While many insurers adapted processes and practices over the past few years to survive and better position their post-pandemic operations, a deluge of natural disasters, soaring inflation (both economic and social), historically low interest rates, supply chain slowdowns, and skyrocketing incidences of cybercrime have caused carriers to retrench, solidifying a hard market of higher premiums, lower capacity, more stringent underwriting, and less competition. The impact? Lowered expectations for organic growth.
Although commercial carriers have grown by rate and exposure, they have not grown by the actual number of policyholders they insure. Growth has also been stymied by the triple pressure of rising losses, increasing expenses, and lower earnings, which only grew at 2.6 percent the first nine months of 2021.
According to McKinsey’s Global Insurance Report 2022, from 2014-2019 expense ratios did not improve (and even rose) for more than 50% of global P&C carriers.
The frequency of severe ($15 million or greater) liability losses is expected to continue to grow as a result of social inflation.
At this time, a hard market persists in commercial risk insurance, and it doesn’t show signs of softening. Contributing factors include:
- Weather-Related Disasters
- The Risk of Cyberattacks
- Social Inflation
- Supply Chain Issues
Current Trends, Challenges, and Opportunities for Commercial Industries
Weather Related Losses
With increasing global warming, higher temperatures, and drier conditions, the possibility for more extreme weather events like wildfires, droughts, floods, and more intense storms also rises – and so does the potential damage.
The 2021 hurricane season ranked as the third most active year in history. Total damages are estimated to cost more than $67 billion. Hurricane Ida alone caused more than $60 billion in damages and was linked to 26 deaths in Louisiana and 50 deaths in the Northeast.
Flooding from storms also costs billions of dollars every year. According to research conducted by First Street Foundation, 2022 predictions peg structural damage due to flooding at $13.5 billion.
Further complicating matters is the great migration of people moving to warmer regions, particularly Florida. As an aftermath of the lockdowns mandated during the COVID-19 pandemic, people are moving to lower population densities as they retire, make lifestyle shifts, or simply choose to live closer to family members.
Unfortunately, the largest influxes are occurring precisely in areas where the threat of extreme weather events and incidences for damaging storms is greatest, putting more people and property in harm’s way and ratcheting up the potential for greater losses.
These colliding trends are not only widening exposure, but also making it more difficult for insurers to accurately price coverage and assess risk. As a result, many are now:
- Increasing Premium rates
- Decreasing limits
- Finding current business models inadequate
- Exiting certain markets
Supply Chain Slowdowns
Rising import costs, material and product shortages, shipping bottlenecks, and labor challenges are some of the major factors impacting the supply chain. According to the Federal Emergency Management Agency (FEMA), a full 25 percent of businesses do not reopen after a disaster strikes.
The supply chain crisis is unlikely to disappear anytime soon. As a result, businesses across industries continue to see lower revenues and cash flows, forcing some to skinny workforces, pass on projects, and/or close their doors, which only makes the problem worse.
Opportunities: Engage with a broker proactively to review submissions, as well as property modeling results, together to ensure construction characteristics are accurate and all factors that enhance the desirability of a risk are included. It is also prudent to work with lenders prior to the renewal process in the event that a potential renewal structure is acceptable (example – a loss limit to reduce overall costs when a lenders requirement is 100% replacement cost).
As organizations across industries leverage more technology solutions to improve efficiency, work remotely, conduct business online, and facilitate virtual transactions worldwide, this gives malicious actors and organizations more opportunities to take advantage of, identify, and exploit virtual vulnerabilities. Almost overnight, the fundamentals of this business line have turned on their head. Research shows:
- Data breaches exposed 36 billion records in the first half of 2020
- As of 2020, the average cost of a data breach is $3.86 million
- On average, ransomware attacks cost businesses $133,000
- More than 77% of organizations do not have incident response plans in place.
Because the severity and frequency of claims continues to rise year over year, cyber insurers are taking a close look at how this trend is impacting their profitability. Recent losses, threat volatility, and lack of historical data create layers of unpredictability that make cyber insurers wary of providing broad coverage. They are also offloading a greater percentage of risk to reinsurers to stay in market.
As a result:
- Premiums have increased 34.3%, highest premium increase out of all lines. Source: The Council of Insurance Agents & Brokers’ Commercial Property/Casualty Market Report Q2 2021
- Insurance Deductibles are up
- Drastic decreasing in underwriting capacity
Opportunities: You should align with a broker who understands how you can develop an offensive strategy against malicious actors due to the volatile current threat landscape. Our team has a pulse on underwriters’ ever-evolving expectations for cyber security programs and maintains trusted relationships with insurers.
