Materials provided in this document are for educational resources only. During renewal, we review each account on a case-by-case basis, and many factors come into play when negotiating on your behalf. The information contained within is written in broad brush strokes. We hope that by providing you with this information, we demonstrate that we have a deep understanding of the industry and are doing everything we can to navigate the sector strategically on your behalf.
As we explore industry performance drivers, there are three trends over the past decade impacting today’s insurance marketplace.
Industry Surplus – This is the cushion that allows carriers to make up for imbalances from an asset or liability perspective when taking substantial risks. Over the last decade, the insurance industry surplus had grown from $550 billion to approximately $870 billion as of Q3 in 2020. That is roughly a 60% gain. In short, the industry has a lot of capital to take on more substantial risks.
Premium Growth – Across the industry, net premium growth has grown from $425 billion to $660 billion over the last decade. With substantial growth like this, when supported by the industry surplus mentioned above, there is still additional room for the industry to take on greater/more risks and absorb those losses should claims occur. Insurers have not been able to write new business at the same rate that the industry has been developing a financial cushion.
Underwriter Profitability – The US P&C market has only generated an underwriting gain in nine of the past 17 years. Before 2004, the last underwriting gain was at least 30 years earlier. While this shows enhanced underwriter discipline, it also highlights the challenges carriers have faced because of several underwriting challenges. The next page outlines several problems that continue to have carriers concerned.
What are the industry performance drivers leading to today’s U.S. property & casualty market?
H I S T O R I C A L T R E N D S
To make up for underwriting losses due to increased challenges, investment income has historically been the largest (often the only) source of earnings for property and casualty insurers. Unfortunately, over the past decade, insurers have earned lower investment income increases as interest rates remained at historically low levels.
While the findings above show that there is a lot of capacity for the industry to insure more organizations, the fact of the matter is there are two major impediments:
Many ask if more business is even there to write. The fact of the matter is research shows that the industry is more commonly competing against one another over “wallet share.”
For the insured organizations, insureds do not see the ROI of investing in additional insurance solutions regardless of the level of risks their organization might be exposed to. Business owners will walk away from options if they do not feel it is priced competitively.
So why are underwriters and agents struggling to write more profitable business?
I N D U S T R Y C H A L L E N G E S
To put it a different way, the U.S. insurance industry is like an exceptionally large bucket that can only be filled halfway.
When reviewing 2020, four major underwriter challenges impact 2021 – catastrophic losses and difficulties in some casualty lines because of social inflation, COVID, and the interest rate environment. We will break them down in more detail below:
Catastrophic Losses: Without a crystal ball, there is no way any organization can predict the weather throughout the year. Catastrophic losses have been high in three of the past four years, leading (re)insurers to become much more conservative regarding property underwriting, including both sharp price increases and changes in terms and conditions. We would have to look back to 2013 (and prior) to find a stretch of time where the U.S. property market showed lower than average losses in this area. And, while there are a handful of factors at play, analysts predict the number of major catastrophic weather incidents, from hurricanes to fires, could well continue to rise.
The Rise of Social Inflation: Much less of a wild card when compared to catastrophic losses; factors impacting social inflation have been well documented. The increase in frequency, severity, and settlement size of recent litigation has carriers concerned. When you see these large lawsuits on the news, remember that many of these cases are typically covered by insurance to some degree, and the trickle-down may impact your rates. We expect excess, general liability, and some professional liability programs to be impacted the hardest as this trend continues.
Underwriting challenges in 2020 and their impact on the U.S. property & casualty market in 2021
H I S T O R I C A L T R E N D S
COVID: The losses have not been as large as initially expected, both in the U.S. and globally. For most cases, the courts have sided with carriers over the past year in business interruption matters. Estimates of total losses globally resulting from COVID-related claims range anywhere from $30 billion – $100 billion, depending on the analyst. While we anticipate the international insurance industry taking losses due to COVID, we do not expect COVID to impact U.S. P&C rates significantly. This does account for indirect impacts from COVID, such as bankruptcies. If there were rate increases, it might be dependent upon new state laws or mandates (such as workers compensation presumptive coverage rules in certain jurisdictions. We may also see increases in programs like event cancellation coverage, though almost certain with Covid-19 exclusions.
Interest Rates: It is a fact that interest rates have been historically low over the last decade. With that in mind, as interest rates begin to rise as the economy begins to start up again, insurance premiums should have some impact.
We expect the rise in interest rates to somewhat slow the premium rate increase – good news for you!
While the industry appears to be well-capitalized with the capacity to write additional business, underwriters have been forced to maintain underwriting discipline in the face of lower investment income and uncertainty around rising issues like weather-related catastrophe losses, more aggressive legal awards in certain liability lines, and potential Covid-19 related losses.
To sum up the historical data above:
Before we dive into how this historical data could impact your family or business, we want to reinforce that below are simply predictions. There are exceptions to every rule, and the below information is being provided as a general rule of thumb and written in broad brush strokes. Similar to our carrier partners, during renewal, we review each account on a case-by-case basis.
Personal Lines –The rating cycle for personal lines insurance has been much less pronounced. U.S. home and auto rates have historically been much more predictable than certain commercial lines. As a general rule of thumb, we anticipate much less of an upswing in personal auto rates due to COVID and fewer drivers on the road. We also expect a similar trend with homeowner rates except for homes in areas impacted by major catastrophic weather.
Commercial Lines – Based on the previous year’s data, we predict workers’ comp rates to be slightly down or remain flat. Unfortunately, with commercial property, we anticipate an increase dependent upon your property’s location and the property’s exposure to past incidents like severe weather. Finally, on lines like general liability, professional, and excess, it will be dependent upon the industry. Overall, on lines like D&O, commercial auto, and medical malpractice, we expect rates to increase as analysts view these as very problematic.
How will this impact your rates?
W H A T C A N W E D O T O G E T H E R?
As a risk consultant, it is our job to better understand all the risks your organization faces using a proprietary risk assessment process. This process enables our team to create a case for you and your organization by creating a feeding frenzy in the underwriter marketplace. While the underwriter community backs decisions supported by historical data and predictive analytics, it is our experience that when presented with an outline of your organization’s exposure identification and a multiyear roadmap of strategies to manage and mitigate risks (beyond merely risk transfer to the carrier), we increase the likelihood that an underwriter will present favorable terms.