Once premiums for property, general liability, auto, workers’ compensation, employee benefits, life insurance and other lines of coverage are added up, it can often total 5 percent or more of a firm’s total revenue—and that is only the direct costs. This number can more than double once indirect costs are factored in.
With that in mind, it is critical to understand how to proactively manage and forecast these costs. Read on for some perspective on where the insurance industry is today and how current finances and underwriting objectives might affect businesses this year.
The Current Market
From 2008 to 2012, the industry’s return on average net worth was poor due to a lousy combined ratio and a low level of investment return. When returns deteriorate like they did during that period, underwriters try to get more rate (increase premiums).
In 2013, 2014 and 2015, the industry performed well, but not great. Insurers earned modest underwriting profits, but decent overall returns. Rates in these years were flat and started trending down. This decrease in pricing adversely affected 2016 results. Insurance companies basically broke even on underwriting (combined ratio of 100.7 percent) and overall returns dropped from 8.4 percent to 6.2 percent—a 26 percent drop.
The first six months of 2017 continued the downward trend. The industry posted a .1 billion underwriting loss for the first six months of 2017 compared to a billion loss in the same period in 2016.
The industry will be further impacted by the catastrophic property losses experienced in the last half of 2017. Floods, hurricanes, earthquakes and wildfires will collectively cost the industry about $100 billion. While property risks exposed to these perils will see increases in 2018, the market as a whole remains in pretty good shape, and relatively flat rates are projected. Of course this will vary by account and each company’s specific risk profile.
Regardless, the fact that the industry could absorb such substantial losses without materially increased pricing reflects positively on the insurance marketplace.
The exception: Auto experience has deteriorated recently, and it is estimated that State Farm lost more than $7 billion on its auto book in 2016. The deteriorating results are attributable to increased claims frequency (distracted driving) and increased severity. The increased severity is driven by higher medical costs, which affect bodily injury claims, and higher costs to repair damaged vehicles. The cost to fix a sensor- and camera-laden bumper is a lot more than it cost to just replace the bumper 10 years ago. On top of that, at least 500,000 vehicles were destroyed by Hurricane Harvey alone, and flood damage is not included on most auto policies.
Professional Liability and Errors & Omissions Insurance
The market for architects, engineers, lawyers, CPAs and other professionals remains competitive, with a large number of companies vying for preferred accounts. Every policy written for this line is tailored by the insurance company providing the coverage. In addition to coverage, the type of risk management resources offered and the quality of the claims handling differs greatly among insurance companies. Moreover, some of the “opportunistic” new players in this market may not be around in five years. Insurance is not a commodity, and it is imperative that coverage, risk management and claims be considered in addition to price.
Preferred professional liability risk professions should be able to negotiate renewal terms that are flat to minus 5 percent from expiring rates. The market is narrower for firms operating in higher risk professions, such as geotechnical engineering, or attorneys specializing in class action cases, as well as for firms with adverse loss experience. These companies should negotiate terms early.
Executive Risk
Executive risk includes directors and officers liability, employment practices liability and fiduciary liability. The headache from the last economic downturn appears to be waning, and these lines of coverage are reasonably competitive. Every form is different, and a number of new players may not be around in five years.
On average, expect flat renewal terms with some opportunities for rate relief.
Surety Bonding
In 2018, the U.S. surety industry will continue to post further growth in overall premiums and below-average loss activity.
The total direct written premium for the calendar year end for 2016 was up to $5.88 billion from $5.62 billion in 2015 (a 4.5 percent increase). Impressively, at the same time the surety industry loss ratio fell in 2016 to 15.5 percent from 18.3 percent the previous year. This high watermark for surety industry volume continued to increase through the second quarter of 2017 to $3.13 billion in revenues, with a 13.6 percent loss ratio (compared to $2.98 billion in revenues with an 18.4 percent loss ratio at the second quarter of 2016.)
Strong growth and profitability since 2005 have attracted an increased number of new sureties to the market, creating fierce competition for market share. During the last five years alone, startup front-line contract or commercial surety operations have included: AmTrust, Axis, Ironshore, Freedom Specialty, Allied World, Berkshire Hathaway, QBE, Euler Hermes, Navigators, Crum & Forster, Patriot, Endurance, Everest, Sirius, Markel and Argonaut. The number of reinsurance markets have almost doubled since 2008. Although underwriting standards are relatively stable, overall supply has outpaced demand. This fresh credit capacity will likely cause increased pressure to further relax and soften terms and conditions (i.e., capacity, rate, indemnity) throughout the surety market.
The slow and steady economic growth has extended the current building cycle to a sluggish pace. This also has lengthened the surety industry’s positive historical results. Continuing labor shortages, inflation, interest rate hikes and other factors will likely slow the economic engines in the coming years.
Wise contractors are now getting margins, building their balance sheets and conserving for a rainy day. Contractors should begin positioning themselves for the impending shift ahead by retaining the best management team and labor talent; closely managing material, field and overhead costs; and demanding acceptable margins to ensure long-term success.
Health Insurance
A number of “repeal and replace” bills have failed to pass, so the Affordable Care Act (ACA) will continue to be enforced. Information is still pending on the Cadillac Tax and whether regulations will be implemented.
For 2018, the number of age bands is likely to change. Currently, for small groups (two to 99 employees), most insurance carriers have one rate for children under 20 years old. In 2018, insurance carriers will divide the zero to 20 age group into seven bands: zero to 14, 15, 16, 17, 18, 19 and 20. As a result, premiums for age 20 and below could see significant increases of 20 percent to 50 percent.
Rates for all “small” employers will be based on the employee’s and its dependents’ individual ages, plan design and location of the company. For example, a family of five will pay for each family member based on each individual’s age and the plan they select. Some younger employees or families with one child may experience lower premiums.
All of the small group plans have changed to conform with the law and most have higher deductibles and copays; therefore, employees will have to pay more when they use the services.
Actuaries at all the major insurance companies have determined that they must change plan benefits annually to stay in compliance with the ACA’s metallic tier guidelines. The ACA guideline gave a percentage requirement for each tier: 90 percent (platinum), 80 percent (gold), 70 percent (silver) and 60 percent (bronze).
As costs increase, the value of the percentage changes and, therefore, the plan benefits change. For example, if the actuarial value of a plan this year was $1,000, then the platinum plan has to cover 90 percent ($900) and pass 10 percent ($100) to the plan member. In the second year, if the actuarial value goes up to $1,100, 10 percent ($110) can be passed to the plan member and the benefits will change. This will always be a moving target until the values are fixed or the law is changed.
The provider networks are still changing and are offering a lower number of choices for doctors and medical groups (i.e., skinny networks). Often the price looks good, but employees will have very few choices for doctors. Be sure to run a report to compare current providers to those associated with any programs being considered.
Insurance carriers continue to seek greater discounts from hospitals, medical groups and doctors, and are offering patient exclusivity in return. Some insurance carriers will allow skinny networks to be offered side by side with full networks, with the price and contribution being set by the employer to favor one or the other.
In 2018, businesses will see an overall zero to 10 percent rate increase and benefit changes for “small” employers and 5 percent to 15 percent for “large” employers.
Captives, self-funding and partially self-funded plans are becoming more popular and should be considered by companies with more than 50 employees. Industry trust plans for all size of employers could lower the overall cost and stabilize the benefits. Other ways to reduce costs include buying a bronze level plan and supplementing it with cancer, hospital, accident and critical illness plans.
Dental, life, vision and disability continue to be very popular benefits with employees.
