You might not realize it, but times have been pretty good for insurance customers. Although there have been some exceptions, for the most part, premiums have been steady or even reducing for years now. This may be about to change.
Why are market conditions changing? Because insurers are experiencing higher than expected losses. According to the 2019 A.M. Best Market Segment Report, the reported combined ratio for the P&C insurance industry has been above 100 – indicating an underwriting loss – since 2016. In 2017, the combined ratio reached 104.
If these losses continue, rate increases will follow. Securing coverage may become more challenging. Essentially, we may be looking at a hard market.
What’s driving higher-than-expected losses?
With property insurance, natural disasters are mostly to blame. The A.M. Best report says that Hurricanes Harvey, Irma and Maria contributed to near-record high U.S. catastrophe losses in 2017, with net catastrophe losses of $53 billion. Then in late 2018, the U.S. was hit with Hurricane Michael as well as the California wildfires, resulting in net catastrophe losses of more than $37 billion.
With both property and auto insurance, emerging technologies such as smart features, AI and robotics have created new liability and cyber exposures, while also increasing the cost to repair/rebuild. The emergence of the shared economy has further complicated the risk outlook.
The market may also be hardening for general liability, E&O, D&O and EPL insurance, where an increase in litigation is leading to large losses. To see how lawsuits are changing, just look at the Securities Class Action (SCA) numbers. According to Risk & Insurance, SCA claims have skyrocketed. In 2015, there were 208. In 2017, that number jumped to 412. In 2018, it stayed about steady with 403 claims. Claims involving cyber security mismanagement and the #MeToo movement appear to be a big factor behind the sharp increase.
What should you expect in a hard market?
In a soft market, insurance premiums are relatively low and coverage is readily available. You can expect to find policies with high limits fairly easily. In a hard market, premiums increase, and underwriting requirements tighten. Insurers are reluctant to write policies with broad coverage and high limits. A carrier that wrote your business in the past, may not have the capacity to offer coverage going forward. In some situations, it may be difficult to get any carriers to offer a quote.
We’re already starting to see some of the expected price increases. Business Insurance reports that the Willis Towers Watson PLC’s most recent commercial lines insurance pricing survey shows a 2 percent increase in the first quarter of 2019. With the notable exception of workers’ compensation, prices are going up in nearly all commercial lines.
How can you prepare for a hard market?
In a hard market, your broker relationship, loss prevention practices and carrier loyalty all become very important.
- Strong Broker Relationship: You need a broker who understands your business and its unique risks. Your broker markets your business, advocates on your behalf and tells your risk story to insurance carriers. When brokers know you and your industry better, they can represent your interests better. You also need a broker who has many long-standing carrier relationships, so you have options. Quotes may take longer and may be harder to get at all, so work with your broker to get all needed information submitted as early as possible.
- Loss Prevention Focus: Insurance carriers that underwrite your business are betting that your past loss history is a good predictor of your future loss history. With the hard market on the horizon, now is the time to shore up risk management practices and put safety measures in place. Make sure your broker can paint a positive risk management picture on your behalf. If you have poor loss history, get an action plan in place now.
- Carrier Loyalty: Carriers are less likely to insure businesses that jump from carrier to carrier, always searching for the lowest price. They’re hoping that if you experience bad losses one year, that you’ll stay with them long enough for claims to average out, so you’re a profitable account over the long haul. The risk of losing you after a year of hard losses is higher if you have a history of jumping around. Furthermore, accounts that jump around often have brokers who do not know them well. This makes it harder for a carrier to assess the risk. Carriers don’t want to work with businesses that treat insurance like it’s a commodity.
The bottom line: Now is the time to prepare for the predicted hard market. Here at Heffernan Insurance Brokers, we are proactively working with our clients to help them be ready. If you are concerned about making your company a more desirable underwriting risk, we can help. Contact us to learn more.