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Today’s Underwriter-Driven Hard Market Report (and What We Can Do About It)

Prepared by our friends at Beyond Insurance Global Network

To our valued customers:

As a trusted advisor to your organization, we felt it was appropriate to provide you with a state of the insurance industry 2021 report. We are in what is defined as a hardening market. We last saw this market cycle in the early 2000s. Some describe this cycle as an Underwriter-Driven Hard Market.

In the following report, we have outlined why we are in this market, and what you can expect moving forward in 2021 and beyond. We hope that you find this information valuable.

What are the industry performance drivers leading to today’s U.S. property & casualty market?as we explore industry performance drivers, there are three trends over the past decade impacting today’s insurance marketplace.

  • Industry Surplus – This is the cushion that allows carriers to make up for imbalances from an asset or liability perspective when they take on substantial risks. Over the last decade, the surplus within the insurance industry has grown from $550 billion to approximately $870 billion as of Q3 in 2020. That is approximately a 60% gain. In short, the industry has a lot of capital to take on more substantial risks.
  • Premium Growth – Across the industry, net premium growth has grown from $425 billion to $660 billion over the last decade. With substantial growth like this, when supported by the industry surplus mentioned above, there is still additional room for the industry to take on greater/more risks and be able to absorb those losses should claims occur. Insurers have not been able to write new business at the same rate that the industry has been developing a financial cushion.
  • Underwriter Profitability – The US P&C market has only generated an underwriting gain in nine of the past 17 years. Prior to 2004, the last underwriting gain was at least 30 years earlier. While this shows enhanced underwriter discipline, it also highlights the challenges carriers have faced as a result of several underwriting challenges. The next page outlines several problems that continue to have carriers concerned.

To make up for underwriting losses due to increased challenges, investment income has historically been the largest (often the only) source of earnings for property and casualty insurers. Unfortunately, insurers over the past decade have earned increasingly lower investment income as interest rates remained at historically low levels.

So why are underwriters and agents struggling to write more profitable business?While the findings above show that there is a lot of capacity for the industry to insure more organizations, the fact of the matter is there are two major impediments:

  • Many ask if more business is even there to write. The fact of the matter is, research shows that the industry is more commonly competing against one another over share of wallet.
  • For the organizations that are insured, insureds do not see the ROI of investing in additional insurance solutions regardless of the level of risks their organization might be exposed to. Business owners will walk away from options if they do not feel it is priced competitively.

 *To put it a different way, the US insurance industry is like an exceptionally large bucket that can only be filled halfway*

Underwriting challenges in 2020 and their impact on the U.S. property & casualty market in 2021 When reviewing 2020, there were four major underwriter challenges that impact 2021 – catastrophic losses, difficulties in some casualty lines because of social inflation, COVID, and the interest rate environment. We will break them down in more detail below:

  • Catastrophic Losses: Without a crystal ball, there is no way any organization can predict the weather throughout the year. Catastrophic losses have been high in three of the past four years, leading (re)insurers to become much more conservative as regards property underwriting, including both sharp price increases and changes in terms and conditions. We would have to look back to 2013 and prior to find a stretch of time where the US property market showed lower than average losses in this area. And, while there are a handful of factors at play, analysts predict the number of major catastrophic weather incidents, from hurricanes to fires, could well continue to rise.
  • The Rise of Social Inflation: Much less of a wild card when compared to catastrophic losses, factors impacting social inflation have been well documented. The increase in frequency, severity, and settlement size of recent litigation has carriers concerned. When you see these large lawsuits on the news, remember that many of these cases are typically covered by insurance to some degree, and the trickle down may impact your rates. We expect excess, general liability, and some professional liability programs to be impacted the hardest as this trend continues.
  • COVID: The losses have not been as large as originally expected both in the U.S. and globally. For most cases, the courts have sided with carriers over the past year in cases related to business interruption. Estimates of total losses globally, resulting from COVID related cases, range anywhere from $30 billion – $100 billion depending on the analyst. While we anticipate the international insurance industry taking losses due to COVID, we do not expect COVID to have a major impact on U.S. P&C rates. This does account for indirect impacts from COVID such as bankruptcies. If there were rate increases, it may be dependent upon new state laws or mandates (such as workers compensation presumptive coverage rules certain jurisdictions. We may also see increases in programs like event cancellation coverage, though almost certain with Covid-19 exclusions.
  • Interest Rates: It is a fact that interest rates have been historically low over the last decade. With that in mind, as interest rates begin to rise as the economy begins to start up again, this should have some impact on insurance premiums. We expect the rise in interest rates to somewhat slow the premium rate increase – good news for you!

 To sum up the historical data above:

  • While the industry appears to be well capitalized with capacity to write additional business…
  • …Underwriters have been forced to maintain underwriting discipline in the face of lower investment income and uncertainty around rising issues like weather-related catastrophe losses, more aggressive legal awards in certain liability lines and potential Covid-19 related losses.

How will this impact your rates? Before we dive into how this historical data could impact your family or business, we want to reinforce that below are simply predictions. There are exceptions to every rule, and the below information is being provided as a general rule of thumb and written in broad brush strokes. Similar to our carrier partners, during renewal we review each account on a case-by-case basis.

  • Personal Lines – The rating cycle for personal lines insurance has been much less pronounced. US home and auto rates have historically been much more predictable than certain commercial lines. As a general rule of thumb, we anticipate much less of an upswing in rates for personal auto rates due to COVID and less drivers on the road. We also expect a similar trend with homeowner rates with the exception of homes in areas impacted by major catastrophic weather.
  • Commercial Lines – Based on previous year’s data, we predict workers comp rates to be slightly down or remain flat. Unfortunately, with commercial property, we anticipate an increase dependent upon the location of your property, and the property’s exposure to past incidents like severe weather. Finally, on lines like general liability, professional, and excess, it will be dependent upon the industry. Overall, on lines like D&O, commercial auto, and medical malpractice, we expect rates to increase as analysts view these as very problematic.

So, what can we do together?

As a risk consultant, it is our job to better understand all the risks your organization faces using a proprietary risk assessment process. This process enables our team to create a case for you and your organization by creating a feeding frenzy in the underwriter marketplace. While the underwriter community backs decisions supported by historical data, and predictive analytics, it is our experience that when presented with an outline of your organization’s exposure identification, and a multiyear roadmap of strategies to manage and mitigate risks (beyond merely risk transfer to the carrier), we increase the likelihood that an underwriter will present favorable terms.

*To learn more about this process, or our unique quantifiable risk assessment tool, please reach out to one of our Risk Advisors*