P&C Market Update – 1Q 2020
Broadly, the macroeconomic and market factors that influence insurance pricing are consistent with recent years. On the one hand, the economy is growing overall at a reasonably healthy rate, so most clients are experiencing growth in their exposures (sales, payrolls, etc.). This allows carriers to achieve premium growth without increasing rates. On the other hand, while the stock market has performed well, low interest rates persist, which continues to put pressure on insurance carriers’ profitability. We believe the combination of positive exposure growth with lackluster investment income is roughly neutral for insurance rates.
With the macroeconomic and market factors roughly neutral, loss trends and market capacity are the major drivers of insurance pricing. These factors vary by line of coverage, but overall they are pointing to a modest hardening of the market (with more severe hardening in areas such as excess/umbrella and high-hazard property, as detailed below).
Below, we provide some general commentary on the market for core lines of coverage. Of course, every business is unique, so we encourage you to connect with your RBN team to discuss the effect of the overall market on your insurance program specifically.
Overall, the Property market has been significantly impacted by global catastrophic losses over the last several years. Wildfires, windstorms, and hailstorms have driven significant loss activity. 2017 was the worst year in history for insured catastrophe losses, and 2018 was the fourth-worst year in history. While 2019 was closer to historical norms, the severe losses in 2017 and 2018 have reduced the amount of reinsurance available and driven rates up significantly.
The effect on your business depends on the nature of your risk. Clients with relatively simple and well-protected property risk should plan for 5-10% increases in rates. If you have high-hazard operations and are insuring large values ($25mm or more), you are likely to experience much more significant increases in rate along with higher deductibles. Clients in catastrophe-exposed areas (e.g., coastal regions) are also likely to experience challenging renewals.
In order to put your business in the best position going into renewal, you may have opportunities to improve protection levels at your property. If your sprinkler system or other equipment is due for an upgrade, consider making that investment now. Take steps to remediate any deferred maintenance issues. If you have outstanding loss control recommendations from your carrier, we encourage you to resolve those or make a plan to do so.
The Auto market has been challenging for at least the last five years, driven by insurance carriers’ difficulty aligning their pricing to the losses they are experiencing. Industry-wide, Auto insurance is an unprofitable line for insurance companies. The major drivers of this are increasing accident rates, increased cost of vehicle repairs, and increased medical costs for injured drivers. Overall, we generally recommend that clients prepare for a 10% increase in rates, with more significant increases possible for clients with significant loss history or higher-hazard operations (e.g., waste hauling).
The best way to control your Auto insurance rates is to adhere to a strong driver and fleet safety program. Set clear policies for acceptable driver MVR history, provide regular training on defensive driving practices, and impose clear consequences for violation of policies. Further, ensure your fleet is in good working condition through routine maintenance checks, including pre- and post-trip checklists.
The General Liability line has been relatively stable for most types of accounts. Businesses with specialized risks (e.g., consumer products, environmental risk exposure, large-scale construction) may see more fluctuation in the market as carriers expand or contract their appetite, but overall we are not seeing significant changes at renewal (other than those related to company-specific risk factors or loss history).
With respect to General Liability risks, our primary recommendation is to be mindful about contracts with customers, suppliers, and subcontractors. You can significantly limit the risk to your business by entering into clear contracts that define the limits on your liability, while ensuring that other parties are properly insured for the risk that they should bear. We encourage you to consult with your RBN team and a legal advisor as to the insurance and liability portions of any contract prior to execution.
In most jurisdictions, Workers’ Compensation trends have been a bright spot in the market. Partly due to healthy economic growth and partly due to increasingly safe workplaces, overall claims activity has been favorable, and Workers’ Compensation has been a profitable line for carriers. As a result, insurers are typically offering flat rates at renewal, or in some cases using modest reductions in the Workers’ Compensation line to offset increases in other lines. This is also an area where we have seen aggressive competition from monoline carriers that can keep the market in check.
Of course, your business’s specific operations and loss history will affect your renewal terms. Prioritizing workplace safety, return-to-work programs, and sound accident reporting practices will help keep your claims under control, and will best position you to take advantage of market conditions. Your RBN team can provide you with helpful materials to guide your safety program and training processes, and we can also help connect you with resources and expertise to make your workplace as safe as possible.
Excess / Umbrella
The Excess / Umbrella market has been challenged by a multitude of factors, including losses related to auto fleets, increased litigation and large jury awards in product liability cases, and significant losses related to wildfire liability. This has led to a dramatic reduction in market capacity, which has caused disruptive increases to umbrella pricing. In some cases, clients have made the decision to purchase lower limits in order to offset the price increases. For middle-market accounts, average rate increases are in the 10-25% range. For accounts with unique risks, higher limits (over $10mm), or large fleets, increases can be significantly more.
Our risk management recommendations for Excess / Umbrella pricing mirror those for the underlying coverage lines. Further, we find that Excess / Umbrella limits are an area where clients may have more flexibility to make cost / benefit decisions about the right level of insurance to carry. When discussing your renewal, we encourage you to review your options with your RBN team.
Professional, Management, and Financial Risks
As these risks become more complex and new coverages become available, there have been significant shifts in the overall market for Management Liability (Directors & Officers, Employment Practices), Professional Liability (Errors & Omissions), and Cyber / Crime policies. Overall, pricing has trended modestly upward for these financial lines, but pricing alone does not capture the dynamics of the market. For Management Liability lines, the #MeToo movement and other labor market trends (gig work, new labor laws in large progressive states, etc.) have made employment practices risks much more salient. For technology-related Professional Liability risks and Cyber / Crime risks, the profusion of hacking events and new types of fraud has created more demand for coverage, and coverage forms are evolving to capture emerging risks.
If you have not purchased Cyber, Employment Practices, and Crime coverage, we strongly encourage you to discuss these options with your RBN team. We believe they are applicable to an overwhelming majority of businesses, and your team can help you understand the nature of your risk along with the most cost-effective coverage program for your needs. If you already carry this coverage, it is still important to work with your RBN team to review your policies on an annual basis and ensure they reflect the most appropriate coverage that is available in the marketplace.