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Opinion: The 'hard' market has arrived; get prepared

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As we move into the second half of 2020, our battle with COVID-19 continues. Businesses are rightfully focused on this challenge and may not be prepared for another obstacle they are facing – the hardening commercial insurance marketplace. The “hard” market is causing premiums to rise and coverages to become more restrictive. We haven’t experienced an insurance market like this since 9/11.

In stable economic conditions, insurance coverages and pricing are normally available and competitive, constituting a “soft” market. The longest economic expansion in history, ending in February 2020, previously brought steady premium pricing and readily available coverage, terms and conditions. The industry’s long-standing “soft” market was long-lived, spanning nearly two decades.

Headwinds of this market shift were well underway prior to COVID and the economic volatility associated with it. A changing legal climate, rising catastrophic claims and inadequate pricing started this trend toward a hard market in 2019.

Why the shift
Over the past several years, volatile weather has adversely impacted the industry. Floods, hurricanes, wildfires, wind and hail have become increasingly more common and devastating. Munich Re, one of the world’s largest reinsurance companies, estimates catastrophic losses of $52 billion in 2018. As a comparison, combined losses in 2013, 2014 and 2015 totaled $44 billion.

The legal climate also has become exceptionally challenging. Nuclear verdicts (those that surpass $10 million) have become an all-too-real trend. In 2019, according to a Liberty Mutual report, the largest jury verdict amounted to more than $8 billion in awarded damages. In that same report, corporate mistrust, litigation financing and social inflation were identified as significant emerging factors. Social inflation is especially troubling for many businesses; this is a societal trend that favors increased litigation, broader contract interpretations and larger jury awards. Just turn on the television and you’ll experience a barrage of plaintiff attorney ads.

Costs to reconstruct buildings, replace equipment and repair vehicles also contributed to rising costs. Richard Lara, CEO of California-based Raam Construction Inc., told that construction costs climbed another 5% in 2018 with material costs alone rising 10%. Material costs, labor and the impact of tariffs continued to rise in 2019, causing another significant increase in construction costs. This compounding effect over several years has left many businesses and insurance companies underinsured and ill-prepared for a loss to property.

The insurance industry itself is not immune to economic conditions. Inconsistent underwriting profits over the past several years driven by rising losses and inadequate risk pricing have caused most companies to reevaluate their pricing models. Eroding investment returns also have had an impact. As importantly, insurance companies buy reinsurance, which has become more expensive.

All of these converging factors are causing two major shifts: Pricing is on the rise for commercial insurance programs, and coverage terms and conditions are constricting.

Certain industries and geographic regions are being impacted more severely than others, but few will be immune.

How to deal with it
Auto pricing, particularly for large fleets of trucks or vehicles, is rising – with expected increases of 6%-12%. Effective fleet safety programs coupled with strong driver training and monitoring can mitigate the impact.

Coverage for directors and officers/employment practices is being adversely impacted, especially for larger and public companies. Expect 5%-50% increases for public companies, 5%-25% for privates. Effective human resource practices, board protocols and strong management lessen this trend.

Commercial property coverage is being impacted in several ways. The rising cost of construction is making it critical to increase insured values. In the Midwest, larger wind and hail deductibles are being demanded by carriers, particularly on large property schedules where pricing is rising. Expect increases of 10%-25%. Well maintained, sprinklered property that’s been insured to value, coupled with good loss experience, can help drive pricing to the bottom end of this pricing band.

Umbrella liability is very volatile. Large auto and truck fleets, hazardous liability exposures and poor experience can make it difficult to find adequate liability limits. Many businesses are layering multiple carriers to obtain the needed coverage. Expect increases of 10%-50% depending on industry and experience.

It’s especially important to have or hire experts to guide a business through these challenging circumstances. Positioning your business to mitigate the impact of the changing marketplace is critical. An experienced insurance consultant can be invaluable in providing a plan to improve performance.

The commercial insurance marketplace is changing. If not positioned properly, businesses will suffer from increased pricing and restrictions in coverage. Preparation coupled with sound risk management and communication can vastly improve your odds of weathering the headwinds of this significant shift.

Richard Ollis is CEO of Ollis/Akers/Arney, an employee-owned insurance and business consulting company. He can be reached at


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