Authors: Charlie Lenz, ACAS, MAAA, Principal & Consulting Actuary, and Les Vernon, FCAS, MAAA, Senior Consulting Actuary
Property and casualty insurance brokers are reporting significant rate increases and reduced capacity, resulting in less favorable coverage terms and often higher deductibles or self-insured retentions being offered. Causes are higher underwriting losses, lower investment returns, and now, the COVID-19 pandemic. This has made finding the coverage a business needs at an affordable price increasingly difficult.
The Commercial Auto Liability line is experiencing increased frequency and severity of claims, producing poor combined ratios. Contributors to the increased frequency of claims are more vehicles on the road and distracted drivers in recent years. A shift to newer vehicles with advanced driving technology has made repairs more expensive.
The General Liability line is experiencing increased severity of claims due to a greater portion of claims being litigated and social inflation, where juries are increasingly calling for greater corporate accountability, and high awards are becoming more acceptable.
The uncertainty surrounding the COVID-19 pandemic and the potential litigation to expand coverage for business interruption retroactively has placed upward pressure on Property rates. In addition, recent hurricane and wildfire activity has forced steep increases in premiums for risks with catastrophe exposure.
Exposure of essential workers to COVID-19 infection combined with mandated coverage expansion in some jurisdictions is threatening to increase costs for workers compensation insurance – one of the few lines of business not yet seeing upward pressure on premium levels. There is also uncertainty regarding potential future litigation of health care providers related to COVID-19, which, in addition to an increased frequency of large claims, is contributing to increased rates in medical professional liability coverage after years of flat rates.
With many more workers shifting to working from home as a result of the COVID-19 pandemic, if only temporarily, businesses are less in control of their computer networks and are more susceptible to phishing and hacking activity. As losses continue to rise, rates are predicted to see double-digit increases.
There are alternatives to suffering through multiple years of increasing insurance premiums and/or coverage reductions. If your organization is experiencing lower claim trends than the industry, self-insurance of some form may be an option worth exploring. Your company can retain more of their own risk via a large deductible policy or participation in a risk retention group. Alternatively, the company can form a captive insurance company (or participate in a group captive) to insure against some exposures for which it currently pays a high premium. Potential advantages are lower costs, insulation from some of the volatility of the insurance cycle and, in the case of a captive insurance company, control over claims administration and direct access to reinsurance markets.
In order to determine if self-insurance is a good option for your organization in this hard market, historical claims experience can be used to perform a retention analysis for a large deductible option and a captive feasibility study for a captive option.