The Effects of a Safer World on Insurance Company/Distributor Viability

 

On November 20, 2018, the Insurance Journal reported an article suggesting auto insurance premiums will decrease by $25 billion by 2025. To put that in perspective, that is approximately 5% of all U.S. P&C premiums. Think you've seen a soft market before? Just wait.

The article continued to state that new coverage lines will more than make up the difference, according to the report author, Accenture. They propose that businesses in particular will buy $81 billion more in other lines. This means woe for the personal lines carriers and agents who have achieved far more personal lines premium growth in the last ten years than commercial (an average annual rate increase of approximately 3.3% vs. -.1%, 2005-2017, inclusive).

The authors argue driverless cars will make the roads safer but increase the need for product liability. I am not sure about this since it has been reported that some manufacturers are planning to forego product liability insurance on their driverless cars. Maybe they had a change of mind or the authors are providing insights missing from press releases the SEC might want to review. Or maybe the manufacturers' contracts will place all liability on their vendors or others (like the owners who do not read their software agreements).

The authors suggest consumers, companies and governments will quickly buy much more cyber coverage. They probably do need to quickly buy more but with as many as 3,000 cyber forms floating around in the U.S. alone (according to a recent Rand Corp study), what cyber is actually being purchased? The Rand study is important to understanding future cyber purchases because, as they suggest, some of the forms may not be intended to pay claims, some companies' actuarial models may be shots in the dark, and clearly some companies' forms indicate they really do not know what they are doing (at least this is my impression of Rand Corp's conclusion). These are big issues that put into doubt what the cyber insurance market really even is and what happens with the inevitable shakeout? If some companies do not really know what they are insuring (reading some companies' forms suggest they really do not know what they are insuring) and taking shots in the dark on pricing (and reserving maybe?) suggest potentially a problem of stronger and smarter companies not achieving adequate market share until the shakeout occurs.

Add to this confusion the fact that explaining cyber insurance, and explaining exactly what the different cyber forms are insuring, is very difficult. Agents need to try doing this to understand that increased cyber sales are not magically going to happen. Beware the agent that pretends all cyber forms are the same or that just because an insured has purchased a cyber policy, they now have "cyber" coverage. The insured may think they have much broader coverage than the carrier interprets (which will be interesting for those companies less sure of what they are even insuring, see the Mondelez v. Zurich suit for a great example). Also, after asking dozens and dozens of agents what they are even insuring when they sell a cyber policy, I'm often met with blank stares or statements that they do not understand cyber so they don't sell cyber.

Product liability sales may increase. Product liability has been one of the most volatile major lines of P&C insurance over the last twenty plus years that any prediction specific to this line seems problematic. Since 1996, NPW specific to product liability per A.M. Best (author's calculation) has only increased 35%. Private passenger auto has increased 106%. In the last ten years, NPW has actually declined 10.5%. I am not suggesting these results are rational either because the combined ratio for product liability is an abysmal 129% over the last ten years. Its worst combined ratio was 159.4% in 2011 and its best was 84.4% in 2006. The volatility is absurd and does not really correlate well with NPW growth. This combination of volatility and lack of charging more premium for really horrible combined ratios makes predicting this line's future problematic.

I hope these experts' predictions are correct regarding other lines taking up the slack. Even if correct though, personal lines agents and personal lines carriers are going to suffer if they do not begin writing commercial. Small commercial will be hurt too because small commercial will lose the auto, they seem more reluctant to buy the quality cyber coverage and they do not usually need product liability.

The winners, if the study's authors' predictions are correct, will be carriers and agents/brokers writing large, complex commercial accounts.

If the authors are wrong about companies and consumers purchasing a lot more insurance but of a different line, then the entire industry suffers mightily. 

Another article in the same edition published a report from Minnesota’s Department of Labor that the state's workplace injury and illness rate decreased in 2017 to its lowest rate since the state first began measuring it. I suspect Minnesota's results are similar to other states. The significant advances in safety and the reduced need for employees to work in more dangerous environments relative to total employment support the probability that workplaces should be safer than ever, even in a booming economy. The workplace will become even safer with more modular construction, better safety devices and monitoring, and continuing emphasis on safety. A safer environment means less rate in this line too.

Maybe the industry needs to offer more law school scholarships to future plaintiff attorneys to take up the slack. Otherwise, most signs point strongly to the devaluation of insurance. Insurance is more important in a risky world than a safer world.

Maybe insurance companies will get desperate and begin insuring previously unthinkable, uninsurable perils and fill the gap that way. Whatever happens though, insurance sales are going to change significantly. The industry is at an inflection point for carriers and distributors both. This is not a point of despair but it is a time that requires true strategic thinking and planning to identify the opportunities that exist and to plan for those opportunities, without getting too far ahead and losing what one already has. This is hard work. It requires quite a balance which is why dedicated strategic planning is truly required.

NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information. 

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