With commercial lines rates continuing to rise, there is no doubt you’ll have customers asking why. These conversations can be difficult – especially if the customer hasn’t had a recent claim.

What influences rates?

As you know, rate is not driven by individual behavior alone. Premiums are largely influenced by broad market trends that impact all customers. Additionally, with current premium pressures, size does not matter. Companies of all sizes, in all industries, in all regions are seeing rates increase.

To help support your conversations and build even more trust with customers, we’re providing insights on what’s driving the hard market. As always, we’ll continue to monitor rate trends vigilantly and provide additional thoughts on what you can share when your customer asks why is my premium going up?

Jump to: Social inflation | Auto | Property | Workers’ compensation | General liability | Management and executive liability | Professional liability
 

Social inflation

Over recent years, there has been a rapid and meaningful increase in the cost of liability and casualty claims, which in turn has driven up premiums in several commercial lines. Known as social inflation, this trend includes significantly increasing jury awards and nuclear verdicts, climbing medical costs, roll backs of statute of limitations, more third-party litigation funding, and shifts in litigation/legal practices. The influence of social inflation directly impacts the underwriting losses and reserves of insurance companies, resulting in a higher need for rate.

• The average general liability combined ratio was estimated at 104% for 2019, making it more than five years of consecutive underwriting losses. The 2019 auto liability combined ratio was 110%.^[1]  
• There has been a steady increase in the bodily injury payouts associated with commercial auto and nuclear verdicts. Commercial auto-related nuclear verdict payouts have grown from $300M in 2011 to more than $1B dollars in 2019, with losses related to non-economic damages playing a significant role.^[2] 
• Civil litigation and compensation awards have seen significant growth over the past five years. Researchers found the top 50 single bodily injury verdicts climbed from $27.7M in 2014 to $54.3M in 2018. This is related to the frequency of severity related claims.^[3] 

Auto

• Since mid-2020, mileage activity has rebounded, nearing pre-COVID-19 levels and resulting in more vehicles, miles driven and distracted driving.
• People are driving faster and there’s been an increase in reckless driving. Some states have seen half the traffic but double the fatalities.^[4]  According to the National Highway Traffic Safety Administration, U.S. traffic deaths have jumped to the highest rate since 2005, rising 13.1% in the months after coronavirus lockdowns ended.^[5]
• For more than two years, collision repair costs have risen above the rate of inflation.^[6]
• Litigation continues to drive up the cost of auto insurance. More than half of bodily injury claimants hire attorneys.^[7]
• With COVID-19, more businesses are using delivery, creating a greater need for drivers. In turn, driver shortages are placing more inexperienced delivery drivers behind the wheel. 
• A lack of claims activity does not necessarily result in minimizing or reduced rates, as other territory specific factors influence rates. Individual risk specific rates are influenced by driver quality, appropriate classification (use, radius), deductibles, prior loss experience.

 

Property

• Commercial property insurance rates are increasing at the fastest pace since September 11, 2001.^[9]
• Total reconstruction costs in the U.S. rose more than 9% over the past year.^[10]
• Climate change has been a concern over the past several years. 2020 was a historic year for weather-related losses in the U.S. with 22 billion-dollar weather or climate disasters, including hurricanes, tornadoes, wildfires, winter and other severe storms.^[11]   
• 2020 was also the costliest year in history for riot and civil commotion losses, with damage from arson, vandalism and looting expected to total as much as $2 billion in paid insurance claims.^[12] Concerns remain about the potential for additional losses related to additional civil unrest in 2021.

 

