted because investment income is greater. As interest rates decrease, the need for premium increases because investment income is minimized. At the time of this blog we are still at 25-year low interest rates.
So, back to the original question: Is the sky falling? No, but this is without question the hardest market we have seen since the years following September 11th, 2001, and perhaps since the 1980s. The good news is that the property and casualty marketplace is extremely cyclical. A 3-year hard market is almost always followed by a 7-8-year soft market with decreasing rates. In many cases, even with significant rate increases, a business can look back 5 years and realize their rates by line of coverage are equal to or below where they once were. What other business expense can boast the same? For many businesses, this is a good wake up call for the need to commit to Risk Management, as those companies with significant loss history are the first to get “picked on” with drastic rate increases.
Simply quoting insurance is not enough in today’s market. Involving a broker that has long focused on stewardship and Risk Management to prevent claims and reduce costs is paramount. If you are not working with Pritchard & Jerden currently, now is the time!