Commercial Insurance Market Disruption and How to Prepare for Your Renewal

Commercial Insurance Market Disruption and How to Prepare for Your Renewal

This article briefly discusses the insurance impacts of the COVID-19 pandemic, longer-term insurance trends and strategies to manage insurance expenses.

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By Nick Scodro and Blair Koorsen

The coronavirus (COVID-19) pandemic has impacted waste collection businesses in many ways. One of the challenges that waste collection companies are currently facing is the rising cost of insurance. This article briefly discusses the insurance impacts of the COVID-19 pandemic, longer-term insurance trends and strategies to manage insurance expenses. As always, when securing insurance and developing risk management strategies, it is best to work with a qualified insurance and risk management advisor that understands the market and your unique needs.

COVID-19 Insurance Market Trends
The COVID-19 pandemic is expected to account for some of the most significant losses the insurance market has ever experienced. According to a Lloyd’s of London estimate, the commercial insurance industry is estimated to absorb underwriting losses of at least $107 billion. These losses are expected to come from virtually all lines of business—from General Liability claims against organizations where people become sick, to Employment Practice claims from workers who allege improper treatment, to Business Interruption claims in a limited number of situations where coverage may apply. With the pandemic still impacting people and businesses all over the world, and with many legal questions still unanswered, there is significant uncertainty about what losses the insurance industry will, ultimately, bear in connection with COVID-19.

The impact of these losses is exacerbated by low interest rates, which reduce insurers’ investment income. Insurers also face declines in the sales, payrolls and property values of insured businesses, which reduces the amount of premium they can collect without changing rates. Combined, these factors all contribute to continued upward pressure on insurance rates. In addition to driving rate increases, this hardening environment is causing carriers to tighten underwriting standards.

Pre-COVID Market Trends
Before the COVID-19 pandemic disrupted the insurance market, there were already signs of hardening in the insurance market.

Market Cycle
The insurance market is cyclical. The insurance industry is exiting a historically long soft market and entering a hard market. A soft market offers low premium rates, high policy limits, flexible contracts and increased coverage availability. Conversely, a hard market has increased premium rates and decreased capacity for most insurance types. There are more restrictions in a hard market as insurance companies re-evaluate their books of business, risk appetites and capacity.

Property Insurance
For several years now, it has been challenging to secure Property Insurance at affordable premium rates. Past catastrophe losses (i.e., wildfires, hurricanes, hailstorms, etc.) and the probability of future losses are primary drivers of Property Insurance rates. Different regions face very different hazards, but virtually every location has exposure to catastrophic weather or geological events. If you have high-hazard operations (as do most waste and recycling businesses) and are insuring large values, you will likely experience much more significant increases in insurance rates at renewal, and in some circumstances, you may have difficulty securing coverage for the full value of your property.

Excess Liability Insurance
Excess Liability Insurance, a policy that covers specific amounts beyond the limits in a primary policy, has become significantly more expensive. It is particularly challenging to find coverage for companies with large fleets, higher-hazards products, environmental risks and with limits greater than $10mm. The major driver of this trend is often referred to as “social inflation”. Social inflation is the increased willingness of consumers, regulators and others to pursue claims through litigation, accompanied by larger settlements. Recently, there have been increasingly large verdicts granted when lawsuits go to trial, regardless of industry. These large payouts have affected insurance carriers’ pricing and appetite for risk.

Commercial Automobile Insurance
Commercial Automobile Insurance has become more expensive to secure, especially for businesses with a loss history. Given the increasing frequency and cost of claims across the entire industry, it has been common for waste collection businesses to see rate increases even when they hire safe drivers and have a clean loss record.

How to Prepare
Despite difficult insurance market trends, there are initiatives that owners and business managers can take to help control their insurance costs and coverage options. Work with your insurance advisor to see which options work best for your company.

Implement Risk Management Strategies
Driver and Fleet Safety
Monitor your Department of Transportation (DOT) and Federal Motor Carrier Safety Administration (FMCSA) ratings and rectify areas that require further development and improvement. Most insurance carriers incorporate these scores in the underwriting process. Any blemishes identified in these reports will reduce your leverage when securing insurance coverage. Generally, these reports go back at least five to seven years.

Address Outstanding Loss Control Recommendations
Loss control reviews are usually conducted by a risk manager affiliated with an insurance carrier. When a possible risk or exposure is discovered, the insurance carrier will send written loss control recommendations. Implementing and documenting steps to address loss control recommendations helps minimize risk and reduce potential insurance spend.

Control Employment Practices Liability (EPL) Risk
Make sure handbook policies and procedures relating to harassment, discrimination, retaliation, FMLA, FFCRA, reasonable accommodations, sick leave, remote work and other relevant areas are current. Educate your key decision makers and leaders on policies on handling different employment situations.

Control Insurance Costs
Review your Exposures
Premiums are determined at renewal and are based on an estimate of payrolls and sales for the next year along with your vehicle fleet. Audits are executed at the end of the policy period to ensure insurance carriers collect enough premium or return premium if payrolls and sales have been overestimated.

Manage Your Fleet
If you are adding vehicles or taking vehicles out of service, be sure you take the appropriate steps to add or remove those vehicles from your insurance coverage. Keep clear records of when vehicles are bought, sold, or decommissioned and report changes to your insurance broker promptly so they can keep your policy current. Failure to report changes in a timely manner can make it difficult to get coverage added or get a full refund.

Review Tradeoffs of Deductible Vs. Guaranteed-Cost Programs (Larger Organizations)
In a guaranteed-cost program, all costs are paid as an upfront premium and the insurance carrier assumes all liability for claims covered by the policy, except for the amount of the deductible. With a loss-sensitive program, the insured is responsible for expenses incurred up to a retention amount, and the insurance carrier pays for all excess costs. Switching to a different structure can lead to potential savings.

Work with a Qualified Advisor
Work closely with your insurance and risk management professionals to develop plans unique for your business and needs. In the current unprecedented market, the ability to access insurance coverage can be a competitive differentiator for your business. | WA

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