In this third quarter 2020 report, we identify the emerging trends that are impacting insurance for the tech sector, with a specific review of the property, general liability, and workers’ compensation coverage areas. The big takeaway? Rates continue to moderately increase across all lines of insurance.
Overall Tech Industry Insurance Trends, 2017 to 2020
When it comes to insurance rates for tech companies, 2015 to 2016 was a very favorable buyer’s market with significant rate reductions across all lines of insurance for tech companies. Starting in 2017, however, we noticed the pace of those rate reductions started to slow.
By the close of 2019, we saw median rate reductions at -1% for property (changed from -2% the prior year) and -3% for general liability (up from -1% the prior year), while there was no change in workers’ compensation, holding steady at -6%.
Fast-forward to Q3 2020, and tech companies were still getting rate decreases in workers’ compensation, but not as big as they once were. Unfortunately, for other lines of insurance, including property and general liability, tech companies saw a median rate increase of 6% and 2%, respectively.
The Rate Environment in 2020
During the first nine months of 2020, we have seen rates continue to increase in the technology sector across all lines of insurance. However, the overall market conditions for technology insureds remain far better than in other industries. The main reason is that the tech industry is still very profitable for insurers. Most tech companies have very few losses, so insurers can continue to offer them reduced rates.
Most tech companies have very few losses, so insurers can continue to offer them reduced rates.
Now, let’s continue the discussion of market conditions broken down by major coverage lines.
Property Insurance: The Tale of Two Markets Continues
Renewal data shows that rates continue to increase, but we’re seeing a different story play out when the property insurance is bundled with other coverage versus a monoline policy.
First, let’s look at property rate trends overall. In Q3 2020, the median property rate increase was +7% versus 1% in Q4 2019. This is a continuation of the trend we have seen since 2018. This trend started with a few years of bad loss experience due to natural disasters and has continued into 2020 with COVID-19 losses as well as damages due to civil unrest.
As with 2019, there is still a dichotomy in market conditions between mid-market companies that package property and liability programs together and larger companies that purchase property coverage as a standalone placement.
As an example, we’re seeing the median increase for all tech insureds is 5%, but for those with over $200 million in values, the median increase was far larger at 20%. Companies that have more than $200 million in total insured values are more likely to have a standalone property program. When packaged, insurers can price a company’s risks across a portfolio (essentially spreading the risk) and rates are typically lower.
Monoline programs have the advantage of offering broader coverage, but this is generally accompanied by higher rates. In part, this is also because insurance carriers have increased scrutiny on property risks associated with monoline coverage.
General Liability: Moving Away from a Soft Market
After years of a very soft market, general liability rates have started to increase. Unlike property rates that have been driven by losses, here, insurers are simply pushing for market-based rate increases and they’ve been able to obtain it.
In Q4 2019, the median rate change was a 9% reduction. During the first nine months of 2020, we saw that swing to a 2% rate increase at the end of Q3. The rates appear to be holding steady in the low single-digit level.
Workers’ Compensation: The Jury Is Out on Rate Increases
The data would suggest that the market is beginning to turn for workers’ compensation as the median rate reduction in Q3 2020 was -5% versus -9% at Q4 2019.
The Trend May Be Misleading
On Jan. 1, 2020, the Workers’ Compensation Insurance Rating Bureau added new classifications to the California Workers’ Compensation Uniform Statistical Reporting Plan—1995 (USRP). USRP puts a cap on an individual’s annual payroll for workers’ compensation purposes for certain highly paid employees.
Added to the list was code 8859 related to computer programming, software development, and application development. That means that for insureds with California exposures in this code and with renewals starting on or after January 1, the class 8859 payroll was capped at $139,100.
Many tech insureds have a majority of payroll in this code and many of the employees in this code earn much more than this payroll cap. This has created an unusual situation whereby headcount for many companies continued to increase but payroll was showing as flat or slightly decreasing.
As an example, one client recently reported a 28% increase in the number of employees year over year with only a 2% increase in payroll. As most of their payroll was within California, the reason for the small payroll increase is entirely because of the payroll cap.
Given these circumstances, insurers have reacted by slowing the overall rate reduction they have been providing. Insurers can’t justify giving steep rate reductions when they are aware that the payroll is not truly reflective of the change in exposure.
Once we get through a full year with the new payroll cap in place, the year-over-year rate comparison will be more meaningful than what we are seeing here.
COVID-19 has not been a material underwriting issue for most tech companies, but it is worth mentioning how coverage has been impacted since the outbreak of the pandemic in March.
Property: A minority of insureds enjoyed a $100,000 or even $1 million sublimit prior to COVID-19, but those have gone away as their programs renew. Most insurers are either excluding communicable disease entirely or providing a very low limit (e.g., $10,000).
Liability: Unlike hospitality, retail, and healthcare, tech is not an industry that has much exposure to third-party claims for communicable disease. Thus, the vast majority of tech insureds have been renewing their liability programs, including umbrella and excess liability, without a communicable disease exclusion.
It should be noted that a few insurers initially attempted to institute communicable disease exclusions across their entire portfolio, but once they saw that the rest of the market was not following this stance, they reversed course and have agreed to remain silent.
Workers’ Compensation During COVID-19
A lot has been said about this in other content we have put out on the subject. Please refer to the coronavirus resources section of our website for more information.
In general, communicable disease coverage for technology insureds is no different than it is for the majority of all industries when it comes to workers’ compensation. Generally speaking, if an employee can show a direct link exposure to COVID-19 from work, it could be a compensable workers’ comp claim.
Based on our technology book of business, most tech companies have not come back to their offices yet. As a result, we have seen very few COVID-19-related claims from tech clients.
The Outlook for Insurance Rates in Tech
Looking ahead to 2021, it’s likely we will continue to see the slow rise in property and general liability rates that occurred throughout 2020, at least in the first half of the year. Beyond that, it is too early to tell if the market will stabilize or continue to increase. For workers’ compensation rates, once we get into 2021 we’ll have a clearer picture of how the payroll cap for computer programming and software development has affected rates. Our expectation is that there will continue to be low single-digit rate reductions.
About the Data
Our data reflects information on more than 100 tech company renewals for which Woodruff Sawyer is the broker. The vast majority in the survey are “mid-market” or commercial, and their P&C programs are written on a package basis.
Auto coverage was not tracked, as most tech companies do not have any owned vehicles. Thus, there is no readily available exposure base to track rates. Anecdotally, we know that auto rates are trending upwards of 10% on our renewals and have been since 2017.