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Commercial insurance rates increasing due to inflation & legal system abuse: APCIA

17th May 2022 - Author: Jack Willard

In the American Property Casualty Insurance Associations (APCIA) latest report, “Commercial Insurance Rates Rising: What Business Owners Need to Know”, the company examined the impact of inflationary pressures on commercial lines insurance and business owners.

With “skyrocketing” inflation and legal system abuse forcing prices higher across society, along with losses in lines such as cyber insurance also increasing, insurers are facing significantly higher claims costs in recent years.

APCIA also states that in many cases, insurers’ claims costs and expenses are now higher than what is collected in premiums, which has led many insurers to increase rates on commercial policies to keep pace with the losses and rising costs.

Robert Gordon, senior vice president of policy, research, and international for APCIA, said: “Insurers and agents continue to look for ways to reduce costs while still meeting all obligations to policyholders, but as claims and other costs have increased dramatically insurers are under pressure to raise rates on a variety of insurance policies typically utilized by small businesses.

“As a result, small and medium-sized businesses may see an increase in their insurance costs when they buy a new policy or renew a policy, even if they have not made a claim in the preceding year.”

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Meanwhile, a recent survey from the Council of Insurance Agents and Brokers (CIAB) found that in 4Q21 medium-sized businesses experienced an average increase in insurance premiums of 10.6% and small businesses faced an average increase of 6.3%

In addition, after three years of combined ratios around 99%, preliminary estimates of 2021 suggest that the property and casualty (P&C) insurance industry’s commercial lines combined ratio is at almost 101%, therefore meaning that insurers paid more in claims and expenses than they collected in premiums.

Gordon, added: “U.S. P&C insurers faced an $11.3 billion net underwriting loss in third quarter 2021. These trends are not sustainable.”

Furthermore, APCIA noted that rapid increases in inflation and other developments over the last year that insurers have paid out to policyholders have led to significant insurance losses. This was highlighted in March, 2022 when the consumer price index (CPI) jumped 8.5% from the previous year, the fastest 12-month pace since the early 1980s.

At the same time, legal system abuse has also been driving insurance losses and higher costs. APCIA stated that changes in laws are encouraging more lawsuits, and jury awards increasingly do not reflect logical conclusions or precedents.

In particular, general liability insurance is impacted by lawsuit trends, including the number of large “nuclear verdicts” APCIA noted that when lawsuits against insured businesses become more likely to lead to large verdicts, the cost of the insurance policy that covers those verdicts may increase, as well.

This is showcased through the P&C industry, as incurred losses for general liability have skyrocketed more than 57% since 2017.

Cyber-related losses are also growing exponentially, as ransom payments have frequently exceeded $1 million, and the resulting costs for business interruption or data exfiltration increased claim payouts.

APCIA noted that the massive growth in ransomware attacks have increased the 2020 loss ratios for stand-alone cyber policies by more than 50%, with the corresponding combined ratio also being estimated at more than 100%. APCIA added that this trend is expected to have continued in 2021.

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