2021 Market Report & Forecast

2021

Market Report & Forecast Understanding the trends driving rates in commercial insurance and employee benefits 2021 Market Report & Forecast

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Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . 03 Commercial Property . . . . . . . . . . . . . . . . . 06 General liability . . . . . . . . . . . . . . . . . . . 08 Commercial Auto . . . . . . . . . . . . . . . . . . . . 10 Workers’ Compensation . . . . . . . . . . . . . . . . 12 Umbrella and Excess . . . . . . . . . . . . . . . . . 14 Directors and officers . . . . . . . . . . . . . . . . 16 Employment Practices liability . . . . . . . . . . . 19 Cyber . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Employee Benefits . . . . . . . . . . . . . . . . . . . 23 3 Things You Can Do . . . . . . . . . . . . . . . . . . 25

2021 Market Report & Forecast

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Executive Summary

Executive Summary We need look no further than the bottom lines of the largest insurance companies to understand why we’re in one of the toughest rate markets in years:

social unrest and political riots. Historically low interest rates, years of sexual misconduct cases, and the ongoing opioid crisis only added to employers’ and insurers’ woes.

According to A.M. Best, the U.S. property/ casualty industry’s net underwriting income plunged by a dramatic 86 percent in the first nine months of 2020, falling to $600 million.

Indeed, with loss ratios heading in the wrong direction, an already-hard insurance market showed little sign of letting up in 2020 (see chart, “Rate Increases, Quarter by Quarter”).

The year ahead, we’re afraid to say, isn’t likely to offer much relief.

Not surprisingly, COVID-19-related losses (amounting to $80 billion at last count) were partly to blame, as were higher underwriting expenses and premium returns to businesses either hobbled or closed by the pandemic.

Record-setting wildfires and a hurricane season unlike any other didn’t help, not to mention damage seen in a year filled with rampant

Evidence of the market’s continued hardening was apparent in the Council of Insurance Agents and Brokers’ (CIAB) third-quarter 2020 report, with premiums increasing by an average of 11.7 percent across all-sized accounts. It was the 12th consecutive quarter of increased premium pricing across all-sized accounts.

Rate Increases, Quarter by Quarter 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

1Q 2019

2Q 2019

3Q 2019

4Q 2019

1Q 2020

2Q 2020

3Q 2020

Average Commercial Pricing Increases; Source: CIAB

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Executive Summary Continued How long before these increases begin to settle down? That’s hard to say, though we derive some hope in the development and production of coronavirus vaccines that promise to prevent illness and, just as critically, heal a seriously wounded global economy.

That said, businesses with poor claims records should expect to see further rate increases.

Insurance buyers also should expect carriers to continue to offer lower limits while pressing for higher self-insured retentions and higher deductibles.

What else? Well, greater underwriting scrutiny will mean longer turn-around times, so incomplete or ill-prepared applications to the insurer will run into trouble.

These are, as we’ve all heard much too often, unprecedented times.

What follows is a deeper discussion of nine major coverage lines, including employee benefits, the trends influencing rates and what we anticipate in terms of price changes in 2021.

Special Note: Knowing exactly where insurance premiums might go is never an exact science. It’s more of an educated guess. Rates are influenced by your type of business, location and claims history, among other variables. A commercial auto renewal in Las Vegas, for example, could be dramatically different than one in Phoenix. That said, this report is intended to give Mahoney Group clients a better idea of what to expect and a clearer understanding of why rates have been rising so sharply.

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Commercial Property

Commercial Property Devastating wildfires, hurricanes and even derechos, the Spanish word for intense, widespread, and fast-moving windstorms and thunderstorms. We saw them all and more in 2020, a year in which property insurance rates rose far more quickly and higher than anyone had forecast.

Commercial Property Rate Change 15.0%

12.0%

12.0% 8.5%

9.0%

8.8%

13.3%

14.2%

9.7%

5.9% 6.0% 3.0% 0.0%

1Q 2019

2Q 2019

3Q 2019

4Q 2019

1Q 2020

2Q 2020

3Q 2020

Source: CIAB

The wildfire story was especially dramatic in Arizona and California, where multiple mega-fires burned millions of acres through the summer and into fall. Responding to the crisis, California authorities issued an order preventing insurance companies from dropping homeowners for one year.

It wasn’t just the fires, of course.

The average hurricane season has 12 named storms. September 2020 alone had 10. There were so many named storms in 2020 that the World Meteorological Organization ran out of hurricane names in the alphabet and resorted to using Greek letters.

