Exclusively from Foa & Son
So, what to expect in the broader commercial P&C market this year? Prior to Sandy the insurance market had turned harder over the past year, but only moderately. Premium increases have averaged, over all lines and all regions, only mid single digits year over year since the market turned. So far there is no indication that this trend is showing any sign of accelerating; it seems to be holding to a slow and steady pattern with modest year over year rate increases.
There are a few factors at play here. First of all, unlike most prior hard market turns, this market can best be characterized as an income statement hard market, not a balance sheet hard market. Put another way, insurance companies are still quite adequately capitalized; what they are not doing is operating profitably. Loss experience slowly eroded over the past few years until they are now paying more in claims than they are collecting in premium. In the past investment income on funds held in reserve provided a cushion for poor underwriting results, and actually allowed insurance companies to write policies for premiums below their actual costs and still turn a profit. Investment returns these days are paltry, so there is no longer any help there. As a result insurance companies are focused these days on charging high enough premiums to pay claims and expenses, but this is more of a slow walk than a stampede.
The economy plays a role here, too. Insurance companies live in the same world we do, and they know how their customers are doing; any inclination to push for higher increases is substantially tempered by economic conditions. And finally, there are no other external factors that are really driving an acceleration in hard market conditions. A storm like Sandy gets a lot of publicity, but insurance companies factored the possibility of events like this into their pricing models several years ago. We are keeping an eye on this, though. Insurance companies tend to be herd animals; if a few decide Sandy is a convenient excuse to seek bigger rate increases, others could follow and rate increases could accelerate.
All things considered, from a 50,000 foot view and with a cloudy crystal ball there seems to be no current reason to expect any dramatic changes in broad, general insurance market conditions. There are two very important exceptions to this. The first is workers compensation, which has recently proven to be the biggest money loser for insurance companies in most parts of the country. Expect changes here, and possibly significant changes. You’ll find that to be especially true if you have not been paying attention to safety and loss prevention, if your loss experience is below par or if your operations are particularly hazardous. Large, complex or catastrophe exposed property risks are the other exception, for obvious reasons. Property insurance renewals should be started much earlier this year; early indications are that underwriters countrywide are seeking higher premiums and deductibles, pulling back on coverages offered, and generally tightening up.
As we have mentioned before, underwriters are also underwriting these days; they are taking a closer look at all their accounts. You may be asked more questions, may have to compete applications you never did before, and you’ll likely find the renewal process more involved and time consuming than it’s been in the past. That aside, with the two major exceptions noted above expect your costs to be up a bit, but still relatively stable.