First, what is the hardening of the insurance market mean? A soft market is often referred to as a buyers’ market, which we see stable premiums, increased capacity, broader coverage terms and increased competition in the overall insurance marketplace. Whereas a hard market is just the opposite, often referred to as a sellers’ market caused by the insures increased overall costs and lower income, which in turn causes those insured to experience increased premiums, reduced appetite by the insures, tighter underwriting scrutiny and less overall competition in the overall market place, also making it harder to secure insurance. Additionally, it is not uncommon when insurance markets harden to encounter an increase in coverage restrictions, have a great deal more conditional renewals as well as non-renewals, as insurance carriers look to reduce their loss exposure and lower their overall costs.
Like most markets, the insurance market can be seen as cyclical and over the last five to seven years we have enjoyed a relatively soft insurance marketplace overall, however that seems to be changing and I am seeing the overall market hardening and expect that trend to continue. In my opinion, in addition to the typical market cycles, we are entering into the perfect storm for the hardening of the insurance market with multiple factors that could affect further hardening and may possibly last for some time.
An increase in weather conditions that lead to in an upsurge as well as an escalating intensity of weather-related disasters such as, tornados, hurricanes, floods and wildfires are causing an increase in catastrophic insurance losses. Recessions typically cause governments, businesses and individuals to pull back on maintaining and updating property, which typically results in an increase in overall added damages and claims. During recessionary times like we are currently in, interest rates have been exceptionally low, which can be a good thing for businesses and individuals, however insurance carriers inherently offset losses from claims through investment income in order to produce profitable results, so with extended periods of low interest rates, income declines, putting additional pressure to increase premiums to those insured. The current Covid 19 pandemic is causing a significant increase in legal costs to defend an exploding number of cases against insurance carriers for things like business interruption coverage. It also has created a considerable amount of uncertainty, even about what things may look like when we get to the other side of it, how many businesses will fail, what are the added threats and when will we be on the other side of it? Insurance markets innately do not like uncertainty! The market is also experiencing a substantial number of additional claims for cyber security mismanagement as well as employment practices liability, which includes things like discrimination and harassment. The cost to repair and replace just about everything is increasing due to emerging technologies, smart features, artificial intelligence crash sensors and increased cyber liability exposures, further complicating how the market reacts. The A.M. Best 2019 Market Segment Report reported a combined ratio for the Property and Casualty insurance market has been above 100, which indicates underwriting losses since 2016. As the economy recovers, the additional hiring increases payrolls and increase risks. Increase in health care costs is pushing up Workers compensation claim costs.
The bottom line, when there is higher than expected losses, increased costs, increased risks, market uncertainty and lower investment income, premium rates will predictably increase. Make sure your agent/insurance partner understands the market, comprehends your risks, annually reviews and shops coverages, encourages and values risk and loss management and has relationships directly with the insurance underwriters, as this will help you navigate through the hard market ahead.
Jeffrey Miller, LL.M. CLCS