As is typical, the U.S. Gulf Coast received the worst pummeling. Hurricane Laura in August crushed entire homes and killed over a dozen people in Louisiana. It was followed by Hurricane Delta in the beginning of October, a storm that unleashed more destruction in areas still trying to recover. Hurricane Zeta also lashed the Southern states at the end of October and caused at least six deaths.

Few of those storms, however, came close to causing as much economic devastation as the derecho that slammed the nation’s Corn Belt on

2021 Market Report & Forecast

Aug. 10. The National Oceanic and Atmospheric Administration estimated damages from the derecho, which raced from Iowa to Indiana, at $7.5 billion.

In all, the U.S. was hit by a record-tying 16 weather disasters that each caused at least $1 billion in damage in 2020.

Man-made disasters also played havoc with insurers’ bottom lines. According to various estimates, the insurance industry was facing losses of at least $1 billion as a result of some of the social justice protests that turned violent last year. That figure would surpass the previous record for civil unrest damages, set after riots erupted in Los Angeles in 1992.

All of this helps to explain the quarter after quarter of price increases we’ve seen since early 2019, as well as tougher underwriting guidelines and even a retreat by insurers in some catastrophe-exposed regions.

Rate Forecast for 2021 For the year ahead, our expectation is that commercial property rates will rise somewhere between 5% and 30%, depending on loss history.

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General Liability

General Liability “Social inflation.” It’s a phrase that we began to hear a few years ago and which, unfortunately, has only become more commonplace in conversations about general liability coverage, among other insurance lines.

Commercial General Liability Rate Change 8.0% 6.8%

6.7%

2Q 2020

3Q 2020

7.0% 5.8% 6.0% 4.6%

5.0% 4.0% 3.0%

5.7%

3.2% 2.0%

2.0% 1.0% 0.0%

1Q 2019

2Q 2019

3Q 2019

4Q 2019

1Q 2020

Source: CIAB

The term covers the outsize jury verdicts and massive punitive damage awards we’ve been seeing, an explosion in class-action lawsuits, rollbacks of tort reform and, perhaps nefarious of all, litigation funding.

What’s litigation funding? It’s how law firms increasingly finance litigation that’s expensive to mount. Hedge funds and other investors advance the money to the lawyers with the hope of securing a big verdict or settlement.

Not helping matters are “reviver” statutes that allow plaintiffs more time to bring civil lawsuits that otherwise would have been barred by statutes of limitation. These statutes have led to a surge in lawsuits and unexpected liability exposures. Many of these claims are filed by adults who experienced the tragedy of childhood sexual abuse, and commonly charge corporate defendants with negligence.

But the most troubling factor in all this, the

2021 Market Report & Forecast

one that may be toughest to overcome, is the increasingly dim view of “greedy” corporations held by the American consumer.

It’s this view, this anger toward Corporate America, that has contributed to a near doubling of the median settlement from $28 million to $54 million from 2014 to 2018.

The end result? Not only are general liability rates climbing, but underwriters are reevaluating the risks posed by individual accounts at renewal – and will amend policy terms and conditions to better reflect the risk they take on and, from time to time, even decline to renew.

Rate Forecast for 2021 Our forecast is that commercial liability rates will rise between 8% to 10% in 2021, although companies with poor loss histories can expect to see increases that go even higher.

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Commercial Auto

Commercial Auto The pandemic has meant fewer Americans on the road. That, in turn, has meant fewer collisions and, consequently, fewer claims.

Despite all of that, 2020 saw commercial auto rates continue to climb and it’s hard to be optimistic that 2021 will offer much relief.

Commercial Auto Rate Change 12.0% 10.0%

11.0%

10.5% 8.8%

9.1%

9.6%

9.6%

1Q 2020

2Q 2020

8.4%

8.0% 6.0% 4.0% 2.0% 0.0%

1Q 2019

2Q 2019

3Q 2019

4Q 2019

3Q 2020

Source: CIAB

In part, that’s because new vehicles, laden with the latest technology, are more expensive to repair. A fender-bender nowadays requires more than just fixing a bumper. It also means paying to replace pricey cameras and sensors.

Another factor influencing commercial auto rates: distracted drivers, those texting, Facebook-checking, forever-scrolling motorists whose social media addictions put thousands of fellow Americans in the hospital every year, if not an early grave.

