The year 2020 challenged the property and casualty insurance industry in numerous ways, accelerating an already tightening market that started in 2018. In addition to increased catastrophe losses and lower investment yields, the market faced compounding challenges with COVID-19 as well as political and social unrest.
Midway through 2021, market conditions continue to tighten. Insurance carriers remain focused on improving underwriting results, with scrutiny surrounding building valuations, complete and correct underwriting information, policy form language, and adequate deductible levels. However, while underwriting has become stricter and more difficult to secure for certain classes of business, the industry remains financially strong. Capitalization for insurers and reinsurers has proven markedly resilient.
Losses from U.S. natural catastrophes in 2020 are estimated to be $65 billion — a significant increase from 2019, which had an estimated $26 billion in losses. The costliest single event was Hurricane Laura, hitting the Louisiana coast as a Category 4 storm and creating an estimated $10 billion in insured losses. This past year’s Atlantic hurricane season set records with 30 named storms, 12 of which made landfall, exceeding the previous record of 28 named storms in 2005 and 9 landfalls set in 1916.
Losses in the United States from severe storms accompanied by thunder, lightning, heavy rain, hail, and strong winds are estimated to have cost insurers $30 billion in 2020. Catastrophe modeling and years of consecutive increased losses indicate the cost of insuring this peril will continue to rise and further the need for reinsurance. Carriers are pushing a minimum of 1 percent to 2 percent wind/hail deductibles for severe storm exposures when, in years past, they have used flat dollar deductibles.
Despite hurricane and major storms accounting for an estimated two-thirds of insured losses, wildfires in the United States set distressing records of their own in California, Colorado, and the Pacific Northwest. Colorado experienced three of its largest fires on record, and Oregon recorded its worst year ever, with more than 4,000 homes lost.
After the most active Atlantic hurricane season on record, rates and wind deductibles for property insurance, both commercial and personal, are rising in most coastal states. Specifically, the Gulf Coast is seeing the market tighten in the aftermath of Hurricanes Laura and Zeta and the Texas winter storms. The placement of larger property accounts of greater than $5 million is becoming very difficult due to reduced market capacity, and lower valued risks of under $1 million are becoming more difficult to place, especially older construction built before 1995.
With the cyber-risk hazard environment, especially ransomware, worsening significantly, prospects for the U.S. cyber insurance market are grim. Cyber insurance is now a primary component of a corporation’s risk management and insurance purchasing decisions. Cyber insurers are challenged by the growing sophistication of cyber criminals who have exploited malware and cyber vulnerabilities faster than some companies have been able to protect themselves. Hackers’ motives appear to be changing, from stealing identities to shutting down systems for ransom. Ransomware claims now account for 75 percent of cyber claims.
The rate increases for cyber insurance outpaced that of the broader property/casualty industry, but the increase in cyber losses outstripped the rate hikes, which suggests trouble for 2021 as ransom demands continue to grow. In addition, underwriting guidelines and requirements have become much stricter. Less than three months ago, underwriters would provide quotes without an application using revenues and number of employees as a basis for premium. In this short 3-month period, underwriters are now requiring completed applications, confirmation of offsite backup, and implementation of multi-factor authentication before they will release a quote.
Around the country, lawsuits are proliferating as property owners seek coverage for business interruption losses stemming from government-mandated shutdowns. The impact of these suits remains to be seen. Insurers, however, are actively clarifying terms to insure property policies do not provide inadvertent coverage for pandemics and communicable diseases. Such exclusions have become nonnegotiable as carriers reevaluate business interruption.
According to Independent Agent magazine, the average rate for commercial lines of insurance increased by 5.9 percent in the second quarter 2021, which is down from 7 percent in the first quarter of 2021, according to Market Scout. The composite rate for personal lines is also slightly down to 4.8 percent from a 5.6 percent first quarter rate assessment.
