We have recently been blitzed, like the way Dick Butkus used to pursue quarterbacks when he was playing in the NFL. The pandemic in and of itself is enough to disrupt markets and create chaos; however, from an insurance perspective, the chaos was forming well before the virus appeared.
“Hard markets” come and go. The last hard Market we experienced for property and casualty coverage occurred between 2001 and 2004. During that time span, property and liability rates increased by more than 55%. Currently, rates have risen for nine consecutive quarters. This is due to the influx of large catastrophic losses, accelerating claims and, most recently, uncertainty surrounding the COVID-19 pandemic. Fitch ratings projects that technical profits for major insurers won’t be seen until at least the second half of 2021.
So, just what is a hard market? It occurs after insurance companies experience underwriting losses, due to abundant claims, for the time period preceding the hard market. As a result, the insurance companies raise premiums and/or reduce coverage limits that were previously offered. This results in an inflationary condition for the insured and sometimes a difficult time replacing coverage for certain types of customers. Although insurance companies maintain reserves to protect them from future losses, including catastrophic losses, the current investing environment has also contributed to the problem, as rates of return on conservative investments have been historically low causing investment returns on the reserve funds to be below historical trends.
Photo credit: Outlook Q4 2019
To give you a better understanding of what to expect, here are a few examples of what’s happened and insight on how rates can be affected.
Additionally, workers compensation costs will be affected. According to the National Council on Compensation Insurance (NCCI), if only 10% of healthcare workers contract COVID-19 and all of the related claims are deemed compensable, costs for workers compensation claims could double or even triple in some states. I could devote an entire Slice on that topic; however, the conclusion is, don’t expect workers compensation rates to go down in the near future.
So, as you prepare for this “hard market,” there are proactive steps you can take to protect your business. First and foremost, review your risk scenario and analyze where you can employ improved systems to alleviate the threat of a loss. While some companies can be severely affected by making no changes, those that proactively apply proven risk mitigation processes and procedures will be the ones that reap the benefits. The hard market won’t last forever, but it does teach us that the industry will adapt as a result of the current environment.
Insurance is a pooling of risks supported by a large number of policyholders. If your company or personal asset bundle presents a less risky scenario than others, you stand to see better rates over time. That said, the current state of affairs has an effect on all policyholders, so even the better risks will likely see increases in the near future until the hard market finds a reason to soften.