WHAT DO RATE HIKES MEAN FOR THE 2020 INSURANCE MARKET?
After more than a decade of flat or decreasing premiums, prices rose across many lines in 2019. As the dust settles, you may be asking yourself what does 2020 look like?
The property/casualty insurance market is at a point not seen since 2002. Rate hikes are forecast to continue across most lines along with reductions in limits offered by insurers and more restrictive coverages. All this promises a challenging year for buyers of insurance.
Let’s look at the data how the insurance market got here, when will we see some relief and what can you do, in the short term, to avoid the worst of the hard insurance market.
In the second quarter of 2019, Marsh’s Global Insurance Market Index noted an increase of almost 6%. This was the largest quarterly increase since Marsh began the survey, in 2012. It was also the seventh consecutive quarter of average price increases. Needless to say, people took note.
The third quarter brought accelerating increases, as global commercial insurance pricing surged. In the eighth consecutive quarter of increases, prices rose 8%, with annualized increase much greater than that, setting another record. Rates flew up another 5% in Q4, with Directors & Officers liability leading the pack at 8.25%. Commercial auto was not far behind, with an 8% spike in Q4. Price increases accelerated in December with only one exception. Workers’ Comp rates fell that month, as they had all year. But many other lines ended the year with their highest average renewal rate change.
That brings us up to speed. As we get our bearings for the year ahead, here’s what to look out for.
THE YEAR AHEAD
Rate hikes and reductions in capacity will continue in 2020, and into 2021. This trend will affect all industries and classifications. (Only Workers’ Comp remains calm, although even those rate declines seem to be slowing.) Capacity is available in many lines, but insurers have grown more conservative.
Also, underwriters are demonstrating unprecedented discipline even though insurers have plenty of capital. In fact, this is the first hard insurance market where this has occurred. In many instances an insurer that was offering a $10 million limit is now offering a $5 million limit for more premium. This double whammy of premium and capacity can leave certain insurance buyers with effective premium increases of over 100%.
In many industries, coverage and wording is narrowing. This is especially true in catastrophe-related property accounts. Insurers are also reining in coverage that had expanded. The most dramatic examples of this occur in cyber coverage. While rate hikes will continue for now, we do see them happen on a case-by-case basis, instead of across broad market segments. Most experts see the market stabilizing no sooner than the third or fourth quarter of 2021.Rates can’t increase forever and at some point underwriters will see opportunity and begin to compete for the most desirable risks.
MAKE THE MOST OF THE HARD MARKET
Have a strategy. Underwriters are under intense scrutiny and are unwilling to risk their jobs writing accounts they have been explicitly told to avoid.
Your broker should map out what can be expected by your incumbent insurers, who might fill in gaps in capacity or replace current insurers and what the best and worst case scenarios are. This process should be started early and communications and updates should continue throughout the process. Your broker should be asking you to provide more comprehensive risk information, and to consider new program structures. Don’t forget, managing your risk is as important now as ever. Showing an underwriter why you are better than average risk with provable documentation can often significantly improve results.
Frustratingly, you might receive some quotes at the last minute, but sometimes the last minute quotes are the best. It is not unheard of to have a very expensive quote 2 weeks before and have an insurer swoop in and provide something more favorable. That’s the best case scenario, but sometimes insureds are seeing very little competition. Other times, the quote that looks expensive 2 weeks out all of a sudden looks like a great deal when other offers come in or no other insurers are willing to quote a risk.
The good news is the insurance industry remains resilient around the world. Insurers are looking for the right accounts at the right price and it’s likely that you will still be paying less for insurance than you did 5 years ago. The biggest key to weathering these conditions will be finding the right advisors. That’s where we come in…
THE VALUE OF EXPERIENCE
One of the biggest impediments in this particular market cycle is the talent gap. Baby Boomers are retiring from most industries (including insurance) at a higher rate than young people are joining it. This means the loss of institutional knowledge, and inexperienced hands at the wheel. Many at the negotiating table have never experienced a hard market before.
We have. We understand market cycles and how to craft the strategies discussed above. We also understand your business, and how to explain it to underwriters who are besieged by brokers looking for alternatives for their clients. They want to work with a knowledgeable broker who honestly and carefully presents their client’s risk, explains what coverage is needed and give them realistic pricing goals. They spend time working with brokers who give them the best chance of writing profitable business. And that is the key to success in a hard market.