Commercial Insurance Market Update 2024

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Posted by: CMR February 1, 2024 No Comments

The commercial insurance market began to harden around 2019, after years of gradual shifts that lead to higher premiums and reduced capacity. The overall hard market is expected to remain for the better part of 2024.

Prior to the current conditions, the commercial insurance sector long enjoyed smooth sailing, with stable premiums and expanded coverage that continued for decades, according to the 2024 Commercial Insurance Outlook from Hylant. With the exception of a period after the September 11, 2001 terrorist attack on the World Trade Center — during which the market hardened for a short time — the last sustained hard market occurred in the 1980s.

Those in the commercial insurance space have now been up against a hard market for the last half-decade, which led many insurers to change course; whether that meant fewer renewals, increased premiums or terminating certain coverage products altogether.

But some insurance-industry watchers are optimistic.

“There are opportunities in the current market to continue to grow and prosper,” David Zona, senior vice president of commercial insurance, LexisNexis Risk Solutions, told PropertyCasualty360. “Economic conditions and business formation remain strong, and the agents and brokers who can serve both existing clients and effectively underwrite and assist those that are forming new businesses are poised for success.”

AM Best currently predicts a stable outlook for U.S. commercial lines in the year ahead.

In a recent update, which you can view in its entirety here, Alan Murray, associate director for AM Best, explained: “There are several key considerations underlying AM Best’s maintenance of a stable outlook for the U.S. P&C commercial lines segment. First and foremost, underwriting performance across commercial and specialty lines, both during and after the pandemic, and amidst the substantial economic and capital markets volatility of the past year has been persistently strong. Furthermore, admitted carriers in aggregate remain disciplined about risk selection, terms and conditions, and capacity deployment. As evidenced by the continuation of strong submission flow and growth in the non-admitted, or excess and surplus lines marketplace.”

“And importantly, from the investment perspective,” Murray continued, “strictly higher fixed income reinvestment rates have begun to significantly bolster operating profitability in virtually all lines, especially long-tailed casualty lines of business.”

When it comes to pricing and reserving, Murray explained that momentum remains positive, with the exception of workers’ compensation and certain management liability lines.

What are commercial clients’ concerns?

Many of the issues influencing the commercial insurance sector are also top concerns among the global business community at large.

According to Allianz’s 2024 Risk Barometer, cyber incidents are the top business risk concern, followed by business interruption, natural catastrophes, macroeconomic developments, fire and explosion, climate change, political risks and violence, market developments and the shortage of a skilled workforce.

The infographic below breaks down the top concerns for business owners worldwide, according to Allianz. Click on each country to see explore location-specific risks and how those concerns have shifted year-to-year.

Climate events and natural catastrophes

Growing natural catastrophe (CAT) losses have impacted the commercial insurance marketplace significantly in recent years, and these losses do not appear to be on a downward trend.

There were about nine billion-dollar disaster events (CPI-adjusted) in the United States each year from 1980 to the present, with an average loss of roughly $60.5 billion each year, according to the National Centers for Environmental Information’s National Oceanic and Atmospheric Administration (NOAA).

However, when looking at the most recent CAT data from 2019 to 2023, there is a dramatic uptick in these events. During these four years, the U.S. saw an average of 20.4 billion-dollar events annually, with a cost of $120.6 billion each year.

In 2023 alone, there were 28 CAT events with losses over $1 billion, including a drought, four flooding events, 19 severe storms, two tropical cyclones, a wildfire and a winter storm. These events resulted in the deaths of 492 people and will have lasting economic effects on the impacted areas.

Globally, the modeled insured average annual loss from natural catastrophes is $133 billion, Verisk reported. The firm urges the insurance industry to prepare for insured CAT losses to exceed $100 billion each year moving forward, though losses exceeding $200 billion are plausible. Verisk attributed this growing exposure to continued construction in high-risk areas as well as rising replacement costs.

Major weather events also tend to have secondary effects, which Hylant explained in its 2024 Commercial Insurance Market Outlook: “In addition to the devastation from these large-scale disasters, losses that occur as aftereffects of major storms or arise from small- to mid-sized weather events (also known as secondary perils) have been on the rise. For instance, the NOAA confirmed that a series of thunderstorms that produced thousands of lightning strikes in Alaska this past summer ended up spawning dozens of wildfires and burning thousands of acres across the state, causing considerable damage.