Independent Agent writes that while the overall average rate index moderated, all commercial segments saw rate increases. Professional liability insurance (errors and omissions insurance) rates positively affected the overall commercial average rate with an increase of just 4.3 percent in the second quarter, compared to the first quarter’s 11.3 percent. However, commercial umbrella and excess liability insurance experienced large rate increases, which saw an increase of 11.6 percent. Directors & officers liability rates increased 11 percent, commercial property increased 9.6 percent, auto increased 9 percent, and business interruption increased 7 percent.
“This quarter saw a slight trend towards rate moderation, but this could be an aberration,” says Richard Kerr, CEO of Market Scout as quoted in Independent Agent. “Let’s see how the rest of the year plays out before we make any predictions about market rates moderating. We are now entering hurricane season and this fall we will be in wildfire season. Property rates continue to rise and could get even higher.”
Below is the market data of commercial rate increases from the second quarter, as published in Independent Agent:
Business interruption: up 7 percent
Business owners policy: up 4 percent
Inland marine: up 4.2 percent
General liability: up 6.3 percent
Umbrella and excess: up 11.6 percent
Commercial auto: up 9 percent
Workers’ compensation: up 1 percent
Professional liability: up 4.3 percent
D&O liability: up 11 percent
Employment practices liability: up 7 percent
Fiduciary: up 2 percent
Crime: up 3 percent
Surety: up 1.3 percent
Additionally, small commercial insurance buyers paying $25,000 or less in premiums saw a slight rate decrease from 6.3 percent in the first quarter to 5.3 percent in the second quarter. The personal line rate increase market data from second quarter is as follows:
Homeowners under $1,000,000 value: up 4.6 percent
Homeowners over $1,000,000 value: up 5.6 percent
Automobile: up 4 percent
Personal Articles: up 4 percent
A conversation concerning the state and the future of the insurance market will inevitably take a turn towards losses that are reported every day in the newspaper or on television — the latest cyber hack, the $5 million ransomware attack on the Colonial pipeline, or the Bootleg fire in Oregon, which destroyed over 400,000 acres. The examples continue with the condo collapse in Surfside, Florida, and the start of the hurricane season with last year’s record number of landfalls in mind.
When viewing these catastrophes, common sense dictates higher rates, less capacity, and more difficulty in finding insurance companies to take on the exposure of complex risks in a tighter insurance market. That will certainly be the case for the remainder of 2021 and could well continue into 2022. Stricter, more disciplined underwriting will no doubt have a positive effect on the market, and one can hope for a dose of good luck as well. The results of that will be seen next year, and perhaps market conditions will ease at that time, bringing a little less pain for the insurance buyer when viewing renewals.
The History and Future of Insurance
It would be difficult to imagine a world without insurance. We take for granted the ability to cover a multitude of risks inherent with the modern world, but it has not always been that way. Beginning in ancient times, insurance has evolved and grown with the complexity and development of human culture. As advancing technology created greater material wealth and interactions among us, the ability to cover the risks associated with those developments has advanced as well.
The use of insurance traces back to the ancient world first recorded by the Babylonians in The Code of Hammurabi in 1750 B.C. The principal on loans known as bottomry contracts given to merchants who were shipping goods that were lost at sea did not have to be repaid. The interest on the loans covered the risk. Later, rates began to vary based upon the season in which the shipments took place — lower during favorable months and higher during unfavorable.
The first types of life and health insurance were used by the Greeks and Romans through benevolent societies that provided assistance to families suffering from the death of a loved one. The first recorded insurance policies independent of loans or contracts appeared in Genoa in the 14th century. This significant development shaped the course of insurance forever.
By the latter part of the 17th century, London had become an important port in world trade. The need for cargo or marine insurance became apparent. Lloyd’s of London, which began as a coffeehouse during this time, was the meeting place for merchants, bankers, and insurance underwriters. The proprietor, Edward Lloyd, produced a list of shipping information that became known as Lloyd’s List, which is still in existence today. By the middle of the 18th century, Lloyd’s transformed into a professional group of underwriters for marine insurance. The term underwriter came about at this time when each risktaker signed their name under the amount they were willing to accept. Lloyd’s grew along with the expansion of the British Empire, becoming the dominant insurer in Great Britain. It then evolved into a present-day reinsurer and primary insurer.
