Insurance rates have been steadily rising, and carriers have been placing moratoriums on new business, which has created challenges for both insurers and policyholders. This blog aims to shed light on the factors contributing to these trends, including the underwriting loss figures, the rising cost of parts and services, and the impact of reinsurance rate increases.
Underwriting Loss Figures
In the first quarter of 2023, the insurance industry faced a significant underwriting loss of $8.2 billion [1]. This loss highlights the persistent challenges insurers have been grappling with. Despite rate increases in the primary market since 2013, high loss ratios have persisted. The industry has experienced an increase in the frequency of severe losses and rising litigation, leading to a loss cost trend that outpaces the rate changes [1].
Rising Cost of Parts and Services
One of the contributing factors to the increasing insurance rates is the continued rise in the cost of parts and services. Various factors have influenced this trend, such as inflation, supply chain disruptions, labor market challenges, and increased volatility in capital markets [2]. These factors have led to higher prices and increased worker salaries, which, in turn, have caused claims costs to rise month by month for property and casualty (P&C) carriers. The premiums for P&C policies have not kept pace with inflation, further exacerbating the situation [2].
Reinsurance Rate Increases
Reinsurance companies, faced with their own net losses over the past five years, have been raising rates on insurance companies. While the underwriting performance of global reinsurers was expected to improve in 2022 due to premium rate increases taking hold. However, concerns remain about deteriorating loss-cost trends, rising social inflation, litigation costs, and the pace of global economic recovery [3].
Reinsurers have experienced significant price increases, particularly in cyber reinsurance, where rates have risen by 15% to 40%. This increase is partly due to capacity limitations and selective underwriting in response to a rise in ransomware claims [3]. Furthermore, reinsurance demand has grown due to rising cyber attacks, with nearly 40% of cyber risk being reinsured [3].
Reinsurance rates have been hardening, but the pricing momentum has slowed down. However, price increases are expected to continue, albeit at reduced levels. Reinsurance demand remains significant, especially considering the potential impact of natural catastrophes and the increasing need for coverage against cyber risks [3].
Conclusion
Insurance rates continue to rise due to multiple factors, including persistent high loss ratios, increased frequency of severe losses, rising litigation, and rising costs of parts and services. Additionally, reinsurance rate increases, driven by the net losses experienced by reinsurers in recent years, have contributed to the upward trend.
These challenges have necessitated carriers to place moratoriums on new business to manage their underwriting portfolios effectively and mitigate further losses. Policyholders and insurers alike are facing the impact of these market dynamics, highlighting the need for proactive risk management and insurance solutions tailored to the evolving landscape.
While the insurance industry navigates these challenges, stakeholders are working on innovative approaches to underwriting, risk management, and pricing to ensure the long-term sustainability of the industry and maintain the necessary protection for policyholders.