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What Drives Insurance Pricing Trends, and What Can You Do About It?

Teresa Kavan
Teresa Kavan
Vice President, Construction

Have you ever had one of those flashbacks featuring you sitting down for your school economics test — and not remembering if you are in Macro or Micro? Speaking for myself, what I do remember is that I preferred Microeconomics over Macroeconomics. It just made more sense to me.

Flash forward more years than I want to admit, and I finally “get it.” While Macroeconomics focuses on the behavior and decision-making of an economy, Microeconomics is focused on individual consumers and firms.

Why does this matter — am I not here to talk about insurance rates? Yes, but there’s a tie!

The Rising Cost of Insurance

Insurance is a for-profit industry, and almost every product line of insurance is being hit with rising costs and expenses, especially in the construction industry. Elevated losses and costs lead to a decrease in underwriting profit, which in turn, requires insurance companies to evaluate, and sometimes modify their strategies on their product offerings, target clients, geography of operations, and rates.

Direct and Indirect Factors Impacting Insurance Premiums

When it comes to rate development, insurance companies must consider direct factors, such as:

  • loss/claim history
  • limits and deductibles
  • rating exposures (payroll, sales, number of employees, etc.)
  • type of business
  • geographic location
  • building age and construction

But (and here’s where the tie comes in), the other consideration is the Macroeconomic and geopolitical factors that are the “indirect” factors impacting premiums. They include pandemic; geopolitical events such as the Russian-Ukraine conflict; catastrophic weather events, like hurricanes, floods, and winter storms; and increased loss costs — think increase in litigation frequency, favorable plaintiff decisions, and higher awards from juries).

A couple of examples:

  • Projected losses from 2022 natural catastrophes are expected to exceed $112 billion which, according to reinsurer broker Guy Carpenter & Co. LLC, will result in an estimated 200 percent increase in reinsurer rate hikes.
  • Systemic cyber losses are expected to exceed the market’s ability to provide insurance. Solutions under discussion include the need for “private – public” options to manage the systemic risk like those that exist for earthquakes and terror attacks.

Pricing Disruption Due to Inflation, Worker Shortage, and Supply Chain Issues

In addition to the above issues, inflation will lead to higher insurance premiums, and it is completely out of your company’s control. Factors contributing to general inflation are labor shortages and supply chain disruptions.

Since the pandemic, employees have evaluated their employment priorities. People have been apprehensive about returning to the workforce, and some have decided to exit all together for many reasons. Labor shortages in construction increase production costs and cause project delays which have led to increased compensation strategies (payroll and benefits) to retain workers. Consumer demand for items and materials continues to outpace inventory since the pandemic driving claim costs.

Additionally, worker shortage and supply chain disruption can be attributed to the rates in commercial auto surges due to vehicle repair expenses, in addition to an increase in frequency and medical treatment expenses. Loss frequency and severity, as well as rising material costs exacerbated by the above have caused increases in the cost to repair, renovate, and build new.

What Can You Do to Control the High Cost of Insurance?

You can prepare for these cost and underwriting changes by taking the following steps:

Have Conversations Early and Often

Talk with your insurance professionals to keep informed of industry trends and changes in the insurance market. Your insurance professional should be accessible, offer risk support, provide guidance on what is trending in the market and causing issues for others, and be an advocate for you in the marketplace.

Be Prepared and Advocate

Review, organize, and showcase your organization’s risk management best practices and attributes with a heightened focus on the area(s) that may have the greatest concern for cost escalation. If you’re a contractor, this could be fleet management, contractual risk transfer, subcontractor risk management, return-to-work strategies, and/or cyber security controls.

Learn to Adapt for the Future

You can do this by retaining more risk, transferring more risk, or avoiding risk altogether by choosing to exit a segment of your business, leaving a troublesome geography, or evaluating contracts and relationships with other contractors and owners that do not work with your business. Some of these may seem drastic, but the main point is to evaluate and make changes/create strategies that will make your business successful.

We Can Support.Fully. Your Efforts!

I get it…this is not only confusing, but it impacts your bottom line. Back to my initial thought…you could ensure you procure good coverage at reasonable cost by thinking in an equation…

E[U] = (1 − π)u(W − P(C)) + πu(W − P(C) − L + C)

Or, rather, detailed/complete applications + supplementary information + good business controls + knowledgeable/experienced/results driven team of insurance specialists.

Or, you can reach out. It may be easier than trying to take yourself back to school! Remember, our experts at Holmes Murphy are always happy to jump in and help out!

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