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The importance of achieving rate adequacy in today’s market

If carriers lack the discipline to obtain adequate rates today, they may find themselves unable to meet insureds’ needs in the future.

By Bryan Sanders, President, Markel Specialty

When it comes to trends affecting the insurance industry, 2023 is a “target-rich environment.” The combination of risks that has emerged in recent months is complex, and is posing an unusual degree of challenge for carriers seeking to ensure appropriate compensation for risk exposures transferred. In other words, how can we achieve rate adequacy in today’s market in a way that will serve the long-term interests of insureds and carriers alike?

The current mix of risk factors is daunting. But if individual carriers lack the discipline to obtain adequate rates for the insurance they write today, they will likely find themselves unable to meet the needs of insureds in the future.

A unique concurrence of risk factors

The insurance industry always faces risks and challenges. Still, I would argue that the current risk environment presents the most significant challenge we have faced in 45 years.

Multiple macro risk issues are making it difficult to achieve rate adequacy. We’re dealing with a war in Europe, the aftermath of a pandemic, widespread social unrest, and the escalation of cyber risk.

“The current risk environment presents the most significant challenge we have faced in 45 years.”

There are other major risks afoot as well, including supply chain constraints, workforce disruption, climate change impacts, the threat of a U.S. (and possible global) recession, and now, banking industry concerns. And what’s most amazing: all of this is happening at the same time.

Economic inflation and social inflation

Underneath all of this, macroeconomic factors are also contributing to uncertainty about rate adequacy, including both economic inflation and social inflation. And for our industry, social inflation means the impact that non-economic influences are having on the cost of claims.

In the US, the civil litigation environment is one of these influences. It has been bad, and it is getting worse. And as it gets worse, it is materially increasing loss costs across the industry.

Despite some recent positive signs, such as the passage of a tort reform bill in Florida, many other legislative and judicial outcomes are driving increased frequency of bigger awards and higher settlements. Claims in the hundreds of millions of dollars, and in some cases billions of dollars, have been in the news.

“While social inflation is increasing the cost of insurance, economic inflation is impacting the value of both premiums and claims.”

One story may indicate the scope of the challenge. Earlier this year, there was a major jury verdict against a railroad. One of their trains struck a person on their railroad track, at night. Thankfully, the person survived. The jury found the railroad 80 percent responsible. It awarded the person more than $50 million in compensatory damages, and $500 million in punitive damages—in all, more than a half billion dollars, to a person who was sitting on the railroad track at night.

Those are the types of things you just can’t underwrite for. And while social inflation is increasing the cost of insurance, economic inflation is impacting the value of both premiums and claims.

When inflation was in the 2% range, carriers had more confidence that their trend assumptions would adequately account for the costs of paying claims in the future. But recent levels of inflation, which at one point exceeded 9%, have added to loss costs, and have introduced more volatility and more uncertainty into the mix.

We’re also seeing what can happen when a pandemic creates a backlog of legal cases. When the floodgates eventually opened, the impact on claims costs was much worse than if the industry had been able to settle those cases a few years earlier.

Controlling what we can control

To navigate this current market, it is critical that insurers achieve rate adequacy. Based on the macroeconomic issues we’ve mentioned, there’s never been less certainty about rate adequacy, at least not in the recent past. But what we can say with absolute certainty is that the industry needs to get adequate rate to compensate for increased loss trends—to offset the impacts of inflation—and to compensate for ongoing uncertainty and volatility.

At the end of the day, we as an industry need to get adequate rate today so we can be in business tomorrow—providing our customers with the products they need. Beyond rate, we need to actively utilize other underwriting tools that can help. That means terms, conditions, attachment points, and most importantly, risk selection.

“With very few exceptions, we see absolutely no justification for price decreases.”

Viewing the industry from Markel’s point of view, we have been disappointed to see prices actually falling in certain lines of business. With very few exceptions, we see absolutely no justification for price decreases, given all the factors we have just discussed.

We will continue to push for what we believe are “must have” rate increases. We will walk away from business that’s not adequately priced, so we can be in business tomorrow and the next day after that. And we continue to believe that it is in the interests of both insureds and brokers to look beyond price alone, and to consider whether individual carriers have a strong balance sheet and a reliable claims-paying history. In other words, whether they are likely to “be there” for insureds in their eventual hour of need.

We hate losing renewals. At some point, however, if we see terms and conditions and pricing almost crashing on an individual deal, we have to walk away—even though we don’t believe that is in the long-term interests of our insureds.

It’s absolutely true that economic and social inflation are more challenging than we have seen in many years. We all must address these issues in a smart, systematic way that can enable carriers to manage their businesses for long-term growth and profitability.