For 2020, the insurance market has reached a crossroads. After approximately 20 years of a soft, buyer-friendly insurance market, we are facing a firming or hardening market – one that is less friendly to insurance buyers.
While the effects of this hardening insurance market on your business will depend on a variety of factors, many businesses will see premium increases for their insurance coverage overall. In fact, for some types of coverage, businesses may see double-digit rate increases at their next renewal. The timing of these market changes is further compounding this difficult situation as these market movements are unfolding as COVID-19 continues to upend life and business as we know it.
While the full human and economic cost of COVID-19 has yet to be seen, it’s clear that it has had a profound influence on businesses across the country. In many cases, businesses are facing challenges related to operational changes, the health and safety of their workforce, new compliance requirements and revenue forecasts. COVID-19 is sure to influence the Property & Casualty insurance industry, likely from both an operating model and pricing perspective.
Now more than ever, it’s essential for businesses to take a proactive approach when it comes to risk management and insurance policies. Put another way, in an insurance and risk environment with many unknowns, businesses should focus on addressing the factors they can influence. Below we highlight several key factors for your consideration.
Factors that Influence Your Rates
There are many contributing factors to a hardening market – notably catastrophic (CAT) losses from disasters, inconsistent underwriting profits (the difference between the premiums an insurer collects and the money it pays out in claims and expenses), eroding investment returns that otherwise provide positive stability even when the insurance company experiences negative underwriting results, the overall economy as a whole, and the cost of reinsurance (basically, the cost of coverage for insurance companies). These are all dynamic market forces which insured’s have little or no control.
In a hardening market, business owners who proactively address factors that are specific to their business will develop the most favorable underwriting profile, as well as the most favorable terms, conditions and pricing.
The experience and expertise of your insurance broker is your most valuable resource to help you prepare for all aspects of the underwriting process.
Type of coverage – The forms of insurance you are seeking, as well as the details of the coverage (e.g., limits of liability and value of insured property), will affect your insurance pricing.
Size of your business – As a general rule, the more employees your business has and the larger your revenue is, the more you will typically pay for your insurance.
Industry – Some industries carry more risk than others, and often additional factors come into play to determine the risk rating. For example, construction is considered a higher risk in New York City, in part because the Scaffold laws permit injured workers to sue for Workers Compensation benefits and make a General Liability claim (where the norm elsewhere is to collect Workers Compensation only). For truckers, payload may determine risk - hauling fuel is a much higher risk than hauling other benign or inert cargo. A fireworks manufacturer is going to be higher risk rated than a manufacturer of widgets. As you would expect, the higher the risk the more likely an insurance claim could be filed and thus, insurance premiums are higher.
Location of your business – If your business is located in an area prone to certain natural disasters, insurers may determine that your facility is more at risk for property damage, which translates to higher insurance premiums.
Claims history – Your business’ claims history, often referred to as your loss history, will have a significant impact on insurance rates. If your business has an extensive claims history, insurance carriers will tend to consider your company more likely to file future claims. This, in turn, means that your business will be viewed as risky to insure, subjecting you to higher commercial insurance premiums.
Hard markets make underwriters more critical, so it’s prudent to come prepared for any concerns the underwriter may address. You will want to audit your information for accuracy (e.g., list of assets or employees) and know your loss history. Underwriters will take into consideration factors contributing to a specific loss and the steps you have taken to mitigate the risk of a future loss.
Risks and Trends to Watch in 2020
Social Inflation – This is a term used to describe a group of societal trends that are influencing the ever-rising costs of insurance claims and lawsuits. Increased litigation is at the root of this trend. Insurance covered litigation funding allows most or all of the costs associated with litigation to be covered by a third party, which has increased the volume of cases and increased the cost of litigation since plaintiffs are able to take cases further and seek larger settlements. This situation is made more challenging by an increasing public perception that businesses – particularly large ones – can afford the cost of any damages. In the current environment, nuclear verdicts (awards of $10 million or more) have become more common. Ultimately, these factors transfer to policy holders paying higher cost for coverage.
Extreme Weather Events – In 2019, wildfires plagued the West Coast; California alone recorded more than 47,000 wildfires. In the Midwest, flooding along the Mississippi River and its tributaries caused an estimated $6.2 billion in damage across 13 states. On the East Coast, the hurricane season caused billions of dollars in damage and affected multiple states along the Atlantic Ocean. As disasters such as severe storms, extreme temperatures, wildfires and flooding become more frequent, expect to see more emphasis around weather readiness, especially from an insurer’s perspective. Policyholders who take steps to fortify their property (e.g., using fire-resistive materials, reinforcing roofs) could enjoy premium discounts.
