In the 2022 casualty insurance market, we saw a continued increase in general, auto, and umbrella/excess liability rates, driven by a consistent rise in average claims costs. This was coupled with a mostly flat and highly competitive workers’ compensation market. What should buyers expect for 2023? Here are our top crystal ball predictions and tips for how insureds can prepare and respond.
1. Rates for General Liability, Commercial Auto, and Umbrella Liability Will Continue to Increase at a Reduced Pace Throughout 2023
Liability rates have increased for the last 20 consecutive quarters through Q3 2022, according to the Council of Insurance Agents & Brokers (CIAB), and this trend will continue through year-end and into 2023. General and auto liability rates remain strained by the steady rise of claims costs, coupled with poor underwriting results and weak return on investment. Inflation in many forms (economic, social, wage, and medical) will continue to impact claim growth and, in turn, carrier profitability, program pricing, and the insurance market. The backlogged court system coming out of the pandemic continues to concern insurers, as potential nuclear verdicts are awaiting trial. However, the pace of rate increases has moderated in 2022, and this consistency is more predictable than the dramatic pricing corrections seen in the last few years.
How to Mitigate Program Increases
Risk managers can focus on leveraging stable and attractive lines of coverage, like workers’ compensation, into a package program to improve pricing, terms, and conditions for more difficult lines like general and auto liability. Risk managers can also work with their brokers to rethink insurance program structure and consider alternative risk financing solutions. Use a strategic and analytical approach—like an actuarial analysis—to quantify expected loss cost and evaluate the optimal balance of risk retention versus risk transfer. This can help buyers reduce overall premium and the impact of insurer rate demands.
2. Workers’ Compensation Premiums and Rates Will Remain Stable or Even Decrease Throughout 2023, but Work-From-Home Will Continue to be a Loss Control Challenge
Financial results reported to the rating organizations (NCCI, WCIRB of California, or other independent state rating bureaus) continue to show underwriting profits over the past five to seven years. The projected ultimate combined ratio (losses plus carrier expenses) for 2019–2021 was 85–87%, which translates into an underwriting profit of 13–15%.
Results for 2022 look promising as the frequency of claims continues to decline. With the Federal Reserve raising interest rates in 2022 to offset inflation pressures, carriers can earn higher portfolio yields or investment income, often leading to rate reductions.
Many employers have offered and have adapted to permanent work-from-home schedules. While it is still too early to observe the effect on workers’ compensation of this shift in work environment, early data indicates a reduction in the frequency of injury. That said, employee exposure to injuries is still present, especially in the areas of ergonomics, cumulative trauma from repetitive motion, and slip/trip and falls. In fact, work-related losses have become a 24/7 exposure.
How to Combat the Challenges of the Remote Work Movement
Ensure employees have proper ergonomic workstations and equipment as a best practice to prevent injuries. Provide information like office and desk set-up tutorials, videos, and testing materials. Work with human resources and your benefits broker to offer additional and creative employee benefits plans. For example, focus efforts on mental health resources and activities like yoga, exercise classes, and other physical and mental activities.
3. Social Inflation and Other Related Factors Affecting the Frequency of Severity of Claims Will Remain a Top Concern for Liability Insurers
One of the top industry talking points over the past several years has been the phenomenon of increasing claims costs driven by changing societal factors such as social inflation, third-party litigation financing, the appeal of class action lawsuits, plaintiff tactics like reptile theory, and the growing public distrust of corporations. The number of nuclear verdicts, or claims of more than $10 million, has consistently increased year over year, and this has a trickle-down effect on settlements as defense attorneys look to avoid unpredictable jury awards. The average verdict in the National Law Journal’s Top 100 Verdicts more than tripled from 2015 to 2019 and hit new highs in 2020 and 2021.
As claims worked their way through reopened court systems in 2021, we saw record-breaking litigation outcomes, including a $1 billion auto liability verdict. With 11 nuclear verdicts, including three of more than $100 million in December 2021 alone, this trend continued into 2022. The time from file to trial continues to elongate with the backlog of cases waiting to be tried, and this trend can expect to carry into 2023 and beyond.
Organizations exposed to these types of shock losses include:
- Those with a fleet of any size, including a large hired fleet or non-owned fleet exposure
- Organizations with difficult product liability risk, like children’s goods, auto parts, medical devices, chemicals, and habitational real estate owners
- Sharing economy firms
How to Proceed in an Operating Environment with an Increased Potential for a Nuclear Verdict
Here are a few ways to mitigate your risk of loss and a large verdict:
- Demonstrate control over exposures by refocusing on basic risk management best practices that may have been deprioritized over the difficult preceding years.
- Conduct a thorough gap analysis of risk controls intended to minimize the potential of big casualty losses like severe auto accidents or class action product liability claims.
- Understand and proactively address the potential attachment of negligence to a complaint.
- Revisit the fleet safety program for updated best practices and explore new telematic technology.
4. The Average Cost of a Liability Claim Will Continue to Rise, Driven by Inflation, the Rising Cost of Healthcare/Medical Treatment, and the Cost of Vehicle Repairs
Claims are simply costing more money to adjudicate. Medical inflation and rising healthcare costs mean the average bodily injury claim from an auto accident or a general liability claim will be more costly than in prior years. With more enhanced technology in our vehicles and the current supply chain issues, the physical damage portion of claims is rapidly rising, as it costs more and takes longer to repair vehicles. This also affects supplemental claim costs like rental car reimbursement.
How to Address the Rising Cost of Claims
With the average claim costing more, improve diligence on the overall claims process—from intake through closure—by monitoring efficiency, reducing waste, and focusing on expenses. Some steps are outlined below:
- Focus on early resolution of claims.
- Stay engaged in the claims process, maintaining open and frequent communication with the claims adjuster.
- Monitor and benchmark adjusting and litigation expenses.
- Use key performance indicators and benchmarking to evaluate claims process efficiency (e.g., closure rates, litigation rates, and reporting lag).
- Look to eliminate wasteful spending where possible, making sure high dollar expenses are necessary (e.g., case management, sub rosa [surveillance], and medical cost containment charges).
- Read our recently published blog on tips for a seamless claims process.
5. Underwriters Will Continue to Refine Coverage Terms and Conditions
The current hard market has brought on not only steadily increasing rates rate, but for some industries, it has also led to bumps in retentions and deductibles, reduction in capacity/limits, removal or reduction of sublimits, refined coverage wording to clarify the intent of coverage, and additional exclusions.
Popular coverage restrictions we expect to continue to see in 2023 include:
- Per- and polyfluoroalkyl substances (PFAS) forever chemicals
- Assault and battery
- Abuse and molestation
- Territory restrictions for Russia, Ukraine, and Belarus
Certain industries with difficult exposures and accounts with extensive loss history have and will continue to face challenging renewals or adverse program marketing results.
How to Mitigate Facing a Restriction of Insurance Coverage Within your Program
Primary casualty insurers continue to maintain rigorous risk selection discipline. Buyers should start early, conduct thorough marketing, and leverage strong relationships with carriers that place attractive lines of business, like workers’ compensation and higher layers of the excess tower. High-quality program specifications and underwriting submissions featuring detailed narratives that demonstrate understanding, control, and risk management processes on these hot button coverage issues are imperative and can improve coverage terms and conditions.
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