It is becoming increasingly clear that a hardening property/casualty insurance market has accelerated and gone global according to Chubb Chairman and CEO Evan Greenberg. With commercial insurance rates set to keep rising in 2020, are you prepared for the hard market?
A year ago, we were seeing a slow, gradual firming of the market. Over the course of 2019, the insurance market has tipped rapidly into what seems like a near rout. This year saw an insurance market that went from gradually hardening to falling off a cliff, at least for major lines of insurance. What happened?
There are a variety of causes, but the real reason for what we are seeing now lies with a reality not fully appreciated by most insurance buyers. Insurance underwriters operate with a herd mentality and largely move as a group. An underwriter or insurance company that strays away from the herd and tries to get rate or premium increases that are beyond what might be “normal” in the market at given time, gets slapped down pretty quickly. But when one underwriter goes for modest increases, and gets them, others see, and emulate. Then others try for just a little bit more, and if they stick, still larger increases. Soon the herd has changed direction, all underwriters are restricting what they are willing to insure, and getting a lot more money for what they do cover. That’s what creates a hard market.
This will go on for a while, but eventually an underwriter will think they’ve gotten enough premium increases and are pricing adequately, then they’ll moderate their pricing demands and accept business they might have declined earlier. Others will notice, soon the herd will turn again, and market conditions will moderate, almost as quickly as they hardened.
This has been happening in the insurance business since industry statistics have been kept. However, there is one significant difference to this hard market that we haven’t seen in the past. The last real hard market like this was right after 9/11 eighteen years ago. Looking back fifty or sixty years or so hard markets came along fairly regularly, on average every eight or nine years, so this last quiet period was unusually long. Insurance has also seen the departure of a lot of institutional knowledge during that time as baby boomers age, retire and leave the business. They take with them a lifetime of accumulated wisdom and experience, including experience with earlier hard markets. A lot of the talent now in the insurance business has never experienced a hard market cycle like this. They are learning as they go, as are many insurance buyers who have also never experience market conditions like these.
Unlike previous hard market cycles, we’re dealing with often unpredictable problems arising from inexperienced underwriters and insurance company people who have simply never seen a hard market before. That introduces a wild card into any insurance negotiation.
The best way to deal with is to start early and allow additional time in any renewal process. Other steps for successfully navigating the hard market include meeting early with key underwriters, carefully re-evaluating your insurance program, and considering options such as changing insurers, eliminating or cutting back on coverage, decreasing limits, or changing terms, conditions or deductibles.
Most of all, start early, leave ample time to explore alternatives and to negotiate with insurers. Underwriting decisions are being made higher up in insurer leadership ranks, so that, too, creates a bottleneck. And more policyholders are shopping their business, causing further activity and market congestion.
In the meantime, assume that any renewal can be a challenge. Property, general liability, commercial auto, excess or umbrella liability, management or professional liability, all can be a challenge, even where your claims experience has been good. About the only line of insurance that’s relatively calm these days is workers compensation, assuming your experience has been good or at least average. Even there, rate declines seem to be slowing from last year’s pace.
Historically, hard insurance markets tend to be short, sharp, and unpleasant, but they do generally end pretty quickly, and there is no reason to think otherwise about this one. Unfortunately, that most likely won’t happen for another year or so, so be ready for a bumpy ride for the near future.