Like many other industries, inflation has been top of mind for risk managers, insurers, and P&C professionals. McKinsey & Company estimated that inflation increased the cost of P&C claims by $30 billion in 2021,1 and it continues to be a primary concern across P&C lines. Property insurance is being hit hard this year. Hurricane Ian alone is expected to cost insurance companies over $60 billion.2 In combination with other recent catastrophic events (CATs) and construction cost inflation, this is driving substantial rate increases and higher underwriting standards for property policies. Inflation in auto costs and increased driving are also forcing insurers to respond with higher auto rates this year. So, cost-control practices will continue to be a main focus throughout 2023, both for insurers and businesses.

What impact is inflation having on the P&C market? Where is it hitting the hardest?

In the current hard market, we are expecting to see price increases across all lines of business, with an overall average increase of 9.3% in rates.1 Some of the top business lines being impacted include cyber, commercial property and personal lines/private risk (including private auto).

Following Hurricane Ian, we saw drastic increases in property insurance rates, with properties with poor risk quality seeing increases of 25% all the way up to 150% at the start of 2023.3 The number of natural disasters and level of exposure have been trending up over time, and costs are compounded by the need to rebuild with inflated prices and strained supply chains. According to NOAA National Center for Environmental Information, natural disasters cost the U.S. over $165 billion in 2022.4

When it comes to cyber, one of the toughest lines of business to write, we expect rates to increase as much as 50% for more complicated risks and 15% for simpler risks.1 This is less a result of inflation and more like growing pains for a newer market. As new risks continue to emerge and underwriting practices strengthen in cyber, it is difficult to predict how significantly inflation will influence costs.

Personal lines/private risk (including auto and homeowners insurance) rates are expected to increase almost 13% on average this year, with automobile rates seeing increases of 8-10% across the nation.1  Although Hurricane Ian and CATs dominated headlines in 2022, of the 15.5% increase in net losses across all business lines, private auto liability represented the largest sector in net incurred losses.5 Supply chain issues that drove up the prices for vehicle repairs and replacement had a direct impact on auto insurance claim severity and created a rate increase need for auto insurers to cover the cost increases. For many companies these rate increases are coming in conjunction with increased underwriting scrutiny, forced up retentions, and coverage reductions.

Workers’ Compensation is an exception to the norm this year. In spite of continued inflation, rates are expected to remain unchanged or slightly drop in 2023, with stable coverage options and underwriting practices. Employment Practices Liability is also looking favorable for buyers in 2023, with modest rate increases of 7% on average. Finally, Surety is also expected to see average increases just above 7%,1 but will face increased underwriting scrutiny with potential for larger rate changes on a case-by-case basis.

Geography is an important factor as well, and not just related to climate. For example, medical professional liability severity trends have increased, but this varies significantly by region. Some states are seeing double digit severity trends and rate increases while others are experiencing very modest increases. Differences in litigiousness and jury awards drive much of these state-by-state differences.

While most buyers are seeing rate increases and some reductions in coverage, high-risk clients are affected the most by continued inflation and other cost increases. This includes businesses with adverse loss histories, located in CAT-prone areas, or with frame construction buildings. Unfortunately, we are not seeing an influx of new players or investment to mitigate rising rates.

When looking at the industry level, Alera Group reports that the two sectors with the most unfavorable market situations are nonprofit organizations and the hospitality and gaming sector. Although nonprofits don’t make up a large portion of organizations in the U.S., they often require specialty insurers which can be costly and hard to find. Nonprofits are also often targets for cyberattacks and face unique underwriting processes that differ from other industries. The industry most impacted by inflation and unfavorable market conditions is the hospitality and casino industry where we expect to see increases in rates, reduced insurer options, and stricter underwriting processes across cyber, employment practices, general liability, property and umbrella.

In wake of recent natural disasters, what’s the outlook for property insurance underwriting and rates? On a practical level, what should buyers expect?

Property rates remain high and are expected to remain high for a while. Hurricane Ian caused big disruptions for property reinsurers, who in turn are pushing carriers for better valuation and stricter underwriting — especially in catastrophe-prone areas. As for how this will realistically play out, buyers may see fewer coverage options and new requirements like recent appraisals, insurance-to-value increases, engineering reports and complete applications. More underwriting processes will also focus on fire suppression systems, difficult-to-place risks and limits on high-rise structures.

