For those that don’t know, Zywave is a resource that publishes risk management articles and resources for independent agencies. Agencies can use these materials to educate their clients on a wide range of risk management topics. Every year they publish a market outlook for the upcoming year. This document is supposedly written to be distributed to customers, but it’s 47 pages of dense insurance material.
I’ve read the document, and I’m relaying the themes in a much more condensed format.
I’ll start with their pricing forecasts.
Line of Coverage Price Forecast
Property CAT-Free – 5% to 15%
CAT- exposed – 15% to 25%
General Liability Overall – 1% to 10%
Commercial Auto 5% to 30%
Workers Compensation -5% to 2%
Cyber 0% to 15%
Directors & Officers Private and Nonprofit companies – 0% to 5%
Public Companies — -10% to +5%
Employment Practices Liability 0% to 10%
As you can see from the pricing predictions, property and auto insurance are expected to be very challenging lines of business. The casualty lines of business are leveling off.
Recent reports have indicated that reinsurance renewals were stable. I think this is reflected in the pricing forecast.
Trends and Explanations
Severe weather patterns seem to be here to stay.
The cause of the increased amount of severe weather may be up for debate, but the increase in storms is not.
The East Coast experiences cold spells and hurricanes. The Midwest sees more hailstorms and tornadoes. Wildfires on the West Coast occur with greater frequency.
The amount paid out in claims has been increasing at a rate of 6.9% above inflation since 2000. That means over 20+ years, the amount paid in property claims has outpaced inflation by over 4X.
The insurance industry makes money by trying to predict the future. The weather patterns we experienced in the past no longer seem to tell us anything about what will happen in the future. This is making it almost impossible for insurance companies to determine accurate pricing for their products.
Reinsurance companies want nothing to do with property insurance
Insurance companies buy insurance for their products. It’s called reinsurance. When they can’t buy insurance for themselves affordably, that cost gets passed on to customers.
Imagine it this way. Let’s say an insurance market is a pizza. And the size of that pizza is determined based on how much money there is available in the marketplace. When the money is not available, the pizza is smaller. There are still the same number of people trying to eat pizza, but now each slice is more expensive and some people won’t get a slice.
Until insurance companies can figure out how to make money on property insurance, this pizza is likely to stay small. Bad news for all of us.
Inflation makes all claims more expensive
This theme came up for every line of coverage.
Buildings are more expensive to build because building materials are more expensive and the wages for the builders have increased. This makes property insurance more expensive. It also makes liability insurance more expensive because when you break someone else’s stuff, it’s more expensive to replace.
Since wages are increasing, this makes healthcare more expensive. This impacts workers’ compensation in multiple ways. First, since healthcare is more expensive, it’s more expensive to pay for someone’s rehab. Next, since wages are increasing, the payroll on workers’ compensation polices are increasing, and therefore increasing the cost of the policy.
Inflation works under the surface to make everything more expensive.
Supply chain issues are better than they were at the start of the pandemic, but they haven’t been totally resolved. A lot of business owners believe that this trend will continue for years to come. This means it takes longer to complete the same building project.
A friend of mine shared a story about a bathroom remodel. A job that should take 6 weeks instead required 6 months to complete. The builder couldn’t get the right supplies.
The same issue applies to vehicle repairs.
If your vehicle is in the shop, and the mechanic says it will take 3 weeks to get a part when it used to take 2, this means your vehicle will be unavailable 50% longer.
This trend is impacting the cost to rebuild properties and the amount of money businesses lose while they are shut down. It’s having the same impact on vehicle repairs.
Third-Party Litigation – some people are making money by funding lawsuits
God bless America. Some firms have figured out that if they pay for the lawyer, some people with a case are more likely to sue.
At the risk of going down a rabbit hole, I wonder if Charlie Munger would think we’re creating a system that encourages people to cheat. But I digress…
This trend has a couple of impacts.
First, there are more lawsuits than before.
Second, since there is a firm backing the lawsuit, they are more likely to push to go to court for higher settlements.
Third the settlements are larger.
This trend impacts casualty lines across the board, including General Liability and Workers Compensation
Lastly – Nuclear Verdicts
If you haven’t heard the term legal hellhole, you should google it.
There are some jurisdictions in America known for awarding outrageously large settlements.
On top of that, people mistrust corporations. There may be reason for it, but it makes lawsuits more expensive.
The impact I see here is that companies are scaling back on the umbrella insurance limits they offer to clients.
It’s a complex insurance market. Overall, the insurance industry is staying out in front of the trends in the casualty insurance marketplace. The pricing outlook reflects this. However, the trends in weather, supply chain, and inflation have made the property and auto insurance marketplaces very volatile.