What to Expect when you’re Expecting...
Rate Hikes-2021 P&C Insurance Premiums

The commercial insurance market is very cyclical in nature, fluctuating between hard and soft markets. These cycles more often than not, truly affect the availability, terms and price of commercial insurance.  Add a Global Pandemic and you’ve potentially got a recipe for disaster!

Premium oscillation and correction is simply a given when trying to predict future losses.  The result is normally a reactionary correction that more often than not leaves the insured scratching their head as to why their rates went up, when they have either had little to no losses and are many months or years removed from a previous claim.   Looking at the historical losses of the industry show why carriers rates react like they do – there is so little margin for error. 

As you will note in the chart below, the majority of the years in the graph are at or above the 100% combined loss ratio, meaning the dollars taken in by insurance companies were insufficient to the dollars paid out in claims.  Many years, the only profits that were made came from fixed income investments such as Bonds.

The Property and Casualty insurance markets are tied to so many different risk factors domestically and abroad. More often than not, corporate consumers are unaware beyond their four walls of “risk exposure” why their premiums might be rising.

The following are common contributors to the hardening insurance markets:

1. Extreme Weather Events

Hurricanes, tornadoes, hailstorms and wildfires—continue to make headlines as they become increasingly devastating and costly. Making matters worse, these events aren’t limited to one geographic area or weather event, impacting businesses and residents across the United States.

2. Litigation Funding

One of the factors driving social inflation has to do with increased litigation or, more specifically, litigation funding. Litigation funding is when a third party provides financing for a lawsuit. In exchange, the third party receives a portion of the settlement. In the past, the steep cost of attorney fees would often scare plaintiffs away from taking a lawsuit to trial. But, through litigation funding, most or all of the costs associated with litigation are covered by a third party, which has increased the volume of cases being pursued. Not only is litigation funding becoming more common, but it also increases the cost of litigation, sometimes to seven figures. This is because plaintiffs are able to take cases further and seek larger settlements.

3. Mixed Investment Returns

Insurance companies are regulated on where they can invest their cash surplus. Fixed income investments such as Bonds, with interest rates being at all-time lows, are causing insurance companies real issues on how to bridge the profitability gap between Rate, Losses and Investment Income. 

4. The Economy

In the midst of a Global Pandemic, our economy came to a screeching halt in March, 2020. Much of the exposure that drives premium for our industry went away because businesses weren’t operating.  It is unknown at this time the amount of return premium we should expect, but March 2021 premium audits should see virtually all Property and Casualty insurance companies mailing return premium checks.

5. Covid-19

Over the past 12 months, we’ve seen a taxed healthcare system, businesses close that will never re-open and as of today the loss of ~542,000 Americans. The real impact of this pandemic may take years to be fully realized, but best estimates below show loss percentages that most assuredly weren’t calculated for when planning 2020 rates.

What to Expect when you’re Expecting…..Rate Hikes – Based on industry data we feel safe to say that virtually all lines of coverage will increase with best in-class clients receiving lowest increases and those with above average or catastrophic loss years receiving the top end of the spectrum or worse – cancellations.

LINE OF COVERAGE

PRICE FORECAST

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Commercial property
Overall: +5% to +25%
High risk/CAT exposed/poor loss history: +25%
General liability
Overall: +5% to +15%
Excess and umbrella liability
High risk: +50% or more
Low to moderate risk: +30% or more
Commercial auto
Overall: +5% to +25%
Workers’ compensation
Overall: Flat to +5%
Cyber liability
Overall: +10% to +30%
Directors and officer’s liability
Public entities: +20% to +70% or more
Private/nonprofit entities: +10% to +50%
Employment practices liability
Overall: +10% to +30%
Price forecasts are based on industry reports for individual lines of insurance. Forecasts are subject to change and are not a guarantee of premium rates. Insurance premiums are determined by a multitude of factors and differ per organization. These forecasts should be viewed as general information and not insurance or legal advice.
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This Article was writing by Chris Sweeney.