The title of this article is a subtle “ripoff” of a Time Magazine cover story written in March 1986; “Sorry America, Your Insurance has been Cancelled”. At this time, the industry went through one of the hardest markets in its history. Of course, the article did not specify Louisiana. However, the insurance market in Louisiana is already difficult and this is compounded by the fact that there is a lack of assistance from the Insurance Commissioner’s office. So what do we mean by this alarmist headline? The drought of commercial markets in Louisiana is at the lowest this professional has seen since 1986, and the commercial auto market is almost non-existent.
WHAT WILL THE STATE OF THE MARKET BE IN 2020?
It is important that you understand the announcements that come out of the Insurance Commissioner’s office are often not accurate. Before this last election, we heard how so many personal auto companies had decreased rates. While that may be literally true, what was not disclosed was that in the 2 to 3 years before the rate decreases, substantial increases had been filed and approved by the Insurance Commissioners’ office. These large increases were not offset by the small rate decreases that occurred immediately before the election. It should be noted that the large rate increases occurred between elections when there was no publicity around the subject. This may seem unusual, but it is not. Because the Office of Insurance Commissioner is an elected position, and they are allowed by the Ethics Commission to receive donations from parties they regulate, it is pretty much a repetitive cycle. Substantial rate increases occur between elections so that when it is time to appease the voters, the carriers will implement small rate decreases when close to an election cycle.
In Louisiana, we have two very predominant factors that affect rates. One is the losses associated with accidents that occur in any state. The other is the vast political influence that the Insurance Commissioner has in this state because of the ability to receive political donations from the very companies that he regulates. The first step in fixing the rate issue would be to eliminate through ethics legislation the ability to accept donations from entities that the office regulates. Then, they would be no reason to approve rate increases because of political favors. The other step would be to put together a task force that would place enough pressure on the legislature to amend the laws that make Louisiana a hotbed for plaintiff actions.
So, where does that leave us for the New Year 2020?
PERSONAL AUTO
For our personal lines auto customers, most of you from the 2nd half of 2019 has already seen rate increases in your auto. If you have not yet renewed this year, you should expect a rate increase for your next renewal. We have re-rated many of these customers and placed them in alternative markets, or we have suggested alternative markets we do not contract with and referred them to other carriers. For those, we could not get alternative plans for, we proposed changes in coverage if their budgets could not handle a substantial rate increase. Since we mainly write preferred customers, the majority of our policies are written through Safeco, a division of Liberty Mutual, or Metropolitan. Although both had a recent rate increase, their rates had not increased in several years. We do not expect that we will see a significant rate increase in either company in the next year. While you may see some improvements, barring a catastrophe (flood or hurricane), the personal lines market should settle down a bit, and rates should stay stable.
PERSONAL HOMEOWNERS
This market has seen a rate increase in 2019 from relatively mild to over 10%. We have had carriers that took flat rate increases across their book of business and other carriers who raised rates based on the activities of each customer and the territories in which the risks reside.
At Apron Agencies, we have a rule of thumb that should there be a rate increase that is more than 4 to 5 percent; we automatically put the risk back out to the market to see if we can obtain a better rate for our clients. Our principles direct us not to sacrifice a policy that has great coverage for a policy with lesser coverage UNLESS detailed explanations are given to our clients to ensure they know what coverage they are sacrificing for the lower premium. In some circumstances where economics is a big issue, a client may choose the lesser coverage because of cost. If this is the case, we make sure the client knows what he is sacrificing for price. But, that is alright if that is what the client can only afford. Better to have some coverage than none at all.
We have been fortunate at Apron Agencies to pick up some new markets that have supplied us with coverage that we were able to substitute for carriers that left the market. We continue every day to scour the markets to find new carriers that will write in Louisiana.
Rate increases in personal homeowners were subject to quite a few hurricanes in the past few years. While none of these were direct hits on Louisiana, there were some regional storms, (Texas and Florida) that were large loss catastrophes.
If you had a claim, large or small on your homeowner’s policy, expect a rate increase. It does not matter if you were at fault or not. Insurance is based on one premise; money in and money out. There are no emotions taken into account when a claims adjuster is settling a claim on a property. It is all figured by the square or linear foot based on construction costs charts for your area of the country.
At Apron, we do encourage our clients to speak directly with their adjusters. However, if you have difficulties with the adjuster for whatever reason, we urge you to contact us. We can often intervene with your adjuster, or through our representatives at the carrier, to mitigate any issues you may have. Does this always work? No. Sometimes, you happen upon an adjuster that sees a situation his way and no other way. At that point, you may have to seek other remedies. But we will try our best to assist you.