According to Alera Group’s P&C Market Outlook, cyber liability pricing is expected to increase by 15% in 2023. What do you think this says about the market and what can organizations do to control their spend?

The cyber market is still relatively young and new risks can emerge quickly. Although rates are expected to increase by 15% on average for the simpler risks in 2023, more complicated cyber risks will see increases as much as 50%, often with difficult underwriting processes. Terms and conditions are changing to better clarify challenging coverages, resulting in longer underwriting processes. Employers and buyers of cyber insurance should ensure they are working with experienced underwriters and that they properly understand the specific cyber risks associated with their business so they can prioritize coverage selections.

Are there any emerging P&C lines that will take the spotlight in the years to come? What about in the captive space?

I cannot say for certain we will see completely new lines of business emerge in the next few years in the P&C market. But I do expect to see changes in coverage within different lines of business, particularly as our economy evolves and new technologies and products are utilized by both individuals and commercial industry. Artificial intelligence and other product innovations are expected to have an impact on both frequency and severity of loss outcome and will influence actuarial pricing indications for various insurance products.

I think captives will continue to emerge as a critical part of the ecosystem. As coverage capacity in lines like commercial property goes down or as new risks emerge in lines like cyber, captives offer organizations new options for layering the coverage they need at a price that truly reflects their own loss history and level of exposure. Captives are able to fill in the coverage gaps in cases where the commercial market has yet to come up with a competitive solution. This happened for cyber risks about a decade ago.

How are actuaries poised to help organizations and risk managers tackle some of the challenges mentioned?

Actuaries specialize in quantifying risks using statistics, whether for a business or an insurer or an entire industry and using that information to manage risks in a cost-effective way. This runs the gamut from reviewing a company’s loss history and current insurance policies to informing better choices in the commercial insurance market, all the way to setting up a captive insurance company tailored to the needs and experience of a specific business. In an environment like today with rising premiums and reductions in capacity and coverage options happening for many P&C lines, actuaries can provide organizations with tools and a higher level of confidence around managing their risks and their costs effectively. As an example, actuarial proforma financial models can be leveraged in a captive solution and aid a company’s decision-making around the appropriate balance between retaining risk and utilizing available market options to transfer risk in a cost-effective way.

The pandemic had certain influences on insurance underwriting. Have we transitioned past these pandemic issues yet?

Court room closures, significant reductions in vehicles on the road, delayed healthcare surgeries and procedures and other changes at the onset of the pandemic had a big impact on the underwriting experience of insurance companies for most property and casualty lines of business. As one would expect, when our economic engine slows the frequency of claims also does. As we are now well past these issues and our economy is mostly back up and running, we are now working through other, likely temporary issues that are currently impacting the underwriting experience within the commercial market and driving the need for rate increases. We are certainly seeing this in the auto insurance market. After over a decade of low treasury yields and a low inflationary environment, we are now in a high inflationary environment for personal lines auto. Supply chain issues during the pandemic resulted in significant increases in vehicle costs and have resulted in rising auto claim severities and the need for auto rate increases in the market.

Any final thoughts on the P&C landscape?

It’s a difficult year for property and auto costs, and cyber risks continue increasing. Some of the bottom-line impacts of these changes are unavoidable, but rate and coverage changes in the commercial insurance market are also driven by broad industry patterns that might not apply to a specific organization. I expect to see more businesses taking a close look at their own risk profile and exploring all of their options to close coverage gaps and take advantage of alternative risk funding structures when appropriate.

1 Alera Group’s 2023 P&C Market Outlook
2 https://wusfnews.wusf.usf.edu/economy-business/2022-12-01/hurricane-ian-is-expected-to-drive-more-property-insurers-out-of-business
3 https://www.businessinsurance.com/article/20230104/NEWS06/912354660/Some-rates-will-stabilize-less-optimal-risk-profiles-will-see-hikes-
4 https://www.climate.gov/news-features/blogs/2022-us-billion-dollar-weather-and-climate-disasters-historical-context
5 S&P Global Market Intelligence, March 2023