At the same time, people are surviving highspeed collisions at higher rates today. That’s good news, of course. But it also means insurers are now faced with higher medical expenses and huge rehabilitation costs that oftentimes stretch on for years.

2021 Market Report & Forecast

Not helping matters are America’s eroding roads and bridges, a public works project that will require trillions of dollars and years to fix.

As any large commercial fleet owner will attest, rate increases have been part of life for several years now as carriers deal with rising legal expenses, unprecedented plaintiff verdicts and other factors that have delivered underwriting losses year after year.

Rate Forecast for 2021 The year ahead is likely to see more of the same, with increases of 10% to 15%.

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Workers’ Compensation

Workers’ Compensation A bright spot over the past few years, workers’ compensation rates saw a slight uptick over the past couple of quarters and are expected to continue inching up.

Companies will, as always, want to keep a close eye on their Experience Modification Factor.

Workers’ Compensation Rate Change 1.5% 1.5% 0.7%

1.0% 0.5% 0.0%

1Q 2019

2Q 2019

3Q 2019

4Q 2019

-0.5%

2Q 2020

3Q 2020

-1.2%

-1.0% -1.5%

-1.9%

-2.0%

-2.5%

-2.5% -3.0%

1Q 2020

-2.7%

-3.3%

-3.5%

Source: CIAB

A few tips to help keep your workers’ compensation costs down: ✛ Make sure your risk management and safety and training programs are up to snuff.

Remember, an ounce of prevention truly is worth a pound of cure. Studies have shown that every $1 invested in injury prevention results in a $2 to $6 return for businesses.

Rate Forecast for 2021 The full impact of COVID-19 on workers’ comp premiums did not enter the ratesetting equation for 2021. It may well be that premiums will drop again because of the high unemployment figures we saw for much of 2020, but we’ll have to wait and see.

✛ Employers should also take care when hiring, even during a time of labor shortages, to weed out candidates who could pose either a safety or moral hazard risk to the company. ✛ Make sure your return-to-work program is designed to help injured employees return to work as soon as possible.

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Umbrella and Excess

Umbrella and Excess Imagine seeing increases between 30 percent to 60 percent. That’s exactly what happened to large and complex risks in 2020 and, shocking as that might sound, the year ahead could well see more of the same.

Umbrella Rate Change 25.0%

22.9% 20.0%

20.0%

17.3% 13.6%

15.0% 9.8% 10.0% 5.7% 5.0%

0.0%

3.3%

1Q 2019

2Q 2019

3Q 2019

4Q 2019

1Q 2020

2Q 2020

3Q 2020

Source: CIAB

We can blame nuclear verdicts – those disproportionate, grossly punitive jury awards fed by a growing anti-corporate sentiment – for driving most of the increases in premiums.

Meanwhile, losses in the reinsurance market, as well as years of underpricing, also have played a role in the premium spikes we’re now seeing.

Some of this is to be expected. After all, the price of umbrella and excess insurance has long failed to recognize the millions of dollars of risk assumed by insurers and reinsurers.

This trend is on full display in almost all areas of excess coverage, although especially in auto risks. The segment feeling the pain most?

Trucking. Many carriers have either reduced

2021 Market Report & Forecast

their capacity – meaning their willingness to do business in this realm – significantly. How bad has it gotten? Consider that carriers that have historically offered $25 million lead umbrella policies are now limiting their lead positions to $5 million or less.

Rate Forecast for 2021 All of the above means that business owners can expect to have to deal with many more carriers and pay higher premiums for the same level of coverage they’ve gotten in the past.

It’s no wonder increases in the year ahead are expected to come in from 25%-75%.

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Directors and Officers

Directors and Officers Let’s just start here by acknowledging the elephant in the room: COVID-19 has not helped. Indeed, we saw a flurry of shareholder lawsuits triggered by the pandemic, including class-actions alleging companies downplayed the impact of the pandemic on business.

Directors and Officers Rate Change 20.0% 16.8%

16.1%

15.0%

8.9%

10.0% 7.0% 4.3%

5.0%

3.2%

0.0%

1Q 2019

2Q 2019

5.0%

3Q 2019

4Q 2019

1Q 2020

2Q 2020

3Q 2020

Source: CIAB

Even where the poor economy may be largely to blame for a company’s poor performance, frustrated shareholders were pouncing on any hint of bad decision-making, mismanagement or misleading statements.

The Securities and Exchange Commission got into the action, too, with allegations lodged against companies for statements that regulators say misrepresented their ability to profit from either the manufacture or sale of COVID-19 safety equipment and prevention products.