We expect the homeowners' market to stay on the “hard” side for the next couple of years regardless of storms. If any extreme storms happen in the next few years, this will increase rates.
COMMERCIAL AUTO
For our customers that are in business, small or large, we are afraid the news is not good. The Commercial Auto market has been decimated in the past two years and the past year in particular. There have been no new markets coming into the state in the last two years, and the ones that are here are extremely expensive and very rigorous concerning underwriting restrictions. We have one market that will write non-emergency medical transportation, and they want a completely clean record (no accidents or moving violations in the past three years), and the cost is $30K per vehicle. That is an impossible cost.
I can quote other examples like this, but the main point is that this price issue is now beginning to affect commerce in this state. No one can afford these rates and still make a profit in their business. In other industries, we would call this price gouging. However, by using sophisticated mathematical analysis and all types of expense ratios, these carriers can show on paper where they are losing money in this line of business. In truth, much of the industry is. However, some of the industry is using these facts to increase rates while they can, before someone becomes wise to their subterfuge.
Insurance is one of the industries that depend on holding premiums from insureds for years before paying out cash in claims. Depending on the type of insurance, we categorize claims in two categories: short tail and long tail. Most auto claims are considered short tail, as an accident occurs, and money is paid out to repair the property and/or pay medical bills. Sometimes, long tail claims occur if there is litigation that occurs as a result of an auto accident. However, most long-tail claims are considered something like Worker’s Compensation. This occurs when someone is hurt on the job and will take a significant amount of time for the claim to reach its ultimate end.
While claims are waiting to be settled, the insurance carrier is holding this money in “reserve”. While in reserve, this money is being invested and making interest on money that will eventually be used to pay the claims. Because interest on investments has been so low in the past several years, carriers are making less money in the investment business than ever before. Investment income has always been used to make up losses on less profitable lines of business. Since investment income is so low, carrier losses in lines like commercial auto are now lines that carriers no longer want to write. Before this time, commercial auto may not have been a large money-maker for the carriers, but they sold it because it was what we would call a “complementary line”. In other words, for a carrier to write your business owners' insurance, they might write commercial auto because your business has a few trucks that are used in your business. Thus, the company would write the coverage on the trucks, but the real money maker was on the property coverage and general liability. But, you had to have the auto coverage to run your business. Thus, the carrier would write the commercial auto as a “compliment” to the rest of your coverage. You also must remember that the state of auto coverage was not as litigious as it now is, so that auto was not the loser carriers now characterize it.
None of the investment factors now play into the profits of the insurance carriers as they once did. In order to make up for the loss of investment income, insurance carriers are now raising rates to compensate their shareholders for the loss.
COMMERCIAL PROPERTY AND GENERAL LIABILITY
Commercial Property is a line of insurance that will see large increases in the next two years. You will hear the term capacity used in the insurance market. Capacity means the amount of dollar volume that insurers are willing to place at risk in a particular line of business. In the past year, Lloyds has shut down eight (8) syndicates, all of which had vast sums in the commercial property market. The syndicates are no longer willing to place their Members' money at risk in this market. Some of this is because of catastrophic losses in the past few years, and others claim that it is just not a profitable market and has to have rate increases to become profitable. Some industry analysts are stating that the market is just starting to firm up and will remain that way for the next five years. Regardless of which analysts in whom you place your faith, the outcome is still going to be a “hardening” market.
On top of the primary carriers, we must also deal with the re-insurers.
Many of the re-insurers are tired of not making underwriting and investment profits on their money. They are shutting down exactly like the eight (8) syndicates referenced above, or they are raising the rates. When my business was operating in the re-insurer markets, there was always one principle we swore by; re-insurers always made deals that made money for them. Sometimes those deals were so complex it took us neophyte’s weeks along with other consultants to assist us in trying to figure out whether or not we could meet their demands or whether we just needed to fold our tents. Re-insurers always make certain they have what is called a “margin”. That margin is pretty much a percentage guarantee of what they intend to make on a given program. If they do not believe they cannot make a guaranteed minimum percentage, they will not enter into the treaty. However, there is always an upside where they can make more money if results are good. The re-insured entity seldom shares in that upside unless it is so lucrative it would be considered unconscionable not to share the profits with the primary carrier. Re-insurers are tough to deal with, and most Insurance Commissioners have little idea of what is going on in the insurance market in general and no idea of the reinsurance market at all. Thus, rates are increased with their not having a clue of the real reasons.
General Liability markets are experiencing rate increases because of a litigious society that is being fueled by social media. That result is now being termed “social inflation”. What exactly is this? Let’s take a look at an issue most everyone has heard of by now; the #MeToo movement.