“Further, the NOAA reported that heavy winds stemming from the remnants of Hurricane Dora over the Pacific Ocean played a significant role in fueling the Hawaii firestorm, which went on to generate $5.6 billion in losses, claim 97 lives and ultimately become the deadliest fire in national history.”

Costs from secondary perils have increased 6.9% more than the average inflation rate every year since 2000, Hylant reported, with average annual losses of $70 billion over the last ten years.

“As these catastrophes become more frequent,” Hylant’s outlook stated, “the insurance industry will need to adopt innovative solutions to keep up with weather-related losses. Moving forward, businesses can expect to encounter additional emphasis on weather readiness from carriers.”

Economic pressures

The cost to repair, replace or rebuild structures has increased thanks to inflation, increased labor expenses (along with fewer available skilled workers) and higher material costs.

Surging inflation has been a concern for commercial lines in recent years, the Hylant report explained. The result has been higher administrative costs and shrinking investment income. While inflation cooled slightly in 2023, it is still elevated, which has resulted in increased claim expenses and underwriting uncertainty, not to mention higher premiums.

AM Best reported property reinsurance costs have also risen while capacity has declined, thanks largely to storm and wildfire losses that affected the United States over the last two years.

Economic inflation also influenced the accuracy of property valuations. Industry research revealed significant inaccuracies in insurance-to-value (ITV) calculations, causing coverage gaps of more than 30%, CBIZ reported.

Social inflation

The term “social inflation” refers to increased negative perceptions of large corporations including insurance carriers. The phenomenon corresponds with increased high-dollar lawsuits and settlements that have caused insurer claims costs to skyrocket, according to the National Association of Insurance Commissioners (NAIC).

Casualty insurers are especially concerned about social inflation and rate adequacy, AM Best reported, as these issues could lead to higher reinsurance costs and tightened conditions on casualty lines like general and commercial liability, commercial auto liability, professional and management liability (such as D&O coverage) and cyber liability.

Hylant’s Market Outlook specifically highlighted three influences affecting social inflation:

  • Third-party litigation funding (TPLF): TPLF happens when a third party provides funding for a lawsuit that a plaintiff might not otherwise have been able to afford to pursue in exchange for a cut of the settlement. An increase in TPLF has led to a higher volume of lawsuits being pursued and often increases litigation costs for insurers because plaintiffs are able to take cases further and chase larger settlements.
  • Tort reform: Tort reform laws aim to discourage frivolous lawsuits, protect businesses from abusive practices and reduce overall litigation. Feelings on tort reform vary from state to state — and often are determined by political headwinds. Some states have had success with tort reform by decreasing the number of claims and putting caps on punitive damages. Other states refuse to enact tort reform due to the belief that it is unconstitutional. Those opposed to tort reform, Hylant explained, feel it can lower settlements to the point where attorneys will not bother to take new cases and help victims get justice.
  • Nuclear verdicts: Nuclear verdicts, defined as lawsuit awards exceeding $10 million, are becoming more prevalent. With anti-corporate sentiment permeating much of the current culture, juries are more likely than ever to sympathize with plaintiffs and award larger settlements, especially when a business defendant has a less-than-stellar reputation. The public also tends to believe businesses can afford to pay high-dollar settlements, regardless of whether that is true. This perception contributes to jury members’ willingness to grant larger awards.

Adapting to market conditions

How can commercial insurance professionals adapt to current market conditions? Digitization and process standardization will be key.

“We expect commercial insurers to continue to invest in the digitization and modernization of workflow and key business processes,” said David Zona with LexisNexis Risk Solutions. “There are multiple benefits to insurers from digitization of workflow including customer experience, agent experience, employee experience, cost reduction and loss ratio improvements . . . workflow process improvements and digitization open the door to using validated third-party data for underwriting and other key decisions.”

In a recent episode of the Insurance Speak podcast, Jason Keck, founder and CEO of digital client engagement platform Broker Buddha, offered advice on how (and why) agencies can modernize their practices in order to streamline operations and create a better customer experience.

The year ahead

“As with any year, the best advice we have is to stay true to the fundamentals of the business,” Zona continued. “The basic building blocks of success lie in the daily and consistent execution of acquisition, underwriting, policy service and claims decisions.”

“While many of these processes are being modernized, the basic tenets of our industry remain the same,” he concluded. “Warren Buffett once said, ‘You don’t need to have extraordinary effort to achieve extraordinary results, you just need to do the ordinary, everyday things exceptionally well.’ …It’s hard to go wrong in this year, or any year, by following that principle.”

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Article Written By: Brittney Meredith-Miller 

Author: CMR