Since 2019, commercial insurance buyers in North America have been searching for a break in the clouds. The second half of 2022 has ushered in a new environment that provides a brighter picture, one with improved pricing conditions, coverage, and capacity for many commercial lines of business. This is not to suggest it is time to celebrate soft conditions, but it does mark demonstrable improvement in the market. That said, one of the lone holdouts for a hard market, commercial property, is facing material headwinds, and the industry as a whole must mind the upward pressure that several macro factors may have on rate.
Every buyer is challenged to accurately assess and present replacement cost values that go up as the cost of labor and materials goes up.
The first of these factors is inflation in its many forms. The Consumer Price Index and slipping purchasing power may headline the news, but there’s also wage inflation, medical inflation, and, as anyone in the casualty world will tell you, social inflation. These factors are raising loss costs. On the property side, every buyer is challenged to accurately assess and present replacement cost values that go up as the cost of labor and materials goes up. Carriers, meanwhile, must recalibrate portfolios based on their growing potential exposure.
On the casualty side, nuclear verdicts fueled by social inflation continue to push tort costs and, subsequently, claims costs higher. But insurers have been dealing with these forces for some time now, and pricing adequacy is beginning to turn the market for buyers—rate reductions are possible and even approaching double digits in the best scenarios.
Property insurers have rekindled their tenacity to drive rate. This retrenchment is not solely driven by inflation but also by the continuing procession of loss events pushed by the extremes of weather. This brings us to the second macro factor we are focused on: Hurricane Ian.
Extreme weather of all kinds strikes in places where we haven’t seen it before, and places we’ve seen it all too often.
In addition to the personal tragedies that resulted from the punishing landfall, this was a big, albeit unique, loss event. While ultimate economic costs will take some time to play out, there is no doubt that Ian losses lean heavier on the personal lines side than the commercial side. However, the commercial response has been swift and dramatic. With retail insurers making immediate adjustments to catastrophe capacity and rate, reinsurers are telegraphing grim renewal conditions for 2023, which would compound the rate and structural pressures we experience today.
Whatever the fallout from the 2022 hurricane season, natural catastrophes loom large for our industry. Wildfire, not high on our lists a ten years ago, remains on our lists now. Extreme weather of all kinds strikes in places where we haven’t seen it before, and places we’ve seen it all too often.
Here are some highlights from our 2023 predictions:
General liability
Rate prediction: Flat to +10%
Liberal class action certification & a highly-organized plaintiffs’ bar
Desensitized jury pools & uncertainty around litigation in post-pandemic world
Those with exposures materially impacted by inflation may find more flexible rate outcomes
Automobile liability
Rate prediction: +3% to +10%
2021 AL segment combined ratio is estimated at 101.3
NHTSA puts the fatality rate for 2021 at 42,915 up 10.5% from 38,829 in 2020
Large auto verdicts: 300% increase over seven years in trucking claims
Distracted driving
Workers’ compensation
Rate prediction: -5% to flat
Profitable combined ratio for eight years straight
Opioid addiction
Aging workforce
Medical wage inflation
Medical technology advancements increasing treatment costs to reducing mortality
Umbrella liability
Rate prediction: High hazard / challenged class: Flat to +10%; Low / moderate hazard: -2% to +5%
After the peak in 2020/21, pricing adequacy has attracted greater global capacity
Risk-specific (two-tiered) underwriting remains, with high hazard risks or lower attachment points yielding worse outcomes
Uptick in frequency of punitive awards
Excess liability
Rate prediction: High hazard / challenged class: Flat to +10%; Low / moderate hazard: -10% to +5%
Even with improving capacity, the industry still faces the impact of nuclear verdicts, catastrophic liability losses and the expansion of litigation funding
A return at looking at pricing rate relativity between layers has emerged
Cyber
Rate prediction: Flat to +25%
An increased level of competition from cyber underwriters eager to write new business following the recalibration of cyber rates last year, has led to more nominal rate increases when organizations can demonstrate good cyber security controls year over year
D&O
Rate prediction: Public company – primary: -7.5% to +2.5%; Public company – excess: -10% to -15%; Private, not for profit – overall: -10% to 7.5%
Increased capacity from newer market entrants and an improved securities litigation environment continues to drive more competitive market dynamics
Broader market conditions have improved since the peak of the hard market in Q3 2020
Moderation has been significant and is expected to continue into 2023
Terrorism and political violence
Rate forecast: Terrorism and sabotage: +10% to +40%; Political violence: +20% to +45%
Current political/economic conditions and conflicts around the globe are helping drive up pricing for political violence and terrorism insurance
The crisis in Ukraine has added another dynamic to a marketplace already in turmoil from the lingering effects of the pandemic and global economic instability.
Captive insurance vehicles continue to provide access to otherwise unavailable or uncompetitive capacity for terrorism risk
Surety
Rate forecast: Flat
Stable loss ratios in 2022
96% of surety executives indicating that there are no plans to tighten underwriting in the near future
Excellent surety capacity with multiple new surety entrants
Infrastructure spend outweighing dampening residential market decline due to rising interest rates
Property
Rate forecast: Cat-exposed: +15% to +25%; Cat-free: +10% to +15%
Premium increases for most insureds will be driven by inflationary construction costs, heightened reinsurance pressures and possible catastrophe capacity constriction, while valuation of assets will be the key topic of conversation in 2023
So, while the grip of the hard market is loosening, buyers are not yet free from it. There are opportunities in the marketplace, which puts an increasing emphasis on the importance of analyzing and understanding your risks and being prepared to present them clearly and effectively to underwriters.
Use all the tools available to you, especially the analytic tools that steadily improve in their predictive value and ease of use. Work closely with your risk management partners — carriers and brokers — to make the most of the opportunities that do present themselves. Availing yourself of these resources will help make you and your organization all the more ready to face the ongoing challenges that lie ahead.