Insights
Alex Wells looks at major trends in commercial insurance
Over the last several months, Alex Wells, Head of U.S. Middle Market for Zurich North America, has contributed a series of articles to zurichna.com focusing on current and historical trends for various commercial insurance products. We wanted to share some of these insights with our Program Leader readers. You’ll find links to the complete article at the end of each section.
Commercial Auto insurers face an environment of continuing challenges
Industry’s struggle to regain profitability drives “rate fatigue,” but risk management strategies can help control cost of risk.
For midsize businesses, maintaining an effective, comprehensive commercial insurance program is a first line of defense against risks that can severely threaten an insured’s financial stability. And one of the most important components of any midsize client’s insurance program is Commercial Automobile coverage. This line of insurance protects the company against the financial consequences of accidents, injuries and fatalities involving company-owned or leased vehicles as well as employees’ vehicles when used on business.
For the better part of a decade, the Commercial Auto line has been affected by a confluence of factors that have severely impacted insurers’ profitability. A recent Conning, Inc. report noted that the industry’s Commercial Auto combined ratio has averaged a troubling 107 since 2010. The same report states that from 2011 to 2019, Commercial Auto has accounted for $22.4 billion in underwriting losses for the industry, $16.3 billion of which came from just the last five years of that report (2015-2019).1
Looking back, from 2005 to 2010, the Auto line was profitable, with 2011 becoming a turning point in terms of profitability. What changed? Simply, a variety of adverse loss trends have intensified significantly, joined by others that did not exist in their present form in years past.
Some of these adverse loss trends include:
- Increased use of smartphones
- Legal cannabis
- Worsening crash severity
- Rising repair costs
- Skilled driver shortage
- Social inflation/litigation
These are challenging times both for Commercial Auto customers and the carriers providing this important coverage. Working together, we can better understand the trends that are driving results and rates so that we can help customers exercise more effective control over total cost of risk.
1. Commercial Automobile Insurance: Medicine for an Ailing Patient. Conning, Inc. November 2020.
Several trends will impact the course of General Liability insurance in the years ahead
Like other lines of business insurance, General Liability is affected by evolving social and economic trends.
Liability lines have seen a steady upward trend in calendar-year loss ratios over the past several years, necessitating rate increases by liability underwriters. Looking ahead, the property-casualty industry may experience additional stress on General Liability results due to a variety of potential headwinds throughout 2022 and beyond.
In particular, following are several social and economic trends we are watching as potential drivers of a changing General Liability environment:
- Medical cost inflation
- Social inflation, litigation costs and litigation financing
- Cannabis
- Per- and polyfluoroalkyl substances (PFAS, or “forever chemicals”)
- Glyphosate (an herbicide)
- Diacetyl (a flavoring chemical)
- 5G technology
- Nutraceuticals (dietary supplements)
The cost of General Liability insurance coverage will increase over time for a variety of reasons, with medical inflation, social inflation and uncontrolled litigation costs driving current, visible costs. But the General Liability line is also the insurance coverage that always pays for the unexpected, emerging hazards such as those noted above.
By keeping lines of communication open with key risk management partners, you will have a much clearer perspective on where you stand – and how you can improve your position.
Trends to watch in tomorrow’s Workers’ Comp market
Getting ahead of market trends will help employers maintain stable, cost-effective Workers’ Comp programs.
Like other lines of business insurance, Workers’ Compensation prices and performance have historically been affected by an “underwriting cycle” driven by the ebb and flow of markets in transition. Today, however, the Workers’ Compensation line of business is experiencing what some are calling an “atypical market” environment. The insurance industry continues to operate in a very low interest rate environment, with stable or slightly reduced rates in the Workers’ Compensation line. This type of Workers’ Compensation market has been in place for five years and all indications are that it will continue through 2022 with small exceptions in specific industries.
While a period of price competition is seen as attractive from the customer’s point of view, an extended flat pricing environment usually signals deteriorating results for insurers as rates fail to keep pace with loss trends and inflation. Yet, today’s Workers’ Compensation line remains profitable, delivering favorable combined ratios overall. In fact, industry combined ratios have steadily improved since the late 1990s, when some carriers’ combined ratios spiked over 120 percent.
Predicting the direction of the market for any line of business will take is usually a best-guess scenario based on historic loss data and what we know about developing marketplace trends. The only certainty is that the Workers’ Compensation market will undergo change. The amount of change will depend upon the relative impact of a variety of trends that underwriters are watching closely. These trends include:
- Telemedicine services — A valuable tool supercharged during COVID
- Use of topical analgesics — A necessary but expensive alternative to opioids
- Mega claims — A broad severity trend impacting all casualty lines
- Continued impacts of COVID-19
- Workplace-related mental injury
- Workforce evolution — The changing future of work
Some trends, such as increased use of telemedicine services to facilitate consultations between injured workers and medical providers, may have distinctly positive impacts on costs and outcomes. Others, such as an unfettered litigation climate and increasing medical inflation, will most likely shape the environment in less positive ways.
The most immediate and impactful way to reduce costs is to do everything you can to ensure that you are providing your employees with a safe and healthful workplace.
Inflation, rising catastrophe costs are challenging Property lines
The impacts of inflation and costlier natural hazards are impacting Property insurance rates and capacity. Accurate valuations are the key to weathering the storm.
In looking at near- and medium-term factors that will continue to affect the commercial property insurance markets in the year ahead, it is a certainty that insurers, brokers and customers will continue to experience the effects of inflation combined with more costly natural catastrophes. While there is not universal agreement about whether the tempo of natural catastrophes represents greater frequency, there is no doubt that the impacts of these events are being amplified as more values are exposed with expanding commercial and industrial development in geographies where severe weather occurrences have not had as great an impact in the past.
The increase in properties at risk of natural catastrophes is further complicated by an environment of rising inflation, which impacts the replacement cost coverages incorporated into commercial property insurance contracts. Put simply, if the values being insured are not up to date and have become significantly understated due to inflation, the result can be unpleasant surprises at claim time as well as impacts on insurers’ abilities to allocate capacity at renewal.
The value of accurate valuations
A recent article in Business Insurance observed that “the spike in inflation has rippled through the insurance industry from higher construction and auto fleet costs to valuation reviews that are surprising some.” The piece noted that uncertainty caused by an uneven emergence of businesses from the pandemic has made coping with change more challenging.1
Each February, Zurich North America publishes a report compiling Replacement Value Cost Trends. Our recently released 2022 report notes that current building cost trends show an unprecedented increase in construction cost inflation for the year ending January 2022, with an average increase of over 12% for the year. Regionally, costs increased in the range of 10% to 15% based on local conditions.2
For underwriters, inaccurate valuation is more than just an issue affecting premiums. Accurate values are fundamental to overall risk assessment, allocation of capacity, reinsurance decisions, the setting of sub-limits and deductibles, and natural catastrophe modeling.
Right now, the most critical need for customers will be to make sure that property valuations are up to date and to better understand what their statements of value are supposed to represent.
- Lerner, Matthew. “Inflation puts pressure on insurers, policyholders.” Business Insurance. 14 December 2021.
- Zurich Replacement Value Cost Trends. Zurich North America. 18 February 2022.
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3 PROGRAM LEADER