The current state of the insurance market

“Social inflation” – escalating litigation costs and their impact on claim payouts and how much carriers ultimately pay – continues to rise, pushing casualty costs up in the industry. (Credit: denisismagilov/Adobe Stock)

We have been in a hard insurance market, with 18 consecutive quarterly rate increases, that is the result of a confluence of several distinct factors. Before diving into them, a short explanation of a hard market is needed: A hard insurance market forms when the market swings up, with increased demand for insurance and reduced supply. Hard markets are characterized by relatively high premiums, fewer options for coverage and a reduced willingness of carriers to compete with one-another for business. This also results in less appetite for negotiating terms of coverage and decreased capacity for most types of insurance. The steady and significant rate increases in premiums are a key indicator of the current hard market. While everyone has their eyes on inflation, the roughly 10% rate increase in premiums in Q4 2021 far exceeds the cost of inflation over the last 15 consecutive quarters.

Primary causes

One persistent long-term factor shaping the current hard market is the continuing COVID-19 pandemic, which extended the period of near 0% interest rates for multiple quarters, resulting in insurers relying more on underwriting profits than investment income. The pandemic has also played a role in the current protracted economic volatility, which increases insurance costs, prompting insurers to tighten their underwriting standards.

Unpredictable major weather events are taking place with increasing frequency, resulting in harder to predict pricing in the P&C space. “Social inflation” – escalating litigation costs and their impact on claim payouts and how much carriers ultimately pay – continues to rise, pushing casualty costs up in the industry. This past year also saw the highest number of auto fatalities since 2006 – more than 31,000 (January – September 2021) – primarily caused by speeding. All of this results in insurance buyers seeing rising premium costs and retentions/deductibles, along with liability limits being cut. Some carriers are exiting the market and others are adding significant new exclusions or broadening existing exclusions in their policies.