How COVID-19 is Affecting the Hardening Insurance Market

Prior to the COVID-19 pandemic, the insurance market was showing strong signs of hardening in 2020 — a term that refers to more stringent underwriting standards for exposure and losses, as well as more selective coverage and/or higher premiums to account for increased losses and claims.

As we work in the second half of the year to bring back our economy, those trends toward a hardening market are likely to return and even increase. To understand why, we have to look at a number of contributing factors.

It helps to first consider how and why insurance works in the perfect world. At its core, insurance is the result of a simple formula. Underwriters collect a group of clients; quantify their risks and aggregate them into a single number; price the premiums based upon that number; and then allocate the premiums to each client based upon their relative portion of the risk. Finally, the insurers include a small percentage of the premium to allow for their profit and expenses for providing this essential service.

For organizations purchasing coverage, the profit portion of the premium is kept to a minimum via open and efficient markets where competition forces providers to innovate; improve client service; and compete for business. In the end, a service is provided and the best providers make a profit for providing the best product.

What was Happening before the Virus?

Prior to the COVID-19 pandemic, damages and claims were much higher than projected — especially in areas affected by wind damage, earthquake, flood, hail and wild fires; both in the United States and around the world. The global insurance market saw record consecutive years of losses in 2017, 2018 and projected 2019.  In response, underwriters were having to adjust the formulas so premiums accounted for these higher risks and/or by increasing deductibles requiring the clients to assume a greater portion of the risk; and they could remain profitable and continue to provide coverage.

An added issue was bad or incomplete data. For years, insurable values and related COPE data often relied upon client-provided summaries (many times in Excel) comprised of missing data, grouped values, estimates, roll-forward increases and approximations of values. These largely estimated values might have been five or in some cases even ten years old and often missed entire buildings, structures, contents, or additions.

When the available data being input into a formula is vague and/or inaccurate and the risks are increasing, underwriters have to account for that additional risk — let’s call this the “the unknown risk”.  Unknown risk has to have an equal and corresponding premium to account for those costs, let’s call this “the premium for the unknown”.

In a growing number of cases, many insurance carriers were choosing not to compete for an organization’s business because underwriters were seeing too much unknown risk. As a result, many organizations were increasingly finding themselves in situations where they were not be able to get more than one or two carriers to bid on their policies. This led to a third issue which was the risk associated with an inefficient market. When fewer carriers can compete for each organization, there is less competitive pressure to keep premiums down. We can call this “the inefficient market premium”.

In the Midst of the Virus, What Has Changed?

Today, organizations and insurers are seeing another wave of increased claims and/or losses from business interruption; cybersecurity (from companies moving rapidly to remote workforces); and property and casualty (as many industries like hospitality had to leave buildings fully or partially empty). These new claim areas are still developing daily and affect the whole market.

As we head into the second half of the year, the underwriters, businesses, brokers, insureds and all of the accompanying risk managers are struggling to incorporate all of these risks (both before and after the virus) into their plans, underwriting, premiums and projections.

What Can Be Done?

In our perfect world, one solution is at a macro-level. We will find ways to reverse the increase in damaging events (the virus, hurricanes, tornadoes, flooding, fires etc.). Of course, this has to be left to science, industry and governments.

In addition, we will undoubtedly see innovations in construction materials, methods and technology to reduce the damage caused by these climate-related events. The good news is throughout history these areas have always seen continuous improvement. However, it takes time for these materials and methods to make their way through our buildings, offices and structures.

What we can control for the immediate insurance market situation in which we find ourselves is how we prepare for the second half of 2020 and 2021 is complete and accurate COPE data and a current valuation. By ensuring everyone has the most accurate data and current valuation possible (from the entity to the underwriters), and are executing loss prevention plans, organizations and their insurance carriers will be able to properly identify, cover and mitigate as many of the risks, exposure and premiums as possible.

Next Steps

In regards to property coverage, having a detailed property valuation and loss control plan conducted for all of the assets (buildings, contents, machinery, equipment, etc.) is going to be a significant advantage. For example, damage to roofs are a large source of property claims, and having information in hand about the structure, age, condition, square footage, framing geometry, material, and pitch provides underwriters the data they need to be sure the total risks and total premiums are in balance.

If underwriters have this detailed information for the entire property, they have the property data needed as part of their calculation for accurate Probable Maximum Loss (PML) and Maximum Foreseeable Loss (MFL).  In turn, brokers will be able to compete for more business; cover these new risks; and do so with lower premium increases and/or deductibles. Perhaps most importantly, organizations will be able to reduce the premium increases (for themselves and the market); create a more efficient market to encourage competition; and have accurate insight and coverage.

For more information about how property appraisals and loss control plans can help your organization optimize its premium, please contact a member of our team.

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CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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