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2021 Insurance Market Insights: Part 1

There has been a flurry of industry data released over the last month with all indicators pointing to an ongoing hard insurance market across all lines for all-sized businesses as insurers continue to address profitability issues as a result of rate inadequacy and increasing losses. Even Workers’ Compensation insurance, which has remained flat while other lines have experienced spikes over the last few years, is now on the uptick. COVID-19 has exacerbated an already pressured environment with uncertainty around the pandemic’s full impact on the economy, financial markets, and insurance losses. Let’s take a high-level look at what we should expect in 2021.

Higher Rates, Diminished Capacity, Conservative Underwriting

Third-quarter 2020 rates saw an increase in rates across all lines with some lines in the double-digits depending on the risk profile. According to The Council of Insurance Agents & Brokers’ quarterly Commercial Property/Casualty Market Index, the average increase in premium pricing for all-sized accounts again broke double-digits in Q3 2020 at 11.7% compared to the previous quarter. Here’s the breakdown by product line:

  • Umbrella Liability: 22.9%
  • Directors & Officers Liability (D&O): 16.1%
  • Commercial Property: 14.2%
  • Commercial Auto: 11%
  • Employment Practices Liability Insurance (EPLI): 10%
  • General Liability: 6.7%
  • Workers’ Compensation: 1.5%

In addition to rate increases, carriers are either reducing capacity or offering limits but at higher premium prices.  Underwriting scrutiny continues to tighten, increasingly so as COVID-19 has ushered in a whole new set of questioning, particularly in the D&O and EPLI space. Underwriters are concerned about a business’s liquidity/solvency, guidance and responsiveness to COVID-19, revenue disruption, supply chain and logistical issues and business plan changes. They are also concerned about the impact of employee layoffs and furloughs on businesses and issues around diversity, inclusion and equity.

Business Interruption (BI) is also another line impacted by COVID-19 with claim disputes continuing to make their way through the courts as insureds look for cover for pandemic-related loss of income while insurers reaffirm that BI insurance only responds in the event of physical loss and excludes viruses. Most of the court cases have sided with the insurance industry but there are a few that have been allowed to proceed. “The legal battle over who will ultimately share in paying for losses associated with the pandemic is far from over,” observed AM Best in its recent industry sector update.

Impact of Natural Catastrophe, Man-made Losses on Industry

Property losses – both natural and man-made – continue to hit insurers hard, contributing to  driving rates up. New data released by Swiss Re indicates that natural catastrophes caused $76 billion in global insured losses in 2020, up 40% from 2019, making it the fifth-costliest year since 1970. According to the Swiss Re data, losses were primarily driven by a record number of severe convective storms as well as wildfires in the United States.

The wildfires on the West Coast in 2020, according to catastrophe risk modeler RMS, are estimated to run between $7 billion and $13 billion in insured losses. The RMS estimate includes losses from property damage, including evacuation and smoke damage, business interruption and additional living expenses (ALE) across residential, commercial, and industrial lines.

Fitch Ratings estimates that insured losses from Hurricane Laura in August are between $11 billion and $15 billion. Add to this the $1 billion to $2 billion the insurance industry paid out in claims on the heels of the civil unrest that took place across the country in May and June, and you have a perfect storm for insurers to continue seeking rate adequacy to cover losses.

Property rates are expected to increase by 10% to 20% well into 2021, depending on the  industry, occupancy, risk quality and catastrophe exposures. High-hazard property risks could see rates go up by 25% as well as higher deductibles and tighter policy terms and conditions.

Social Inflation Continues to Concern Insurers

AM Best in its insurance sector update sees social inflation rearing its ugly head again in 2021 after a respite because of COVID-19 and courts operating at limited capacity or closed altogether.  Social inflation, nuclear verdicts in the tens and hundreds of millions of dollars, an aggressive plaintiff bar, litigation funding, sympathetic juries, and rising loss costs have wreaked havoc for insurers, particularly in the Commercial Auto and Commercial Umbrella lines. AM Best predicts these issues will regain focus and importance in the coming year. The year 2021 “will likely witness a reemergence of the trend toward increased attorney involvement in claims, as well as higher demands and jury awards, particularly where anti-corporate sentiment is strong and large awards are viewed as a form of economic or social justice.”

The focus in 2021 for insurance agents is to continue to communicate with clients, explaining the hard-market conditions. Emphasize the importance of strong loss control and risk management practices to improve a client’s risk profile. Go to market as early as possible to negotiate capacity, pricing, and coverage terms and conditions on behalf of clients. We will provide additional insight into the insurance market in Part II of our series, including how some other key coverage lines are impacted by current conditions and COVID-19