The insurance market was already hardening as we entered 2020, driven by elevated catastrophe losses and the rising cost of litigation. Over the course of the year, this was compounded by shocks associated with COVID-19, civil unrest, and lower interest rates. We expect the market to continue tightening in 2021, though some companies that experienced a substantial readjustment in 2020 may not be as severely impacted.

2021 Market Update

Brief Version
The insurance market was already hardening as we entered 2020, driven by elevated catastrophe losses and the rising cost of litigation. Over the course of the year, this was compounded by shocks associated with COVID-19, civil unrest, and lower interest rates. We expect the market to continue tightening in 2021, though some companies that experienced a substantial readjustment in 2020 may not be as severely impacted. Businesses with challenging property exposures, large excess limits, and large fleets will continue to feel pressure. We recommend that clients prioritize outstanding loss control recommendations and be prepared to discuss ongoing improvements in their safety and risk management practices. We also recommend that clients renew their focus on cybersecurity and cyber insurance given the continued evolution of cyber risk and payment fraud.

Longer Version
Looking back on 2020, the dominant stories in the insurance industry reflected the shocks experienced by the country more broadly:

  • COVID-19: The industry’s ultimate losses from the COVID-19 pandemic will not be known for years, but they will be significant. Among other impacts, the industry will absorb losses and defense expenses for a wide range of COVID-19 liability claims, employment practices and D&O claims, and elevated levels of cybercrime. Additionally, insurers in jurisdictions outside the US will pay on certain business interruption losses, and carriers will likely spend years dealing with such claims in the US. All told, the global insurance industry’s losses from COVID are expected to pass $100 billion.
  • Civil Unrest: Over the summer, businesses around the country experienced losses related to looting and civil unrest. The volume and severity of claims was a hit to insurer profitability. According to the Insurance Information Institute, total losses related to civil unrest could exceed $2 billion, the largest year on record for such claims. While this is dwarfed in scale by COVID-19 and weather-related catastrophes, its impact is strongly felt among small businesses, including retailers and restaurants that have been most severely hit by the pandemic.
  • Macroeconomic Policy: While equity markets held up remarkably well in 2020, most insurers rely on “normalized” interest rates to drive their investment income. As policymakers have utilized virtually every tool available to ease monetary policy, insurers’ investment outlook has been strained. This has put more pressure on the underwriting side of the business to drive profitability.

These shocks emerged in a market environment that was already hardening for reasons that we’ve outlined in previous updates. As we move into 2021, we expect the market tightening to continue, though with some adjustments to the outlook.

  • Property insurance rates will continue to climb and overall capacity will be challenged for higher hazard risks. In addition to losses from COVID and civil unrest, the industry absorbed $83 billion of catastrophe losses in 2020 per SwissRe estimates, the fifth highest year on record. The increasing rate of weather-related events is an ongoing driver of property insurance pricing: looking at the five worst catastrophe years since records start in 1970, three have occurred since 2017.
  • We continue to see significant challenges in the excess / umbrella markets. Insurers have been hit hard by social inflation – the increasing prevalence and costliness of litigation and the willingness of juries to hand down large verdicts. This has caused many carriers to re-evaluate their position in the umbrella market, often deciding to pull back on limits, exit certain classes of business, or exit the market entirely.
  • Auto insurance rates are still expected to increase, but at a more modest rate and with fewer insureds experiencing severe disruption than in recent years. Companies with large fleets or heavy trucks should remain focused on safety procedures and driver quality
  • Workers Compensation had been a relative bright spot in the market, but rates are beginning to turn. During 2020 we saw several market indexes show upward trends in Workers Comp pricing. That said, with the importance of specific loss history in Work Comp pricing, this is still an account-by-account negotiation, and we have seen some carriers willing to be competitive.
  • Financial and professional lines, including Employment Practices and D&O, have been deeply affected by the pandemic. With companies experiencing financial stress and making decisions about furloughs, layoffs, and other fraught issues, claim levels are expected to be high. Carriers have been enacting stricter underwriting standards and taking rate increases across the vast majority of accounts.
  • Cyber insurance has continued to evolve, with multiple new carriers and MGAs entering the marketplace and driving broader coverage and new underwriting processes. Pricing remains very competitive even as coverage expands, though insurers are often looking more closely at insureds’ cybersecurity practices and areas of vulnerability before offering their best terms.

The pain of a hardening market has not been evenly distributed. The most affected accounts have been companies with significant property exposure (especially if the operations or location are high-hazard), those with large vehicle fleets, those operating in higher-risk industries, and those with large excess / umbrella limits. For clients in these categories, the market has imposed significant rate increases – in some cases more than 50% or 100% – along with a tightening of coverage terms. Many companies have already experienced a substantial readjustment to their insurance premiums and may not be as severely impacted going forward.

To help plan for renewal, we strongly recommend that clients prioritize outstanding risk control recommendations. Over the last 12-18 months, we have consistently seen carriers scrutinize insureds’ risk management and operations and make more stringent underwriting decisions than they have in the past. The clients that navigate renewal most successfully are those that can point to ongoing improvements in their safety and risk mitigation practices. While these of course vary by risk, we have observed an emphasis on fire protection, maintenance, dedicated safety oversight, contractual risk transfer practices, and driver quality.

Additionally, we continue to recommend that clients closely evaluate their cybersecurity and electronic payments practices. With many businesses conducting more transactions electronically and with the shift to remote work forcing modifications to normal security practices, there has been a significant increase in payment fraud and other cybercrime. Cyber insurance that includes coverage against fraud is widely available.

As always, while we’ve tried to highlight overall themes that are driving the market, each account has unique exposures and coverage needs. We are always available to discuss questions or concerns that are specific to your account, and we look forward to serving you over the course of the year.

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