Insurance Rates –What Is Really Going On?

By: Pierre Morrisseau, CEO, OneGroup

I’m sure you have noticed that the cost of insurance has been rising rapidly, far outpacing the general inflation rate. Understandably, business leaders are not only upset about this, they are downright angry. Some may feel their local agent is not working hard enough to find lower cost coverages. Others believe their insurance companies are gouging them. So, what is really going on?

First, your agent typically works hard to find the best risk protection for your unique circumstances at the best possible price. Still, in the end, your agent is only the messenger. While a competent agent can impact coverage and price by doing their homework to put your company in the best possible light with insurance companies, they are at the mercy of the carrier’s pricing or its decision to provide any coverage at all.
On to the insurance companies. They exist as businesses specializing in spreading the risk across a very broad market. As businesses, they need to make a profit to survive and to keep future premiums in check. In turn, they also require purchasing insurance for the risk they assume from their customers. This is known as reinsurance. Reinsurance companies face the same challenge as the carriers they underwrite. When their losses increase due to climate change, wars, catastrophic events and higher interest rates, those costs are passed on to the insurance carrier who in turn passes them on to the consumer.

The question still remains: why are insurance rates going up so fast and so high? The short and simple answer is inflation. Continuously rising inflation in everything from labor to home values to vehicle cost to product pricing—combined with quickly rising interest rates has dramatically increased the value of each loss. Those payouts must be recouped through higher premiums. But that is only half of the story—literally.

The insurance industry is indeed coping with high general inflation, but it is also greatly impacted by what is known as social inflation. While not new, the impact of social inflation has spread rapidly over the past decade and more dramatically since the pandemic.

The “social” component of the name defines the nature of shifting societal perceptions such as negative views of corporations, insurance companies and business leaders through perceived earnings gaps and the belief someone must pay. As a result, juries and judges are awarding larger and more frequent awards in suits against both companies and their insurance companies. Trucking is a prime example of the direct impact of social inflation. Commercial trucking is a sector most affected by frequent lawsuits and higher awards. According to a recent study by the American Transportation Research Institute, from 2018 to 2021, the size of awards grew 33% annually even as general inflation only grew 1.7% and healthcare costs grew just 2.9% annually.

Additionally, social inflation has advanced in the form of third-party litigation and third-party litigation funding. According to Bloomberg, the funding of lawsuits by international hedge funds and other litigation funding/lending with no stake in the outcome except to collect a portion of the settlement, has become a $39 billion global industry.

Third-party claims of a different flavor are badly damaging the Florida insurance market and stressing Florida homeowners. Assignment of Benefits (AOB) is an agreement that transfers the insurance claims rights and benefits of the policy to a third party that can file a claim and collect insurance payments. This has led to rampant fraud as contractors and public adjusters scramble to collect AOBs then work with a lawyer to bring suit against insurance companies if they refuse to pay exorbitant repair and replacement costs. According to the Insurance Information Institute, there were about 1,300 AOB lawsuits in Florida in 2000. By 2013 there were 79,000 suits and projected to be about 130,000 property claim lawsuits excluding any impact from Hurricane Ian. All told, as of January 22, six Florida insurance companies had failed and several others were being watched closely or downgraded.

Putting this all into perspective, we are likely to see continued general and social inflation which will further drive up the cost of all forms of insurance. Still, there are ways of controlling the cost to businesses by fully investigating your cost drivers attached to risk, mitigating or eliminating risk where possible, and working with a competent insurance professional who can craft a compelling, positive assessment of your risk to present to your insurance carrier.