Since 2020, insurance carriers have increased premiums due to the uncertainty the pandemic created. Now in the post-covid era, the economic and social fall out has led carriers to significantly increase their rates. There’s no sense of sugar coating it. Here are the reasons why.
Spotlight on Inflation
Yes, its true, inflation has come down off its high of 9.1% in June 2022. However, inflationary concerns have carriers concerned about underweighted balance sheets. In late 2022, a McKinsey report estimated that inflationary costs added approximately $30 billion of unexpected loss expenses industry wide. Increased medical, construction, repair, and overall labor costs are all driving up losses. These increased loss expenses drive actuaries to increase rates underwriters apply to premiums.
Inflation has also driven up ratable exposures. Many manufacturing, distribution, processing, and construction insureds are seeing their top line revenue increase, not due to having more work or producing more product, but rather increased pricing to reflect inflationary expenses.
Solution: A candid and detailed conversation with your trusted insurance professional affords the underwriters a clear picture of what’s going in on your business. With today’s market conditions, creative underwriting and levering strong relationships are key to successfully keeping premiums manageable.
Strained Investment in the Reinsurance Space
Another critical factor driving premiums, especially in the excess casualty (liability and umbrellas) space, is the limited capital invested in the reinsurance market. Private equity and investors have been putting less money into the reinsurance carriers because the returns have been diminishing as compared to other investment options. The global inflationary environment has eroded returns, reducing the incentive for investment. The lower capital injected into the industry has limited coverage offering availability (supply), while the demand for umbrella / excess liability coverage has grown, thus premiums have increased.
Investors are also changing their risk appetite favoring upper tiers on liability towers. In years past many carriers were offering excess liability immediately after the primary liability limits for around 35-45% of the primary liability premium. More and more carriers are only interested in offering terms after the first $5MM of limits. The limited insures now offering lead excess or “buffer layer” are now seeking 65% to 100% of the primary premium. Since 2019 excess casualty premiums are up 300-400%. It’s becoming more common 3-4 carriers are needed to achieve the same limits of liability a single carrier could offer just 3 years ago.
Public Opinion Drives Settlements
The other reason premiums have increased is because of “social inflation” and “nuclear verdicts” when it comes to jury awards. Some carriers refer to this as “legal system abuse”. The industry is seeing plaintiffs file more lawsuits when compared to the last few years. While some suits may be frivolous or unfounded, carriers are required to defend these suits, contributing to the loss expenses.
As it pertains to the excess liability and umbrella market, jurors are awarding plaintiffs significantly higher awards than ever before. Many of these awards are breaching the primary general liability policy and impacting the excess liability & umbrella layers. Several carriers (Travelers, Liberty Mutual, Hartford, State Farm, etc.) have reported 30-40% increases in awards as compared to a decade ago. This is due to a few a factors. The public sentiment of corporations and insurance carriers in specific judicial territories (Metro NY, California, Cook County, IL, Metro Atlanta to name a few) are less than favorable. Influenced by mass / social media reporting unscrupulous business practices of some corporations, this negative public perspective influences juries, often times viewing a large award as justice against corporations or institutions.
Additionally, juries are now comprised of younger members of the populace from the millennial generation and Gen Z. These younger jurors frequently have misconceptions about reasonable awards due to portrayals of affluence at their fingertips on every social media platform.
Lastly, the rate of information exchange is unprecedented. Plaintiffs’ counsel, jurors, and spectators communicate the status of the case in real time, often with their respective inherent biases. This immediate information exchange influences jurors to issue larger than normal awards.
Nuclear Verdicts and Litigation Investment
The Chubb Bermuda 2022 Report highlights the growing settlements in various sectors, including manufacturing, real estate, and construction, with some exceeding $1 billion. Parathon Strategies calculates the median verdict against corporate defendants has increased by 55% since 2010, with total corporate nuclear verdicts skyrocketing from $4.9 billion in 2020 to over $18.9 billion in 2022. The average verdict has also doubled in the last 12 years, reaching $41.1 million.
The reason this new factor is making such an impact is due to new investment in litigation funding. This allows plaintiffs to hold out for higher settlements and additional resources to be deployed by plaintiff’s counsel to solidify investor returns. In 2021, Chubb reported litigation funding surpassed $17 billion with no signs of slowing.
What to expect for 2024
With the insurance industry losing $27 billion in 2022, casualty carriers are seeking 8-12% increases with the expectation their own loss costs are going up 9% on average. For habitational and construction industries, most specifically in the most litigious territories mentioned above, expected steeper increases.
The challenges facing the US Casualty Insurance Marketplace in 2023 are multifaceted, driven by inflation, legal developments, and evolving industry dynamics. It is essential for business owners stay informed, adapt strategies, and engage in open dialogue with their insurance professionals to navigate these complex waters effectively.
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