Written by Dave Mathews, Partner

There are a lot of songs about pressure. Queen and David Bowie gave us the gem that is “Under Pressure” in 1981.  Billy Joel followed in 1982 with his take on “Pressure”.  However, the Clash’s 1980  “Pressure Drop”** more accurately describes the direction of the insurance industry today.

The insurance marketplace goes through cycles, like most other industries. Those market cycles are named soft and hard markets by the insurance industry. Soft markets are characterized by decreasing rates, easy underwriting and plenty of coverage available. Hard markets are the opposite, with rate increases, underwriting scrutiny and insurance carriers pulling back on limits and adding coverage limitations and exclusions.  Historically, hard markets last less than two years. Our current hard market is bucking the trend lasting longer than expected.

After a prolonged soft market from the mid to late 2010s, the hard market came back with a vengeance in the 2020s. There were many forces at work that instigated the hard market.  Economic (interest rates and the decline of the bond market), legal (social inflation and nuclear verdicts) and supply chain issues (exposed and exacerbated by the pandemic) were just a few.  During these years, double digit rate increases drove up the premium for most insurance policies.

Despite lingering challenges, there are signs of relief for buyers as Q2 2024 insurance renewal results become available. Let’s focus on three areas that generally impact the gas distribution industry.

Natural Disasters have a significant impact on the property insurance industry. The National Oceanic and Atmospheric Administration (NOAA) measures the number of billion-dollar Natural Disaster events that strike the United States each year. From 1980 to 2007, the average number of billion-dollar events was 5.2 per year. From 2008 to 2019, there were 12.7-billion-dollar events annually. From 2020 to 2023, 22-billion-dollar events occurred each year. That precipitous increase is one of the factors driving the property insurance marketplace up significantly in the last several years.

Coinciding with the increase in natural disasters was the impact of supply chain issues that drove up the cost of construction. As damaged buildings were being repaired and replaced, insurance carriers quickly realized that many buildings were underinsured. The cost of raw materials and labor spiked during the pandemic and remain high. In response, insurance carriers are asking their insureds to increase building values which multiplies the impact of rate increases.

There is, however, some optimism in the property marketplace. Although wind exposed coastal areas and wildfire geographies will still experience challenging renewals, most buyers should not see increases as sharp as they have been in the past. The most recent CIAB Market Survey shows commercial property rates increased on average 8.9% in Q2 2024, versus 10.1% in Q1 (and down from 18.3% in Q2 2023). More carriers are competing for business, especially for businesses with good loss history, and the insurance buyer is seeing some relief.

Cyber insurance cannot be ignored by companies in any industry. No company, regardless of size, is immune from cyber-attacks. The pandemic caused a mass exodus from working in the office to working from home.  Home computers were often not as secure as office computers and hackers took advantage of the situation. A significant increase in the frequency and severity of ransomware attacks, phishing, social engineering among others led to losses that the cyber insurance industry did not anticipate. The work from home shift also exposed the significant lack of network security as well as needed training for employees to recognize fictitious emails. In response to the subsequent massive losses, the insurance industry increased pricing sometimes as much as 100% and required upgrades to network security and employee training. In 2024, we have seen a significant drop in the pressure on this line of business. Renewals are often flat and at times, rate decreases are being delivered to insureds.

Workers Compensation pricing continues to be a relief for insurance buyers. Over the last several years, workers compensation rates have been flat or slightly down. Several reasons are contributing to the trend. Greater focus on employee safety and training, additional technology used to perform more hazardous jobs and return-to-work programs all contribute to lower overall losses. Although some reports show that medical inflation could be one factor that adds pressure for rates to increase, employers continued focus on safety practices will be rewarded with favorable insurance renewals.

Although there is cause to be optimistic about some areas of the insurance industry, pressure is rising for Automobile insurance. Reports show that auto rates have increased each quarter for the last 13 years! Rising vehicle repair costs, nuclear verdicts and the cost of medical care for injured passengers are just some of the factors that will continue to contribute to auto rate increases for the industry. The CIAB Q2 2024 report showed that auto rates increased by an average of 9%, more than any other line of coverage. Despite rate increases for over 50 quarters, the insurance industry still loses money on auto insurance. You can expect to see rate increases continue for auto insurance.

Of course, employers can have an impact on their insurance renewal premiums. Insurance carriers are looking for best in class companies to underwrite. A strong safety program championed by company leadership is shown to reduce losses to employees, automobiles, property and more. Updated network security will lessen the chance of a cyber related claim.

The insurance industry is continuously evolving and reacting to economic, legal, environmental and many other forces. The prolonged hard market does not look like it will end soon, but there are areas of optimism that will provide some needed relief and drop the pressure on businesses.

— Dave Mathews

Originally published by GAWDA