Earth, wind and fire

This has been a year of catastrophes: hurricanes, high winds, floods and fires.  Loss figures that are still being compiled likely will have an influence on commercial insurance rates next year. But to what extent rates will change, no one knows at this point.

“You can’t talk about the year without talking about the three hurricanes as well as what the impact of the fire in Napa Valley will have on the insurance industry,” says John Stanchina, president and CEO of the Mid-Atlantic Region of Marsh & McLennan Agency.

He describes 2017 as a “tale of two halves” for the insurance industry. “In general, commercial insurance has remained soft across the board as it relates to most pricing,” he says.

The natural disasters that occurred during the latter half of the year may change that cycle. “We are watching to see what happens with reinsurance renewals so we can see what happens to property reinsurance rates,” says David Schaefer, president and CEO of AHT in Leesburg.

Reinsurance involves insurers transferring some of their risks to other companies.

Many in the industry expect reinsurers will need to recover their reserves. “Some of that will be paying out from what has happened in 2017. Reinsurance is a component of the premium we all pay, and that is likely to go up in 2018,” Schaefer says. “It’s still not clear if the reinsurers feel the need to apply a rate increase across the board or if they would apply it more selectively for the exposures that created the losses such as catastrophic wind.”

In October, Switzerland-based reinsurer Swiss Re Group estimated total insurance market losses from hurricanes Harvey, Irma and Marie at about $95 billion. Catastrophe-risk modeling company RMS estimates an economic loss range of $3 billion to $6 billion for the fires in California and expects insured losses from the Mexico earthquake in September to total around $1.2 billion.

Capacity in the market (the ability to provide insurance) was good this year, but there is the potential for that to be “absorbed by the three hurricanes,” says Stanchina. “There is also a very large concern about what the impact of the Napa fires will be on the market. The effects will start to play out next year.”

By October, fires had destroyed more than 3,500 homes and businesses. That number doesn’t account for losses caused by business interruptions. “Wineries had to shut down, and hotels closed for an extended period of time,” Stanchina says.

This year’s commercial insurance market was a reflection of last year’s buyer’s market. “On the property/casualty side, which includes workers’ compensation, rates were flat to slightly down with the exception of commercial automobile insurance and some specialty coverages such as cyber liability,” says Curt Hodges, Richmond-based vice president of marketing for Lynchburg-based Scott Insurance.

Commercial automobile insurance is one of the insurance lines seeing consistent rate increases this year. “The entire industry is feeling the pain of distracted driving,” Hodges says. “The frequency of accidents is increasing due to technology and distracted driving. Repair costs are also escalating with the value of component parts of any given vehicle increasing. Automobile [insurance] is one line of coverage that will continue to see increases from most carriers, and in general, they are warranted.”

This year total auto insurance losses exceeded total premiums collected. “Insurance companies are losing money on auto,” says Paul Fleming, senior vice president of Richmond-based Bankers Insurance. “Rates were up 7 to 15 percent this year, but we’re not expecting that steep of a rise next year. Probably from 3 to 5 or 3 to 7 percent.”

On the flip side, general liability insurance pricing was down this year as was the cost of workers’ compensation coverage. “Most accounts were seeing their overall premiums range from a 5 percent decrease to a 2 percent increase,” Fleming says. 

More and more companies are looking at cyber insurance this year, especially after Equifax announced a breach in September that could cost insurers an estimated $125 million. “Both at the corporate level and the personal level, people are thinking about their risk or exposure,” says Stanchina.

Schaefer believes cyber insurance will grow through the mid-2020s. “We’ll see significant premium growth as well as uptake,” he says. “Loss trends will continue to develop and premium has the potential to be volatile based on frequency and severity of incidents.”

Cyber events can originate from a subcontractor or anyone that has access to a company’s electronic data.

“This year, cyber liability insurance rates [on average] increased in the single digits to double digits in some cases, as the providers of this insurance continue to expand their understanding of cyber exposures and ultimate loss payouts,” says Hodges. “Educating the insurance buyer as to how a breach can occur and the client’s ultimate exposure is a challenge for all of our agents considering the vast array of threats present via today’s technology.”  

One of the larger expenses for companies is health insurance. With rates steadily climbing, many companies are looking for less expensive options, such as self-funded programs. In a traditional insurance plan, the insurance company takes the risk and covers all medical costs. In a self-funded plan, the employer takes the risk of paying claims. If claims go above a certain level, the costs are covered by an underwritten insurance plan.

“The self-funded model for large companies has been around for many years,” says Tony Herbert, vice president of managed care for Bon Secours Health System. “If a company’s costs are less than the predicted amount of medical expenses, it can retain that amount.”

Smaller companies have refrained from this type of model in the past because the cost is “too unpredictable,” Herbert says, noting the Bon Secours Value Network is a hybrid self-funded, “level-funded” model.

With level funding, the anticipated losses for the year are divided by 12 so the employer knows what it will pay each month. “We created an affordable, accessible network of hospital providers through Bon Secours and physicians independent of Bon Secours that are aligned with Bon Secours,” Herbert says. “We wanted to provide an alternative for smaller companies.”

The commercial insurance industry will be watching next year to see how the market fares in all areas, including health insurance. “I don’t think anyone is expecting anything dramatic either up or down in terms of rates yet,” Fleming says.

Insurance brokers

1 For 2016                   WND: Would not disclose                             Note: This list first ran in March 2017.                                      Source:  Individual firms.