Workers’ compensation

• Employees are growing more focused on the expanding public health guidelines that protect them in the workplace. Now that OSHA has mandated workplace procedures for COVID-19 there is a mounting concern over increased litigation for employers that do not adhere to the regulations. Also, the introduction of the COVID-19 vaccine comes with a stringent process and procedure for mandating within the workplace; there is a wave of litigation looking to again protect the rights of employees. 
• State bureaus are showing decreasing rates for 2021. The rate reductions are lower than they have been in prior years and they reflect a pre-COVID-19 pandemic workplace. All signs indicate the pattern of falling workers' compensation (WC) rates is coming to an end, and the effects of the pandemic environment will give rise to rates. Changes within the workforce, duration of injury, access to normal medical care and reductions in return to work will be contributing factors in future rate changes.
• WC wage benefits are increasing in most states. Between 2000 and 2018, benefit dollars have increased by 50% to 100%.^[14]  Additionally, as wages increase for injured workers so does the insurance benefit.
• WC medical costs, which account for 60% of total costs, are increasing just like they are for non-WC injuries. ^[15]
• Less tenured and inexperienced workers are always a driving factor with WC losses for both frequency and severity. Prior to COVID-19, employers have not been able to screen and train their new hires in a complete manner.
• Due in part to COVID-19, the WC line has seen a broadening of coverage especially in states that added some form of presumption coverage.
• In 2019, the number workplace fatality deaths was the highest it has been in the last 12 years. 
• With COVID-19, there is an expectation of more ergonomic injuries as many remote workers perform their jobs in areas not designed for work; i.e. kitchen table, couch, etc.
• Though we have yet to see the full impact of the pandemic on WC rates, experts predict it will add 6 cents per $100 of payroll, resulting in a 4.1% premium increase.^[16]

 

General liability

• General liability pricing is still trailing loss trends, but rates are predicted to jump 7.5% to 15%, more than doubling previous increases of 2.5% to 7.5%.^[17]
• Slip and fall claims are returning to normal as the economy begins to recover.
• New litigation rates are also returning to normal as more court systems begin to reopen. Attorney economics took a hit during COVID-19 and will begin to try to recoup loss revenue.
• Treaty reinsurance costs have been increasing over the past three years to offset increasing loss ratios.
• Tort erosion continues to occur, resulting in significant reserve increases for many carriers. From 2015-2019 more than 10 states have changed the statute of limitations for victims of childhood abuse.

 

Management and executive liability

• Rates have been rising since 2019. While publicly traded companies have experienced the greatest rate jumps, private and nonprofit organizations have also seen meaningful rate increases anywhere from 10-50%, or more, depending upon size, financial stability and type. 
• A variety of emerging risks and losses aimed at directors, officers and their organizations have contributed to the current market conditions in the sector including: cyber/privacy breaches, ransomware attacks and phishing, alleged discriminatory employment practices and COVID-19 exposures.
• COVID-19 has spurred 1000+ workplace-related lawsuits. Nearly 70% of these lawsuits deal with layoffs and firings, with employees asserting age or racial discrimination.^[19] Impact from COVID-19 is expected through 2021.
• There has also been in an increase of allegedly discriminatory employment practices heightened by social movements such as #MeToo and Black Lives Matter. 
• Newer claim trends impacting rates include rising defense costs as well as plaintiffs’ asking for and winning outsized settlements in proportion to the alleged damages. 
• Given the current recessionary environment is likely to lead to an increase in bankruptcies and related litigation, we can anticipate a continued hard market, at least through Q1 2021.

 

Professional liability

• In lawyers’ professional liability (LPL), pandemic driven court closures, suspension of legal deadlines, and lack of clarity on tolling provisions creates uncertainty and potential for increased claims against attorneys. Attorneys handling estates and trust work continue to face claims, with beneficiaries often unhappy with division of family wealth.
• In architects and engineers (A&E), there continues to be heightened claim activity around public work, specifically schools and hospitals. COVID-19 shutdowns limited design professionals from providing physical oversight of projects and in-person progress meetings with stakeholders and contractors, increasing the potential for errors. Work stoppages of non-essential projects has led to delays, cost overruns, change orders and project cancellations while the lack of contract discipline and the rapid project timelines have also contributed to increased claims and higher rates.
• In miscellaneous professional liability (MPL), record low interest rates have exacerbated an already chaotic real estate market, with reduced capacity leading to heightened competition and ultimately increased litigation against real estate agents. A continued trend of bodily injury and property damage claims on miscellaneous professional policies has also driven up loss costs.
• In accountants’ professional liability (APL), pressure from Congress relative to IRS funding has resulted in stricter adherence to laws relative to penalties and interest and resulted in increased rejections for abatements. Pressure within firms to drive revenue generating services such as consulting has resulted in scope creep and blurred lines with standard accounting services resulting in increased claim activity as accountants step outside traditional areas of expertise.