2020 has been a year of major change in the insurance market. With the addition of coronavirus-related effects on carrier loss ratios and investment portfolios, the current state of the market is best described as turbulent. However, even before the onset of COVID-19, certain lines of coverage were seeing double-digit percentage rate increases.
What can businesses expect on their next renewal? In the next year, the industry will see significant renewal rate increases, reductions in the limits of coverage offered on renewal and the addition of coverage restrictions of limitations. Here’s what’s driving this hard market.
COVID-19 Bankruptcies
In its devastation of the U.S. economy, the coronavirus has seemingly spared no one. From major department stores, gyms, entertainment giants and mom-and-pop shops, the retail industry has been affected by stay-at-home orders, curfews and social distancing measures, causing many to require financial restructuring.
COVID-19-related bankruptcies have been hurting investment returns, and experts are expecting an additional spike in bankruptcies over the next six months[1] as the longer-lasting effects of the pandemic continue to take financial toll.
The pandemic is not the only thing affecting rates. There are other social and economic factors driving rate increases.
Major Weather Events and Natural Disasters
2020 has seen many extremes, including a record number of wildfires and hurricanes. So far this year, the U.S. has had 16 natural disasters (including wildfires, hurricanes, tornadoes and drought) that each caused at least $1 billion in damage, [2] tying the record set in both 2011 and 2017, with several months left to go.
Social Inflation
Social inflation, or the general feeling that someone needs to pay when there’s damage or sustained injury regardless of negligence, is leading to higher claim costs for underwriters. For example, the reopening of the statute of limitations for sexual abuse claims has paved the way for significant class action lawsuits and similar litigation. There is also an upswing in lawsuits, particularly employing practices related lawsuits, in an effort to right the wrongs of the past. In some cases, juries have awarded verdicts that are disproportionate compared to the economic damages. Add to that the impact of riots and it has piled up losses for the insurance company.
Lower Insurance Rates
The biggest single driver affecting renewal rates is lower interest rates, as lower interest rates mean lower investment income for insurance companies.
10 Year Treasury Bond Yield
Most insurance companies are invested in the bond market, not the stock market, and significant dips have made a significant impact on their investment income portfolio. Just three years ago, the 10 Year Treasury Note was trading at 3.12%. Today’s rate is 0.9% with the 6 month treasury bills yielding 1.1%.
What Can Employers Do to Offset Rate Increases?
Given the losses and reduced investment income we named above, we can expect rates to increase in 2021. Even so, there are a number of things employers can do to help ensure that they’re getting the right coverage at the best value in 2021.
Watch the on-demand webinar for our recommendations, plus what to expect across specific lines of coverage, including property & casual, workers compensation, D&O liability, cyber and more.
