The current state of the insurance market

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“Social inflation” – escalating litigation costs and their impact on claim payouts and how much carriers ultimately pay – continues to rise, pushing casualty costs up in the industry. (Credit: denisismagilov/Adobe Stock)

We have been in a hard insurance market, with 18 consecutive quarterly rate increases, that is the result of a confluence of several distinct factors. Before diving into them, a short explanation of a hard market is needed: A hard insurance market forms when the market swings up, with increased demand for insurance and reduced supply. Hard markets are characterized by relatively high premiums, fewer options for coverage and a reduced willingness of carriers to compete with one-another for business. This also results in less appetite for negotiating terms of coverage and decreased capacity for most types of insurance. The steady and significant rate increases in premiums are a key indicator of the current hard market. While everyone has their eyes on inflation, the roughly 10% rate increase in premiums in Q4 2021 far exceeds the cost of inflation over the last 15 consecutive quarters.

Primary causes

One persistent long-term factor shaping the current hard market is the continuing COVID-19 pandemic, which extended the period of near 0% interest rates for multiple quarters, resulting in insurers relying more on underwriting profits than investment income. The pandemic has also played a role in the current protracted economic volatility, which increases insurance costs, prompting insurers to tighten their underwriting standards.

Unpredictable major weather events are taking place with increasing frequency, resulting in harder to predict pricing in the P&C space. “Social inflation” – escalating litigation costs and their impact on claim payouts and how much carriers ultimately pay – continues to rise, pushing casualty costs up in the industry. This past year also saw the highest number of auto fatalities since 2006 – more than 31,000 (January – September 2021) – primarily caused by speeding. All of this results in insurance buyers seeing rising premium costs and retentions/deductibles, along with liability limits being cut. Some carriers are exiting the market and others are adding significant new exclusions or broadening existing exclusions in their policies.

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In this hard market cycle, it is critical that the insurance company you are working with accurately and completely understands your organization or business, your exact exposures to risk and how you manage these exposures via various loss control procedures. Having a broker and risk management partner that understands your business – both where you have been and where you are going – and how to differentiate from your competitors can and should be used to your advantage when insurance company underwriters are inundated with new business opportunities.

What the future holds

So, the question remains: What’s on the horizon for the insurance market? Economic conditions prompted the Federal Reserve to raise interest rates 0.25-0.5% in the March Federal Open Market Committee (FOMC) meeting, and then hike the rate further to 0.75-1% coming out of the May meeting. Continued rate increases could result in increased investment income for carriers, who could then leverage that investment income to compete for underwriting profits and market share, spurring a “race to the bottom” for premiums. As this occurs, carriers may begin to compete more on market share and price, which would give buyers more room to negotiate.

With inflation remaining at a 40-year high and recession fears looming large on everyone’s minds, insurance rates are likely to keep increasing for the remainder of the year, but the degree of increases will level off. In the P&C space, since property claims are typically settled quicker than liability claims, the property line can serve as a useful forward-looking indicator on the state of the market.

If and when the market does soften and flip, safety and risk management best practices should be top of mind to ensure you’re positioned for success in the eyes of insurance carriers at renewal. Having strategies and processes in place that can help prevent losses from happening while minimizing the dollars being paid out in losses is critical to support this effort.

Regardless of the market we find ourselves in, it’s vital to partner with an insurance broker who can assess your unique operations and insurance policies holistically.

Matt Karlofsky is a producer for Graham Company. 

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