The #MeToo movement began in 2017-18 with women coming forward, stating they were sexually assaulted and abused by men in the Hollywood Studio setting. It then spread quickly into the corporate arena, in both large and small offices. A firms’ General Liability Insurance would be the line of insurance that would cover this type of claim. Also, Workers’ Compensation insurance could be involved. For the sake of simplicity, we will use the term Liability Insurance for this discussion.
The alleged victim makes a claim against the alleged predator and hires an attorney to file suit. Whether or not the claim is true or false makes no difference at this juncture. The defendant must then hire an attorney to defend himself. This normally takes place in the venue of calling your insurance carrier, and the carrier sets up a claim and then hires counsel to defend the insured and the carrier.
What are the financial outcomes of these cases? Whether the alleged predator is found guilty or not, the economic toll can be quite costly. This is particularly true of high profile insureds. Many insurance carriers have specific questions on applications asking if the applicant is a “high profile person,”; i.e., an athlete, an entertainer, a politician, etc. Underwriters know from experience that persons seeking financial settlements are not going to file suit against someone that has no money. Therefore, when underwriters look at applications for General Liability risks, they have to take into consideration the finances of the insureds, as well as their employment, their reputations, etc.
So, in the first example, we will assume the defendant is held liable. In addition to all of the legal fees, expert witnesses, research, and investigative expenses and all other expenses that go into a case of this type, the insurance carrier is at the mercy of a jury as to how much money they will award the plaintiff. In addition to actual monetary damages, the jury can award what are called punitive damages. These are damages that are assessed on the defendant to “punish” his or her behavior. Punitive damages have no cap and can be any amount that a jury feels justified in awarding. In cases where the defendant has been sued multiple times for the same outrageous behavior, the award could enter the hundreds of millions of dollars. Even if a defendant is held not liable, the insurance carrier still has a financial loss in covering all of the expenses involved in a lawsuit like this, and the defendant may have substantial expenses trying to reestablish his or her reputation.
All of these expenses have significantly increased because of social media, thus now termed as “social inflation”. Social media has become a nightmare in the handling of high profile claims because what was once handled by a PR firm or held in confidence is now splashed all over social platforms with little value given to the significance of any truth. Each juror that sits in judgment cannot help but hear and read these comments, and this bias is taken with them into the Court Room. No amount of jury instructions given by the Judge will change the effects of hearing or reading these statements one way or the other and will affect the outcome of any deliberations. Remember, in civil trials, it only takes a preponderance of evidence for a jury to hold someone liable. This principle was exhibited in the O.J. Simpson trial. He was found innocent in the criminal trial and held liable in the civil trial.
Because of all of the aforementioned discussion, there will be significant increases in General Liability rates as well as a decrease in the amount of coverage that will be provided. I have already been notified by some carriers that they will not afford coverage for Personal Umbrellas unless the underlying auto has coverage of $1,000,000 combined single limit. At present, companies have been accepting coverage of $250/$500. This will no longer be acceptable in the future with some carriers. If you are with any of these carriers, we will have to make changes to move your business to other insurance companies.
MISCELLANEOUS COVERAGES
For most of our clients, the four categories above have covered all of your concerns. But, for some of our clients, we have other coverage like Cyber Liability, Vacant Property, Directors and Officers Liability, Surety Bonds, Etc. Most of these policies have seen some increases. On the other hand, Cyber policies have softened and are experiencing decreased rates. Each of these markets has to be analyzed on an individual basis and will be discussed with each client as they come up for renewal. Suffice it to say, that very little in this economy is getting cheaper and everyone should prepare for their business and personal expenses to rise in the next two years.
Professional Liability insurance has been on the decline for the past four years, but I doubt that that will continue in 2020. If you have been one of our fortunate commercial clients, you have saved a great deal of money with us in the past 3 to 4 years, remember that when we renew your policies this year. What comes down will eventually go up, and that maybe the story line this coming year.
We will certainly try to notify you of any upcoming trends in the market place as we see them coming. However, please know that while we work very hard to stay well informed of current changes, no one is a fortune teller at Apron Agencies. As the veteran of this group (that means old broad), I try to read as much about the markets as time permits. I do enjoy staying abreast, but the reading material is enormous, and sometimes I need to take out time for a really good football or basketball game. We will do the best we can to forewarn you of significant changes. I hope this newsletter finds all of our customers well and about to embark on a new decade with us!!
At Apron Agencies, we offer you a full team of accessible agents who are here to work with you and answer all of your questions. Call to schedule an appointment today at (504) 834-9280.
