CFMA members may recall the August 2019 edition of Talking Trades where an article called “Insurance Rates Are on the Rise” was published. That article warned that there were strong signals that the insurance market was in for a major shift and explained the rationale and basis for this prediction. It is important to point out that this was a prediction that was drafted back in the middle of the third quarter of 2019, prior to the global pandemic involving COVID-19, the wildfires that plagued most of the western U.S., and the unprecedented levels of social unrest that has transpired over most of the third and fourth quarters of 2020.
The insurance industry is no different than any other supply and demand commodity. When demand increases at the same time in which the supply becomes limited, this causes a shift in the marketplace that creates a hard market. As discussed in prior articles on this topic, the insurance industry has not seen a hard market in over 15 years, so it was inevitable that this would be a reality in the marketplace at some point. With all the signs and signals that were there already in the third quarter of 2019, and the additional issues that transpired since that time, we are now in the throes of one of the hardest insurance market cycles the industry has experienced in over two decades.
The issues that are driving this are fairly simple. A term being used by the insurance industry experts is what they refer to as “social inflation,” which is really just a fancy term for the increase in insurance losses caused by such factors as higher jury awards, more liberal treatment of claims by workers’ compensation boards, legislative rises in compensation benefit levels, and new concepts of tort and negligence. Social inflation is very difficult to predict, making underwriting and pricing risk a challenge. The lines of insurance that are most impacted by this phenomenon include but are not limited to workers’ compensation, professional errors and omissions, general and public liability (including automobile liability claims), director and officer insurance, employment practices liability, and cyber liability to name a few.
“Analyzing data for liability insurance costs from 1950 to the present, the picture at first looks alarming, with costs growing at 9% per year on average and in some periods, such as the ‘70s and ‘80s, at a much greater rate. But once you examine the data on a per capita basis and adjust for normal monetary inflation, that growth rate is revealed to be much less significant: 4% on average over the long term What’s more, since 2002 real costs per capita have actually declined. From 2002-2007/8 the economy was stable, the market was in equilibrium, tort reforms had been enacted, and generally the reinsurance industry was flourishing. Some of those positives have started to unravel in the last couple of years, so this is an important time to closely examine where the social inflation trend is likely to go next.”
Source: AM Best, Tillinghast & Partner Recalculations
Unprecedented losses that have been sustained by the insurance industry over the course of the past three consecutive years, a consensus concern around what the true impacts of COVID-19 may be (the fear of the unknown), and the fact that we appear to be on the front end of what has every sign of a global economic recession, has provided the perfect storm for a hard market cycle, This cycle was already in the early stages of developing in late 2019 prior to many of these other factors that happened after the market correction already began. If you have yet to renew insurance in your 12 month cycle between 2019 and 2020, you should get prepared for some harsh realities. Below is a simple table that illustrates what some of the rate implications may look like as you prepare to renew your property and casualty insurance programs.
These will be different for each individual company based on many factors, including geographical location, size of organization, type of business, historical loss performance, publicly - or privately-held companies, etc. The intent in showing this illustration is to inform the membership to the fact that regardless of these factors, it should generally be accepted that these ranges will be what the new normal is for the time being in a market cycle that is just now beginning to make corrections and firming considerably.
Begin your renewal discussions early, engage with your brokers and risk consultants, meet with your underwriters, and be prepared to provide significantly more information for your renewal than you have historically been accustomed to providing. Hard market cycles come and go just like with any other market correction, so this will not be an indefinite trend. However, we do predict this cycle will cut deep, last longer than normal, and will have significant impacts as it pertains not only to cost of insurance but also to insurance availability.
Copyright © 2020 by the Construction Financial Management Association (CFMA). All rights reserved. This article first appeared in Dec. 2020 Talking Trades newsletter.