2015 Insurance Market Outlook: Putting It Into Perspective

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By Jeff Cavignac, CPCU, RPLU, ARM, CRIS, MLIS

For many companies, insurance is one of their largest costs. When you add up premiums for Property & Casualty, Workers’ Compensation, Employee Benefits, Life Insurance and other lines of coverage, it can often total 5% of revenues or more.

It is critical to understand not only how to manage these costs, but also how to forecast your costs as you look into your next fiscal year.

The purpose of this article is to give you some perspective on where the insurance industry is today and how the current financial situation and underwriting objectives will affect you in 2015.

Insurance Company Economics

Insurance companies are in business to accept risk in exchange for premiums. Like any other business, they want to make money and earn a fair return for their shareholders. Absent a decent return, they will not be able to attract additional capital and the insurance industry thrives on capital or surplus.

Insurance companies make money in two ways:

1.         Underwriting

2.         Investments

An underwriting profit is earned when losses plus expenses divided by premiums is less than 100%. This factor is called a combined ratio. If an insurance company has a combined ratio of 98%, it means they are making a 2% underwriting profit. If the ratio is 105%, it means they are losing 5%.

Insurance companies also earn money investing the policyholders’ surplus and cash reserves they have set aside to pay future claims. It is not uncommon for an insurance company to have an underwriting loss, but to make up for it with their investment income (especially when interest rates are high).

If you look at Table 1, you will note that from 2008 to 2012, the industry’s “Return on Average Net Worth” was poor. This was attributable to a lousy combined ratio and a low level of investment return (the majority of an insurance company’s portfolio is invested in debt obligations; they can only invest about 20% in equities).

The industry needs to attract capital (surplus) to continue to grow. Ideally, in order to do that they need to earn 10% or more. When returns deteriorate like they did from 2008 to 2012, underwriters try to get more rate (increase premiums). This is reflected in the rate increases illustrated above in Table 2.

2013 was a different story. Unlike 2012, which was a bad “cat” year (losses from catastrophes…remember Hurricane Sandy?), 2013 was a light “cat” year and the combined ratio reflects that.

Underwriters realize that 2013 was somewhat of an aberration. They still feel they need about 5% rate increases on preferred accounts; however, they are not pushing the price increases as hard as they were at this time last year.

So what should you expect to see in 2015?

Allied Lines

This includes Property, General Liability, Auto & Umbrella. If you look at Table 2, you will note that Property & Casualty rates have increased nearly 15% since 2011; however, they are still over 30% lower from where they were in 2004. While most underwriters we talk to want an additional 5 points of rate or more, the positive results of 2013 are moderating those rate increases. On average, preferred accounts should be able to negotiate close to flat rate renewals and possibly even minor rate decreases.

Professional Liability – Also Known As Errors & Omissions Insurance

The market for architects, engineers, lawyers, CPAs and other professionals remain competitive with a large number of companies competing for preferred accounts. Recognize that coverage, risk management, and claims handling differ greatly between insurance companies. While you may be able to save money by going with a “bare bones” insurer, it is not recommended.

Like the Allied lines, preferred professional liability risks should be able to negotiate renewal terms plus or minus 5% from expiring rates. If you operate in what is considered a higher risk profession, such as geotechnical engineering, or attorneys specializing in class action cases, or if you have adverse loss experience, the market is much narrower. It is suggested that your terms be negotiated early and your program marketed if necessary.

Executive Risk

Executive Risk includes Directors & Officers (D&O) Liability, Employment Practices (EPLI) and Fiduciary Liability. The last economic downturn saw many companies going out of business or generating poor results, which resulted in downsizing and layoffs. As you can guess, this increased the number of claims covered by D&O and EPLI policies and the results suffered accordingly. Underwriting tends to be reactive as opposed to proactive and the adverse loss experience is driving rates for these lines higher. On average, we are expecting D&O to increase 5-10% and EPLI 10-25% or more. Fiduciary Liability should be flat to +5%.

Workers’ Compensation

The good news is that Workers’ Compensation results in California have improved significantly since 2011. This is due in major part to average rate increases of about 35% since 2009 (see Table 3). It should also be pointed out that average charged rates are still over 50% less than they were in 2003! The Combined Ratio has improved from the mid-140s experienced in 2009-2011 to a projected 113 for 2013 (see Table 4).

Of course, the bad news is that the combined ratio is 113, which means the industry still needs some additional rate to return to profitability.

While the Workers’ Compensation Insurance Rating Bureau (WCIRB) has yet to publish its recommended loss costs, it is estimated it will be in the 7-8% range. Most of the insurance companies we work with have filed for or announced similar rate increases.

While every insurer will publish their own rates, on average rates in California should increase 5-10%. National results have been marginally better, but each state will vary.

Conclusion

The insurance industry is in a better financial position today than it was a year ago mainly due to the positive results in 2013 and the early positive predictions for 2014.

The industry, however, has not forgotten the mediocre returns experienced from 2008-2012. Most underwriters still want more rate, however, preferred risks should be able to negotiate flat renewal pricing or possibly modest rate decreases. The exceptions as mentioned above are with Workers’ Compensation and Executive Risk.

While the health of the insurance market will directly affect what you pay for insurance, a much more important element is your Risk Profile. When an underwriter considers your account, they will evaluate your overall operations, your HR practices, safety culture and overall safety practices as well as your loss history.

A positive Risk Profile will result in substantially better pricing than a lousy Risk Profile. This underscores the importance of proactively managing your cost of risk. While you can’t control the insurance marketplace, you directly control your Risk Profile.