Four Reasons Why Insurance Premiums Might Be Rising
There is quite a lot going in in the insurance industry as a whole right now and, to be frank, not much of it is positive. Overall we are headed deeper into a “hard market” where there is a consistent increase in renewal premiums and the tightening of underwriting guidelines and coverage offerings. As one of your most expensive budget line items, you might be wondering why insurance premiums are increasing. Here are four reasons:
Quite possibly the greatest contributing factor is the sharp uptick of “social inflation.” Social Inflation is the increase in insurance losses caused by factors such as higher jury awards, more liberal treatment of claims by workers' compensation boards, legislated rises in compensation benefit levels, and new concepts of tort and negligence. Casualty (liability) losses are often becoming catastrophic, with extensive judgments handed down by judges and juries. The median average of the top 50 verdicts in the U.S. doubled from $27M to $54M in only four years, from 2014 to 2018.
Another factor is the concern of an impending recession. Whether it happens or not, insurers are preparing now for the possibility. Insurers make most of their profit from investment activities, using the premium dollars they collect. For every dollar in premium taken in, almost all of it ends up going toward paying claims and expenses (payroll, taxes, office expenses, advertising, etc.). Many insurers actually end up paying out more than they take in. The investment piece allows them to make a profit and thus stay in business. Since there is worry the investment income may decrease, they must take other measures to remain profitable.
Carriers are increasing their focus on controlling loss ratio (losses ÷ premium) and reducing their loss combined ratio (losses ÷ (premium + expenses)). This results in increased premium, greater scrutiny on unprofitable risks, lower interest in writing new coverage for clients in high-risk business types or those with prior losses, and less interest in extending high casualty limits, to name a few.
Also worth mentioning is the auto segment. With all the technology being put into new vehicles, seemingly minor damage from an accident can prove to be quite costly. Further, distracted driving has dramatically increased the frequency of accidents. With a shortage of Commercial Driver’s License (CDL) drivers, new drivers are oftentimes being rushed through certification and put behind the wheel of large, dangerous vehicles before having the appropriate experience and training.
We also have the impact from disasters in the past several years – fires, flooding, hurricanes, etc. These disasters not only affect the areas hit but also impact how insurance companies provide future coverage in those areas. Coverage most influenced as a result of these disasters are property lines, particularly those covering unprotected structures, frame construction with habitational exposure and coastal exposure. With disaster come increased claims. A huge number of unanticipated claims could have big impacts on costs, now and into the future.
While an increase is premiums is likely, there are steps you can take to navigate the hard market. Reach out to your insurance advisor for recommendations on options to minimize the negative impact to your premiums and your bottom line.
Patrick Buck, Risk Management Advisor
CBIZ Insurance Services, Inc.
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