We help underwriters understand your cyber risk in its totality, which better positions your company’s risk profile and makes insurers more likely to take on your risk. The ability to do this is especially critical for those with a loss history who will find it even more difficult to find coverage. Because cyber threats, the insurer market, and coverages change constantly, we continually provide in-depth coverage comparisons, proposals, and webinars that help educate clients about how to help protect critical digital assets and mitigate losses.
Employment Practices Liability
Rates for Employment Practices Liability (EPL) are slightly improving at this time. But potential litigation still remains likely due to trends in this space, including, but not limited to, the following:
- The growing number of controversial return-to-work policies that require employees to get vaccinated
- Continuing social change movements
- A push for pay equity in many states
- An uptick in disability accommodation requests from employees and potential new hires
As a result of these trends, underwriters will likely look for ways to relieve pressure on profit margins and limit losses.
Directors & Officers insurance
Although the macroeconomic outlook remains somewhat unstable (global conflict, inflation, etc.), we remain cautiously optimistic about the D&O rate environment through the remainder of 2022. Absent any significant exposure changes, we anticipate stable renewal premiums for most clients through the remainder of the year. Furthermore, we believe that current D&O premium levels, particularly on the excess layers, should benefit from new market capacity, and may ultimately serve to drive material savings for many clients.
Start Early: The renewal process should begin at least 90-120 days prior to the renewal date, with a strategy discussion. Time is a critical tool in the renewal process, allowing for a broad marketing effort to ensure best-in-class pricing and terms.
Run a Competitive Marketing Process: We recommend a broad marketing process for most clients in 2022. Host an underwriting call for insurers to hear the company story directly from the executive team. The call will expose the firm to new D&O market entrants, while also serving to drive competition with incumbent insurance carriers.
Review Policy Language: Policy terms and conditions should be reviewed at each renewal. Carriers are increasingly open to negotiate material coverage enhancements in the current marketplace.
Pervasive Social Unrest and Inflation
Social inflation is straining the market. Increasing litigation, nuclear verdicts, and moves to roll back tort reform are the specific trends driving change. According to Verisk, which compiles insurance data nationwide:
- The average size of jury awards rose almost 1000 percent from 2010 to 2018 to about $22 million.
- There was a 300 percent increase in verdicts of $20+ million in 2019 alone compared to the average from 2001 to 2010.
At this point in time, many insurers that previously retreated from this market to shield themselves from the rising incidences of nuclear verdicts are beginning to re-emerge.
Several encouraging trends are also emerging, including:
- Flattening premium rates for those companies that own fleets with more favorable risk profiles and fewer losses. The trucking industry, however, is still experiencing a rising cost of business due to escalating insurance costs.
- Increased deductibles
- Insurer appetite geared toward companies who are focused on technology and telematics to motor vehicles on the road.
- Legalization of both medical and recreational use of cannabis as well as the ubiquitous use of cell phones have contributed to more distracted driving crashes–and losses for insurance companies.
Looking ahead, industry sources predict the overall commercial auto insurance market will continue to rise.
While other markets show some signs of softening, the commercial umbrella insurance market remains firm due to several persistent trends:
- More claims by companies to cover the damages and injuries
- Historic rise in inflation
- Limited capacity to underwrite business profitability
- Social inflation
As a result, greater use of effective risk mitigation practices and programs are likely to help this segment move forward.
Opportunities: Deeper evaluation of loss mitigation practices, as well as ensuring a nimble and responsive claims outcome management process, can help differentiate your business. Business leaders should work with a broker to leverage their relationships with insurers that understand different business segments and potential exposure to risk and also remain committed to offering general liability coverage at reasonable rates over the long-term.
Excess and Surplus Market
The Excess and Surplus (E&S) market is growing due to admitted carriers pulling back. E&S carriers/Managing General Agents are more agile than their admitted counterparts but still are straining under profitability pressures. This has led to serious pullback and reduction in the total number of viable markets for any single risk, as well as the need to build limits with multiple carriers on both the layered property and excess liability side.
As a result, retrenchment is occurring. E&S carriers are likely to adjust their risk appetites, reduce their books of business, and not surprisingly, increase deductibles and rates especially for business property in catastrophic (cat)-prone coastal areas.
This material has been prepared for informational purposes only. BRP Group, Inc. and its affiliates, do not provide tax, legal or accounting advice. Please consult with your own tax, legal or accounting professionals before engaging in any transaction.