Even before COVID-19, the D&O market already was experiencing a hardening, with higher premiums, higher retentions, lower limits and harder-to-find coverage for buyers.

Years of underpricing, heightened claim frequency and accumulating underwriting losses caused several major insurers to begin

2021 Market Report & Forecast

pushing for D&O rate increases in 2018. Rates haven’t stopped climbing since. In fact, prices increased even as businesses increased retentions and shifted to lower limits.

The hardening market has been most pronounced for companies completing an initial public offering as well as those in sectors such as healthcare, life science, technology, communications, and financial services.

At least some of this is related to a 2018 U.S. Supreme Court decision – Cyan Inc. vs. Beaver County Employee Retirement Fund – that allows some securities lawsuits to move forward in state courts rather than federal court.

Companies prefer to fight such lawsuits in U.S. court because federal judges have more experience with the laws that govern IPOs. But with help from overly aggressive securities lawyers, investors are quicker than ever to

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pounce when a newly issued stock fails to live up to expectations. The Cyan decision made their job easier.

Will the Supreme Court, now in the hands of more conservative judges, take up the issue again and perhaps reverse itself? That’s impossible to tell but could easily take years were it to happen.

Rate Forecast for 2021 The year ahead won’t bring any relief to publicly traded D&O; rates are expected to rise from 20% to 40% on the low end but easily 80% or more on the high end. Private companies may escape some of that, but also should expect to see increases in their D&O rates.

Looking forward, D&O buyers can expect further rate increases, closer scrutiny from carriers during underwriting, and, again, lower liability limits.

Whether we’re talking about a new D&O policy or renewal, companies should expect a process that is challenging, time-consuming, and laborintensive.

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Employment Practices Liability

Employment Practices Liability By the time it’s tamed, COVID-19 won’t have impacted D&O premiums alone. We also expect to see a spike in Employment Practices Liability claims, especially if employers require employees to come back to work without taking the necessary precautions and they get sick or worse. These workers or their families will file claims against the employer for willful and wanton misconduct or even wrongful death.

Even companies adhering to all official reopening guidance and safety recommendations may not be totally protected from EPL claims. Employee allegations are certain to include accusations of denied wages and discrimination along with unsafe workplace conditions.

The good news is that even before winter, some states had passed legislation – or were considering it – to protect essential businesses from these claims.

While the rate hikes in Employment Practices Liability Insurance haven’t been as pronounced as those in the D&O space, #MeToo laws in California, New York, Illinois and other states are expected to trigger a new flood of discrimination claims once we’ve recovered from the COVID-19 downturn.

Rate Forecast for 2021 In the year ahead, we expect increases to come in between 15% and 30%, although, again, some could see much higher increases.

EPLI Rate Change 12.0% 10.1%

9.4%

10.0% 8.0% 5.5%

60% 4.0%

4.6% 3.2%

3.2%

2.0% 0.0%

2Q 2019

3Q 2019

4Q 2019

1Q 2020

2Q 2020

3Q 2020

Source: CIAB

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Cyber

Cyber This should sound familiar: Cybercrime is a fast-growing problem and no one is safe. We’ve been hearing that for years now, right?

So, how bad have things gotten? The FBI’s Internet Crime Complaint Center says it receives an average of almost 1,300 complaints each day and, in 2019 alone, documented more than $3.5 billion in losses.

It’s not just a big-business issue, far from it.

Cyber Rate Change

12.0% 1.0%0

10.8% 9.3%

8.0% 7.5%

6.0%

6.2% 5.2%

4.0% 2.0% 0.0%

11.7%

3.5%

1Q 2019

2Q 2019

3Q 2019

4Q 2019

1Q 2020

2Q 2020

3Q 2020

Source: CIAB

According to NetDiligence’s latest Cyber Claims Study, approximately 96% of cyber claims were filed by organizations with $2 billion or less in revenue.

Perhaps worse yet, NetDiligence says the average ransomware amount jumped to $175,000 in 2019 compared to $72,000 in 2018.

Social engineering, ransomware, hacking, and malware/viruses were the leading causes of loss in 2019. Just 14% of claims involved noncriminal causes, such as employee error or system glitches.

The pandemic hasn’t helped, giving cybercriminals a new opportunity to prey on people’s heightened anxiety and tricking them into sharing information. Additionally, workfrom-home setups often have weaker security than corporate networks.

