The other factor you have to look at is Return on Average Net Worth. The insurance industry needs to attract capital, and it competes with every other business to do so. If you look at Table 1, you will note that, over the last five years, returns have ranged from 5 to 8.4 percent and averaged 7.2 percent. These types of returns don’t excite investors and the industry would ideally like to see their return at 10 percent or higher. While the industry has been trying to increase rates for the past several years, the robust surplus numbers have kept the market com- petitive enough to basically keep rates in line. That is slowly changing. Rates are starting to trend up. So, if you are budgeting your insurance costs in 2020, what can you expect? Property Insurance - Property underwriters have experienced several poor years in a row due to a number of factors, with the main one being catastrophe-type claims. Because of this, the insurance compa- nies are carefully underwriting existing and new business. In general, preferred risks can expect rate increases of 5-10 percent in 2020. Any property that is even close to a brush area, however, can see dramatic rate increases. The 2018 California wildfires hammered property in- surers (over 30,000 homes destroyed) and this is affecting pricing for both personal and commercial lines. It is also driving rates up in the Builders Risk segment, especially for frame construction. General Liability Insurance - General Liability results have deterio- rated as well, and underwriters are looking carefully at the risks they insure. They are also seeking rate increases. While some businesses will see flat renewal pricing, most will see rate increases of 5 percent or more. Auto Insurance - Auto rates continue to increase. It is not uncom- mon to see prices go up 10-20 percent or more, and this is not the first year this has happened. This is driven by both an increase in frequency and severity of claims. Frequency is attributable to distracted driving. The number of rear-end accidents has doubled in the last five years. Severity is being adversely impacted by the cost to fix a modern ve- hicle (cameras and sensors are expensive) and the increased cost of medical bills for those injured in accidents. Five years ago, it was not uncommon to see average repair costs for a private passenger vehicle or pickup truck of about $1,000. Today, the average can be $1,800, $2,000 or higher. To obtain the most favorable rates, underwriters like to see a five-year loss ratio of 25 percent or less in addition to well- written Fleet Safety Programs that are being effectively implemented. Excess Liability - Excess Liability pricing is based on the premiums of the underlying policies over which it provides coverage. While the percentage rate of the primary cost is staying consistent, Excess Liabil- ity pricing has increased, just as auto premiums have. We should point out that anyone working for a gas and electric company in California should be forewarned. One such company is now requiring that any contractor who wants to work on its projects carry $50M in general liability limits. The excess market for this exposure has all but disap- peared, and arranging this coverage is outrageously expensive. Executive Risk including Directors & Officers, Employment Prac- tices and Fiduciary Liability - Experience in these lines has deterio-
rated and it is not uncommon to see increases of 5 percent to 15 percent or more. Underwriters are also looking to increase deductibles on Employment Practices Liability. It is getting more difficult to obtain defense coverage for Wage & Hour claims (indemnity damages have never been covered for Wage & Hour lawsuits). Cyber Insurance - Cyber Insurance covers both first- and third-party damages. Most policies have numerous coverage parts, and every Cyber policy is different. While the current cost is fairly modest, we have seen claims on the rise. Because the marketplace is still competi- tive, we only expect modest increases this year; but if the loss trends continue, prices will have to go up. Note that every business, no matter how small, needs Cyber Insurance nowadays. Professional Liability - We are seeing some of the opportunistic insur- ance companies that jumped into the Professional Liability marketplace starting to exit. Regardless, this line of coverage remains competitive and preferred design professionals, attorneys, accountants and other professionals can expect flat to modest rate increases. Recognize that every Professional Liability policy is different as are the companies that offer the coverage. Even more so than most commercial insur- ance lines of coverage, Professional Liability is not a commodity. It is critical that you understand the coverage you are buying, as well as the claims-handling abilities and risk control services that are offered by the insurance company and your broker. Workers Compensation - Rates across the country continue to trend down for Workers Compensation, especially in California. Table 2 in- dicates that the average rates charged in California have dropped over 30 percent in the last five years and a whopping 66 percent since 2003. It is anticipated that rates will continue to drop in 2020. Assuming a consistent Experience Modification, most of our clients can budget flat to minus 10 percent.
Table 2 - California Workers’ Compensation Industry Average Charged Rate per $100 of Payroll
$ Dollars
6.02
6.00
5.73
4.74
4.66
4.00
3.47
3.24
2.97 2.96
2.90
2.81
2.52
2.50
2.52 2.15 2.10 2.25 2.32
2.26
2.04
2.00
0.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2019
Policy Year
We expect to see insurance prices in general increase 5-10 percent, with the exception of Workers Compensation. Insurance premiums, however, need to be kept in perspective. They are only one component in the cost of risk. As mentioned above and illustrated in the sidebar, insurance is often 50 percent or less of the total cost of risk. Surety Outlook 2020: Capitalizing on your Capacity As 2019 comes to a close, the overall economy remains positive and continues to grow. Though at a slower pace than experienced in 2018 and early 2019, 2020 should continue to show slow to moderate growth
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csengineermag.com march 2020
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