Why insurance premiums are going up
The insurance market is always changing, and for the past few years it has been hardening as insurers adapt to increasing threats (this means getting tougher in the ability to access cover and price). And this is the case across all classes of insurance, retail, commercial, and life insurance.
Each of the classes of insurance have their own unique reasons why they are having to increase the cost of providing their products.
In this article we will look at commercial or business insurance.
There are a few main things that are causing this hardening market, which are creating the need for insurers to increase rates, these are Social Inflation, Severe Weather, Economic Factors, Cyber & data risk, & Covid-19.
Looking at these five factors and starting with social inflation which is one of the primary reasons.
Insurers are currently seeing higher litigation rates, there are now broader definitions of liability, more client friendly legal decisions and larger injury compensations. There is a general anti-corporate sentiment and a sense that “someone will pay” for this regardless of negligence, are among some of the contributing factors. There are now more litigation funding strategies where law firms have a no win no pay philosophy or third-party investors may agree to cover a client’s legal fees in exchange for a portion of any payments awarded, this tends to encourage clients to follow the path of litigation rather than settle and it also encourages attorneys to inflate the value of the claim.
Severe weather impacts
We are also seeing more extreme weather events such as, fires, floods, and droughts we are definitely a country of extremes, all have taken their toll over the past decade. With fire been the most significant in damages with the cost sitting somewhere around $100 Billion. Historical data of these losses and current rates cannot reflect the severity or frequency of current weather patterns, which makes it more difficult for insurers to forecast claims costs. This is contributing to increased pricing from the reinsurers resulting in some of the largest rate increases we have seen for some time.
The Loss ratios of all insurers is increasing, interest rates on investments is at an all-time low giving much lower investment income. With insurers unable to secure decent returns on equity, they are underwriting risks more thoroughly and subsequently increasing premiums. One area that has not been as severely impacted is workers’ compensation, which has not seen losses like the other areas. However, workers’ compensation insurers are concerned that inflation-driven rising medical costs, one of the biggest contributing factors to the rising medical costs is mental health, overall the indicators are that mental health concerns are on the rise and may create a huge economic cost. Recently, hospital emergency departments in Perth have had capacity issues, reports have indicated that one cause of this is the increase in mental health patients. This plus an extended period of low interest rates, will affect their loss ratios negatively and will impact pricing.
Cyber and data risks
Data security and privacy continues to be one of the top risks for many business. The average ransom payment has increased significantly. As claims values and cases increase, cyber insurance premiums are starting to increase anywhere from 5 percent to 15 percent. The rise in claims are brought about by the increases in ransomware and social engineering attacks.
Even before the impacts of COVID-19, businesses were seeing the effects of a hardening insurance market, which has caused higher business insurance rates. COVID-19 has made the uncertainty in the market greater than it was, adding pressure to prices.
How to navigate the hard market
Like all other challenges business owners have, it is unclear when a hardening market may turn. Considering this uncertainty and the environment we are in, you need to spend time with your broker reviewing your insurance and options to get the correct coverage so you can navigate and maintain through this hardening insurance world we are in.