Despite the ongoing COVID-19 pandemic, commercial insurance rates are continuing to go up, pretty much across the board with the exception of workers' compensation.
Certainly it's not what we all want or need to hear right now, but understanding the "why" should at least shed some light on why we are seeing increased premiums.
A new report by online insurance exchange MarketScout found that in the third quarter of the year the highest rate increases were in liability lines, but hefty rises in property insurance were also noteworthy. Most of these rate hikes were occurring before the COVID-19 pandemic, but their magnitude increased recently.
"The composite rate is up 6.25% for the third quarter of 2020, as compared to up 4.8 percent in the second quarter. Rates began adjusting upward at a quicker pace in September," said Richard Kerr, CEO of MarketScout. "We expect the fourth quarter 2020 will reflect continued aggressive rate increases in property, D&O and umbrella/excess liability coverages."
Arthur J. Gallagher, in its own report, attributed commercial rate increases to:
- A spike in large weather-related loss events and catastrophes,
- Historically low interest rates,
- Industry-wide rapid increases in liability losses, and
- The global pandemic and resulting economic uncertainty.
Below we'll look at what's driving rate increases in individual lines of insurance.
Directors & officers liability
One of the most stressed lines is D&O insurance, rates for which have been on a steady rise for a few years. In fact, increased litigation and hefty court judgments against the top brass at businesses around the country have resulted in substantial payouts by insurers.
Gallagher noted in its report that all of its clients are seeing increases in their D&O coverage, although publicly traded companies are witnessing far higher increases than privately held firms. But insurers are also pulling back and writing fewer policies, which in turn feeds into higher rates as the supply diminishes. Some insurers have stopped taking on any new D&O accounts.
General liability and umbrella
Rates for these coverages continue climbing due to a number of factors, including large judgments, the cost of litigation and a rising tide of lawsuits against businesses. Gallagher noted that the median verdict for the top 50 cases has doubled in the past four years.
Another factor that could affect future rates is the liability effects of the COVID-19 pandemic and if businesses will see a new groundswell of lawsuits for failing to adequately follow and communicate public health guidelines. As a result, some insurers have started including communicable disease exclusions in their liability policies.
In addition, insurance companies have scaled back on policy limits, according to Gallagher.
"Carriers are also restricting the amount of limit they are willing to put forth, or repositioning their capacity at a higher level. For example, carriers that have historically offered $25 million lead umbrella policies are now limiting their lead positions to $10 million or less, in most cases," the company wrote.
Rates continue rising in commercial auto, despite a drop in claims due to the pandemic. The increases in commercial auto premiums over the past few years have been down to an increase in distracted-driving accidents and deaths, escalating medical costs and climbing repair costs.
Property insurance rate inflation is largely due to the increasing number of natural catastrophes occurring throughout the country. Hurricane activity and intensity continue to grow, as does the frequency and destruction of wildfires, tornados and flooding.
In response, commercial property insurers have been making changes to coverage terms and conditions, increasing deductibles and shrinking policy limits. These moves have been especially pronounced in areas with higher exposure to natural catastrophes.
With markets hardening, now is a good time to double down on your risk management efforts to reduce your exposure however you can. Depending on the insurance those efforts will take different forms, such as better protecting your properties against catastrophes or training your driving employees regularly in road safety.