The London fire of 1666, which destroyed more than 30,000 homes, became the impetus for fire insurance. The need for fire insurance migrated across the Atlantic with the establishment of the first American insurance company originating in Charleston in 1735. The Friendly Society for the Mutual Insuring of Houses Against Fire was founded by Charles and William Pinckney. Unfortunately, four years later, a huge fire destroyed more than 300 buildings and with them the company. Later, several fire insurance companies in Charleston provided metal plaques to be displayed by policyholders on the outside of their homes. These plaques served as proof of insurance as well as advertising for the insurance companies. Some of these plaques are still visible today on Charleston’s older homes.
Benjamin Franklin in 1752 brought together a group of Philadelphia businessmen to launch the Philadelphia Contributorship for the Insurance of Houses from Loss by Fire. New principles established by this company helped create the structure for modern insurance. The inspection of properties and the setting of rates based on risk are two of them. Standards in construction and the increase of rates if conditions change are others initiated by Franklin’s company.
Throughout the 18th and 19th centuries different forms of insurance became available that are commonplace today, such as life and health insurance. Accident insurance, the forerunner of disability insurance, began with the advent of the railways and the dangers involved with this new form of transportation. As technology grows and expands, so does the insurance industry.
Cyber insurance is one of the newest offerings that until recently was considered a novelty. The hacking of Colonial Pipeline and countless other businesses large and small has focused attention on a need that is clear and present. Our world is digital in all respects, from the smallest retailer to the largest conglomerate, and is dependent upon the internet and computing. This dependence is the Achilles’ heel of modern society that hackers prey upon, and crypto currencies provide a way for them to get away with it. Things have changed dramatically since the days of Ed Lloyd, but the future looks even more transformative.
Connected devices, artificial intelligence, deep learning, and other technologies will change the face of the insurance industry as it will everyday life for all. AI is already with us in our homes, cars, and what we wear and has become more integrated in our lives than we probably realize. The COVID-19 pandemic accelerated this trend with the need for remote work and communication. Companies and individuals had no choice but to adapt to a faster pace of change than would normally have happened.
Estimates of one trillion connected devices by 2025 will have a profound influence on the direction of many aspects of life not the least of which is the insurance industry. All these connected devices will create a flood of data that will give carriers greater understanding of their client base. This will allow them the opportunity to offer more personalized service and new products leading to real-time insurance delivery for unique individual situations.
Robotics continues to advance at a rapid pace, changing the ways we interact with the world; 3-D printing, drones, autonomous farming equipment, and advanced surgical robots are advancing at a rapid pace and will be ubiquitous in the next 10 years. Each one of these technologies and their greater integration into our lives and businesses will create new insurance needs that will demand coverage. A common attribute of new technology is the compression of time. Cars and jet aircraft have drastically reduced the time to travel and ship merchandise. AI and deep learning will reduce the time of purchasing insurance. Copious data on individual behavior coupled with AI algorithms will reduce the time needed to create risk profiles and offer the insurance requested.
This will also change the current paradigm of the purchase and annual renewal model. Continuous purchase cycles will become more the trend as insurance products become more personalized and tailored for commercial and personal lines. Insurance will become more specific and segmented than what has been traditionally offered and will be purchased rapidly on an as needed basis. Microcoverage, such as phone battery insurance or what is referred to as usage-based insurance, will become prevalent and closer to the norm. This insurance will offer a pay by the mile, time, or usage concept initiated by companies such as Uber and Airbnb.
The disruption resulting from the advancement of technology is nothing new. The creation and implementation of life-changing tools and methods has been a part of mankind since our earliest beginnings. The newest form of technological change derived from the digital revolution will create challenges and opportunities for the insurance industry. The consumer will benefit from more and better individualized products and speed in consummating transactions. One thing is for sure though — as long as humans exist and interact, they will need insurance.