CHICAGO – The American Property Casualty Insurance Association's (APCIA) latest report, “Commercial Insurance Rates Rising: What Business Owners Need to Know,” examines the impact of inflationary pressures on commercial lines insurance and business owners.Skyrocketing inflation and legal system abuse have forced prices higher across society while losses in lines such as cyber insurance have also increased. As a result, insurers are facing significantly higher claims costs in recent years. In many cases, insurers’ claims costs and expenses are now higher than what is collected in premiums, which has led many insurers to increase rates on commercial policies to keep pace with losses and rising costs.
“Insurers and agents continue to look for ways to reduce costs while still meeting all obligations to policyholders, but as claims and other costs have increased dramatically insurers are under pressure to raise rates on a variety of insurance policies typically utilized by small businesses,” said Robert Gordon, senior vice president of policy, research, and international for APCIA. “As a result, small and medium-sized businesses may see an increase in their insurance costs when they buy a new policy or renew a policy, even if they have not made a claim in the preceding year.”
A recent survey from the Council of Insurance Agents and Brokers (CIAB) found that in the fourth quarter of 2021, medium-sized businesses experienced an average increase in insurance premiums of 10.6 percent and small businesses faced an average increase of 6.3 percent.
The increase in costs for insurers can be seen clearly in the “combined ratios,” which represent claims and expense costs as a percentage of premiums. After three years of combined ratios around 99 percent, preliminary estimates of 2021 suggest that the property and casualty (P&C) insurance industry’s commercial lines combined ratio is at almost 101 percent, meaning insurers paid more in claims and expenses than they collected in premiums.
“U.S. P&C insurers faced an $11.3 billion net underwriting loss in third quarter 2021. These trends are not sustainable,” added Gordon.
Rapid increases in inflation and other developments over the last year have significantly increased the cost of claims that insurers have paid out to policyholders, leading to significant insurance losses. In March 2022, the consumer price index (CPI) jumped 8.5 percent from a year earlier, the fastest 12-month pace since the early 1980s. Additionally, inflation in insurance claims has been rising even faster than CPI, outpacing increases in premiums.
Legal System Abuse
Legal system abuse is also driving insurance losses and costs higher. Changes in laws are encouraging more lawsuits and jury awards increasingly do not reflect logical conclusions or precedents. In recent years, practices like third-party litigation funding – investment by hedge funds and other third parties in lawsuits in return for a share in the awards – have played a significant role in litigation abuse.
General liability insurance, in particular, is affected by lawsuit trends, including the number of large “nuclear” verdicts. When lawsuits against insured businesses become more likely to lead to large verdicts, the cost of the insurance policy that covers those verdicts may increase, as well. The P&C industry incurred losses for general liability have skyrocketed more than 57 percent since 2017.
Cyber-related losses are growing exponentially. Ransom payments have frequently exceeded $1 million and the resulting costs for business interruption or data exfiltration increased claim payouts. The massive growth in ransomware attacks increased the 2020 loss ratios (prior to expenses) for stand-alone cyber policies by more than 50 percent, and the corresponding combined ratio was estimated at more than 100 percent. This trend is expected to have continued in 2021.