COVID-19 – The COVID-19 pandemic continues to be a top-of-mind concern for organizations and individuals across the globe. While many essential businesses (e.g., hospitals, pharmacies, grocery stores, gas stations) remained open, other operations deemed nonessential have shut down temporarily, changed the nature of their operations or may be considering closing their doors for good.
Business interruption started to receive national (and international) attention towards the latter half of March, as disputes between restaurants and carriers reached the mainstream media. Arguing that COVID-19 constitutes physical damage and triggers coverage under the civil authority clause in their policies, many businesses submitted business interruption claims for losses incurred by forced closure under government orders. However, insurers have aggressively denied claims for COVID-19-related losses under a variety of theories.
Federal Responses to Business Interruption (BI) Loss
Two approaches are under consideration to manage future business interruption losses – one a public/private partnership, the other a federally funded program. These proposals reflect different approaches to federal involvement in responding to BI losses from pandemic events.
The Pandemic Risk Insurance Act (PRIA) of 2020 (H.R. 7011) is intended to create a new market for private commercial insurance coverage for pandemic-driven business interruptions and event cancellations. Insurer participation in this approach is voluntary, but participating insurers would be required to provide coverage for pandemics in all of their business interruption insurance policies. This would provide insurers that choose to offer BI coverage for pandemic events a federally funded backstop to reimburse them for a portion of their loss payments.
The Business Continuity Protection Program (BCPP) is built on the premise that pandemics are simply not insurable risks; they are too widespread, too severe and too unpredictable for the insurance industry to underwrite. Under the BCPP program businesses would purchase the federal revenue replacement assistance through state-regulated insurance entities that participate with BCPP on a voluntary basis, but the aid would come from FEMA. The program would be automatically triggered upon declaration of a federal public health emergency. Relief payments would be paid immediately once there is a presidential viral emergency declaration. No advance documentation or claims adjustment is needed, the trade groups reported.
Both PRIA and BCPP are forward-looking programs. In an effort to secure reimbursement for current pandemic losses yet keep the issue out of expensive, multi-year court fights that would not benefit those needing help right now, the Business Interruption Group has offered a middle-ground proposal. Basically, if a policy clearly excludes pandemics, then the issue is over as no reimbursement is due. If there is no exclusion for pandemic or virus, then there is no case because reimbursement should be made by the insurer. However, for those less clear-cut cases where insureds and insurers have realistic arguments for and against coverage, the group proposes a federal subsidy program, which would reimburse insurers that voluntarily pay pandemic-related business interruption claims. This proposal was described to the U.S. House of Representatives Committee on Small Business during a May 21 Congressional Forum. Introduction of a bill based on this idea is expected in the near future.
Lines of Coverage Price Forecast
As we have discussed, insurance premiums are determined by a multitude of factors and differ per organization. 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 but can be useful in the planning stage and in discussion with your insurance advisor or broker. These forecasts should be viewed as general information and not insurance or legal advice.
LINE OF COVERAGE
- Non-CAT exposed: +10% to +20%
- CAT exposed: +10% to +30%
- CAT exposed with poor loss history: +25% to 50%
Excess and umbrella liability
- High risk: +25% or more
- Low to moderate risk: +15% or more
- Overall: +6% to +12% or more
Directors and officers liability
- Public companies: +17% to +50% or more
- Private/nonprofit companies: +5% to +35%
Employment practices liability
- Certain states and industries: +5% to +25%
- Overall: +5% to +15%
Tips for Insurance Buyers
Preparing for market changes takes an integrated insurance purchasing and risk management approach, where buyers are prepared for possible coming changes. We recommend that you work with your insurance broker to begin the renewal process early in order to put your best foot forward. These specific suggestions should help you in that process:
- Examine the design of your property insurance with your insurance broker.
- Gather as much data as possible regarding your exposures and existing risk management techniques. Be sure to work with your insurance broker to highlight any business continuity plans and loss control measures you have in place.
- Address any open insurance carrier recommendations prior to renewals. Insurers will be looking at your loss-control initiatives closely. Taking the appropriate steps to reduce your risks whenever possible can make you more attractive to underwriters.
- Pinpoint your exposure and cost drivers; identify the best loss -control solutions to address your unique risks.
- Create a solid business continuity plan to account for disasters and other unpredictable risks.
- Build a company culture focused on safety.
- Manage claims efficiently to keep costs down.
For more information regarding the issues discussed in this article, don’t hesitate to contact your CBIZ advisor or the CBIZ Insurance professionals. The CBIZ COVID-19 resources center provides up-to-date COVID-19 content and webinars (live and recorded) touching on tax & legislative, employees & HR, financial management, and risk & operations topics.