With a new administration in the White House, it’s easy to imagine new, considerably tougher privacy regulations and penalties will be coming, a la the European Union’s General Data Protection Regulation (GDPR) and California’s Consumer Privacy Act. Not so long ago, in what perhaps could be

2021 Market Report & Forecast

described as a more innocent time, a General Liability or Commercial Crime policy might cover a business’s cyber losses. That’s no longer the case. Carriers don’t like paying for losses that aren’t explicitly covered by a policy and have taken to adding cyber exclusions to their non-cyber policies. In short, the need for a stand-alone cyber policy is greater now than ever.

Moreover, while cyber policies were once relatively inexpensive, premiums have risen sharply over the past two or so years, especially for larger organizations. Not surprisingly, carriers today require a thorough underwriting review, generally by a third party, and will closely examine a company’s controls, practices and procedures before issuing a cyber policy.

Companies in sectors most frequently targeted by cybercriminals – retail, hospitality, healthcare and finance – have seen some of the biggest jumps in premiums, especially if they have had a cyber claim or two in their history.

Rate Forecast for 2021 In the year ahead, we expect cyber rates will likely rise by 5% to 20%.

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Employee Benefits

Employee Benefits No crystal ball required: The COVID-19 pandemic is expected have a significant impact on health care benefits for years to come, putting yet more pressure on employers to find new ways to contain costs.

Finally, the pandemic saw a sharp rise in stress disorders for millions of Americans, underscoring the need for better mental healthcare for a healthy and productive workforce.

Most insurers expect increased medical claims linked to the pandemic but, of course, costs were rising even before COVID-19 arrived at our shores.

With a new administration in the White House, there also is a good possibility that one or both of the following bills could be enacted into law:

For 2020, insurers expected an increase in medical costs of 9.5%, roughly 3.5 times the rate of inflation. For the year ahead, insurers expect the increase in costs to come in at about the same level, if not higher.

In response, employers looking to manage costs will want to consider a mix of strategies including the increased use of telemedicine, focused networks and centers of excellence, programs that treat complex medical conditions while meeting the most rigorous quality, safety and patient experience standards. For some employers, the captive route may offer the relief they’ve sought for so long.

Employers will also want to invest in low-cost preventive health care services that can help reduce crisis care outcomes and costs.

2021 Market Report & Forecast

Pregnancy Accommodation. The proposed Pregnant Workers Fairness Act (H.R. 2694) would clarify protections for pregnant workers under federal discrimination laws and would require employers to provide reasonable accommodation — such as more frequent restroom or water breaks — to those employees.

The bill passed the House of Representatives in September 2020 by a vote of 329–73 (including 103 Republicans) and enjoys the support of the business community.

Paid Leave. The political debate surrounding federal paid family/sick leave legislation has evolved dramatically over the last several years, with both parties expressing support. The paid family and sick leave provisions of the Families First Coronavirus Response Act (FFCRA) gave us a glimpse of what a national requirement might look like.

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3 Things you Can Do

3 Things You Can Do Avoiding higher premiums may be impossible, but business owners can take steps to try to keep their insurance costs under control. Here are three ways:

1.

Don’t wait until the last minute. Whether you’re looking for a new policy or renewing, give yourself time to avoid rushing things. Start at least one full quarter ahead of the expiration of your existing policies.

2.

Coordinate, cooperate and communicate.

Your broker can help to make sure you’re gathering and sharing the right information with your carrier from the get-go. But that only can happen when you’ve made that broker your true partner, in a relationship marked by transparency, trust and regular communication.

3.

Consider your options. Why keep doing the same thing year after year? There are alternative solutions that we can help you understand and consider, ranging from self-insurance options to alternative retention options to perhaps joining a captive.

About the Mahoney Group The Mahoney Group traces its roots to 1915 and, over the last 100 years, has emerged as one the largest independent insurance and benefits brokerages in the nation. Our substantial growth has been driven by our focus on a number of specialties including Habitational, Tribal, Condominiums, Self-Storage, Intermodal Trucking, Single-Family Investment Home, and Pest Control programs. The Mahoney Group recognizes our success comes from dedication, commitment and involvement in the communities we serve.

service from individuals committed to the area, but at the same time, backed by Mahoney’s specialized expertise and strength as a Top 100 Agency.

For more information Call 480-730-4920 or visit mahoneygroup.com

Each Mahoney Group office is locally run to provide you with personal and professional

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