As the insurance industry enters a new decade, it is faced with significant challenges unlike anything that has come before. These challenges are a combination of typical results-driven cycles and the unique aspects of today’s society. 

As agents consider the upcoming year, it will be very important to understand these issues, and to be able to explain them to their clients. Failing to do so will lead to disgruntled insureds who don’t understand why their rates are going up and their coverage is getting more restrictive. Communicating this correctly will lead to stronger client relationships and increased business.

The consensus in the market is that 2020 and perhaps 2021 will be years where overall rates rise. This will be across a wide range of products and be driven by several factors, the first of which is a recognition that rates are too low in a number of areas. Carriers have been fighting for business for years through a gradually softening cycle, and have managed to erode rates to the point where they are borderline profitable. With the loss of historic rates of investment income, carriers are forced to depend on underwriting profitability to drive their financials. Across many product lines, that point has been reached.

Several factors have made the current rate levels unsustainable. The first is the significant upswing in claims frequency and severity over the last several years. This spike in claims activity is driven in large part by changes in our society and how people and the courts view insurance. In addition, tools to press litigation exist today that didn’t exist a few years ago. Combined, this Social Inflation is putting significant pressure on the insurance industry.

In the mid-nineties, runaway jury verdicts led to a serious effort at tort reform across the country. By the early 2000s, half the states had enacted a version of tort reform with caps on damages, including punitive awards. This allowed carriers to begin lowering insurance costs for the next twenty years as their books became more profitable.  

In the last several years, however, many of those reforms have been eroded as they have been challenged as unconstitutional. This has allowed very large jury verdicts to once again occur across many jurisdictions. By some measures, significant jury awards (those over ten million dollars) have tripled in the last five years. This has had a chilling effect across the country as carriers try to analyze the impact on their books of business and determine corrective action.

There has also been an erosion in the perceived value of money which has had a related effect on claims. Apparently everyone feels like they should be a millionaire, and an accident involving a commercial company is an opportunity to achieve that goal. Situations that might not have led to a formal claim in the past are now turning into full blown claims against the company with legal counsel involved. Any commercial account in any way related to an accident is pulled in and tied to the resulting loss. Carriers are seeing judgements against them they never would have expected, and claims that at one time would have been settled for a few hundred thousand dollars at worst, are now settling above a million or more.

Plaintiffs attorneys are also utilizing time demand strategies to force carriers to make fast decisions about claims or face potential bad faith judgements. A strategy crafted to force carriers to act in a timely fashion is being used to force responses on very complex situations, often leading to higher dollar payments.

Another component of Social Inflation is the presence of Private Equity backed litigation. This is where a Private Equity firm provides significant funds to an attorney to prosecute a case, with a percentage of the final payment as their compensation. This allows plaintiffs and attorney’s with limited resources to pursue litigation without fear of financial failure. This imbalance in the process is leading to far more lawsuits that are pushed further than ever before.

These social factors have combined to put a huge amount of stress on an already thin pricing model.  Carriers now need to make significant adjustments in their rates as we move into 2020 and beyond.  They warn of double digit increases in auto related risks if coverage is even offered, and a reduction in overall limits offered. Excess pricing, CGL, and Property rates are all forecast to climb in many areas. The insured who needs twenty million of coverage may have to get two or even three different companies involved to put the full limit together.

Until our industry learns to adapt to the new socially driven issues, we should expect tighter underwriting and higher rates for the foreseeable future. 

Because of these factors, there is the potential for a reduction in the number of markets offering environmental products and supporting lines. Whether through acquisition or refocusing resources, we expect to see the number of viable programs drop over the next two-year period. This is yet another reason to choose your partners carefully. Carriers with a real track record in the space are the most likely to weather this storm. They are also the companies most likely to work with you as you handle your book. They take a long view and know that knee jerk reactions seldom support long term relationships.

For agents dealing with this seemingly quick change in the market, the key will be early communication with their clients and setting realistic expectations. Gone are the days where flat or reduced renewals are possible. Wishing it were not so is not an effective strategy, so getting in front of it with your client is key. 

The best risks may see a nominal increase in some lines, while more challenged accounts could be severely impacted. Preparing your client for the reality of, and the reason for, these changes is important. Companies with good loss histories, meaningful safety and loss control measures in place, and a track record of solid performance will be the least impacted. Those with less than stellar results will see more of an increase, while those risks with loss frequency issues may find it difficult to find coverage at affordable prices.

While this correction may seem severe, it is the result of a decade long trend of rate reduction and coverage broadening. Insureds have enjoyed rate stability for years, and while this correction may not be appreciated, it is sorely needed to allow the industry to weather the new reality. Until our industry learns to adapt to the new socially driven issues, we should expect tighter underwriting and higher rates for the foreseeable future. 

The silver lining in all of this is that it is not unique to one carrier or one product. Everyone is in the same boat. This means that those agents who learn to handle this situation effectively quickly stand to gain a great deal over the next several years.