What does the future hold for commercial insurance buyers in 2017?

The insurance industry’s surplus is currently at an all-time high—increasing nearly 50 percent in the last seven years—which means rates have begun to decline. Although most underwriters are trying to hold the line on rate, it is anticipated that pricing on preferred accounts will continue its modest downward trend. 

This will differ by client and line of coverage. Preferred risks in desirable industries with profitable loss histories may see rate decreases of 5 percent or more, while challenging accounts in high hazard classes with poor loss records can still see substantial rate increases. Following are projections by line of coverage.

Property, General Liability, Auto and Umbrella 

Preferred property risks are experiencing the largest decreases, but even challenging accounts benefit from somewhat relaxed underwriting and increased competition. The same can be said for catastrophe-driven accounts (risks exposed to earthquake, wind and flood). The additional capital in the market has to be deployed somewhere, and the recent favorable catastrophe loss history is driving rates down for this line. 

Regardless, some foresee the pricing decreases moderating, and property pricing will not drop much further.

General liability is also seeing overall rate decreases. Not surprisingly, the companies that have the best risk management programs and positive loss histories are seeing the largest decreases. More challenging accounts—those that haven’t invested in risk management and have the loss runs to prove it—are seeing flat and sometimes increased pricing on renewals.  

Automobile rates, on the other hand, are going up across the country. Poor profitability in this line is increasing the average cost per vehicle anywhere from 5 percent to 15 percent. Differences among insurers are also greater in this line, which means this coverage is being shopped more frequently than other lines. Increased focus on fleet safety is critical to managing auto insurance premiums.  

Excess liability (umbrella) remains reasonably competitive. Pricing is usually based on underlying policies. If those premiums
go up, excess will increase.  

Contractors’ Professional and Pollution Liability 

This area remains very competitive, and a number of new players are looking for business. However, don’t be deceived; not all offerings are the same. Coverage can differ dramatically, as can risk management services and claims handling. Preferred risks should experience flat rates or modest decreases (up to 5 percent).
 
Executive Risk 

Executive risk, which includes directors’ and officers’ liability, employment practices and fiduciary liability, remains fairly consistent, but is carefully underwritten. Adverse loss experience or poor internal controls also will impact pricing and should be proactively managed.  



Cyber 

Cyber coverage is the fastestgrowing insurance product, but it is still under-purchased. Every business has cyber risk. Managing these exposures goes beyond locking down computer systems. Cyber extortion and social engineering (i.e., cyber deceit), among other types of crime, continue to grow. 

Every construction company should consider this coverage. The application process alone serves as a valuable self-audit on exposures and can alert a company to areas that can be improved.   

Workers’ Compensation 

Workers’ compensation continues to improve across the country. Rates in California reached an all-time high in 2003, when the average charged rate per $100 of payroll was $6.29. Rates dropped nearly 67 percent to $2.10 in 2009, and then increased 44 percent through June 2015 ($3.04). Since then, the average rate has dropped to $2.90 and is still 50 percent less than it was in 2003.  

The balance of the country enjoyed a 94 percent combined ratio, according to the National Council on Compensation Insurance. While California continues to have, on average, the highest workers’ compensation insurance rates in the country, rates have dropped on average 5 percent since June 2015. Rates are expected to drop another 5 percent to 7 percent this year. 

Surety 

The U.S. surety industry will continue to realize growth in overall premiums, with a modest increase in loss activity in 2017. 

The total direct-written premium for the 2015 calendar year was $5.62 billion, with an 18.3 percent loss ratio. (The surety industry break-even loss ratio is generally 34 percent.) This record-breaking pace continued through the second quarter of 2016, with more than $2.98 billion in total direct premium written and an 18.4 percent loss ratio.

With market capacity growing and a surprising number of new players entering the industry, the supply for surety bonds continues to outgrow the demand. Although there has been an increase in the number of carriers, the lion’s share of premium remains with the top five largest surety companies: Travelers, Liberty Mutual, Zurich, CNA and Chubb (recently acquired by ACE LTD Group). These top carriers write 50 percent of all premiums. In fact, the top 10 surety companies control 63.1 percent of the overall surety market.  

Despite the top-heavy makeup of the market, the U.S. surety industry remains very competitive, with frequent softening of underwriting terms and conditions to acquire and retain good, solid contractors. 

Health Insurance 

The major change with the Affordable Care Act (ACA) in 2016 was the definition of “small” and “large” employers by individual states. 

Rates for all “small” employers will be based on the employee and their dependents’ individual ages, plan design and location of the company. For example, a family of five will pay for each family member based on each individual’s age and the plan they select. Some younger employees or families with one child may realize lower premiums. All of the small group plans have changed to conform with the law, and most have higher deductibles and co-pays; therefore, employees will have to pay more to use services.  

The actuaries at all the major insurance companies have determined that they must change plan benefits every year to stay in compliance with the ACA’s tier guidelines. The ACA guidelines gave a percentage requirement for each tier: 90 percent equals platinum, 80 percent equals gold, 70 percent equals silver and 60 percent equals bronze. So as costs increase, the value of the percentage changes and plan benefits also will change. For example, if the actuarial value of a plan this year was $1,000, then the platinum plan has to cover 90 percent ($900) and pass 10 percent ($100) on to the plan member.  

In the second year, if the actuarial value goes up to $1,100, 10 percent ($110) can be passed on to the plan member and the benefits will change. This will always be a moving target, at least until the values are fixed or the law is changed.  

Provider networks are still changing and offering a lower number of choices for doctors and medical groups. The industry calls them “skinny networks.” Often the price looks good, but employees will have very few choices for doctors.  

Be sure to run a disruption report to compare current providers to those associated with the programs being considered. Insurance carriers continue to seek greater discounts from hospitals, medical groups and doctors, and are offering patient exclusivity in return. Some insurance carriers will allow skinny networks to be offered side by side with full networks, with the price and contribution being set by the employer to favor one or the other.

In 2017, expect a zero to 10 percent rate increase for “small” employers and 5 percent to 15 percent for “large” employers. Changes to the ACA could happen as early as this summer; however, legal challenges and pushback from the 17 states that implemented their own health reform could delay the process.

Captives, self-funding and partially self-funded plans are becoming more popular and should be considered for companies with more than 50 employees. Industry trust plans for employers of all sizes could lower the overall cost and stabilize the benefits. 

Jeffrey Cavignac, James P. Schabarum and Patrick Casinelli are principals of San Diego-based Cavignac & Associates, a risk management and commercial insurance brokerage firm. For more information, visit cavignac.com.