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Hardening of the insurance industry

The insurance industry has seen many changes over the years. New risks come and old risks fade, and in between, there’s much nuance pertaining to how it affects both the industry and consumers. We here at Pepper, Johnstone & Company want to make sure that our clients are prepared for these changes ahead of time. 

Currently, we’re seeing a fairly significant upheaval of the norms that guided premiums over the past 20 years or so. Though the current pandemic is but one of those changes, in many ways it’s a bookend for a period that has seen lower premiums. This change is what we call a ‘hardening’ of the insurance industry: it means that risks have begun to overtake the cheaper premiums that people and businesses have enjoyed over the past twenty years. And higher risks require higher premiums. 

Reasons for hardening of the insurance industry

The insurance industry has enjoyed a long stretch of time in which agencies and companies have been able to work together to offer low premiums for people and their businesses. Much of this is due to societal advancement, whether in technology or medicine, which has greatly mitigated risk. 

Recently; however, with the accumulation of risks such as tropical storms, the California wildfires, and now the coronavirus pandemic, premiums could rise significantly. There are three major reasons for this rise. 

Greater risks mean higher premiums

Just because the events mentioned above have actualized doesn’t mean that premiums should automatically rise. However, because there is an increased risk for events like tropical storms and wildfires, insurance companies are forced to adjust their premiums. 

These risks didn’t increase overnight. Insurance companies have seen a higher payout ratio since 2013—meaning they have paid more to people and their businesses than they have charged in premiums. Unfortunately, this can’t last forever, and the pandemic may very well be the catalyst for a hardening of the insurance industry. 

Legal action is accelerating the hardening

Many events, though disastrous, aren’t totally covered by insurance. For example, insurance contracts covering loss of income, without fail, include exclusions for disease, as there is no possible way that current premiums can cover for income loss at this level. 

However, many lawsuits are being filed that, if successful, would require insurance companies to pay out for lost income. The only way the insurance industry can afford this unforeseen cost will be to significantly increase premiums, thus, hardening the industry. 

The trickle-down (or up) effect

Increased risks and the corresponding premiums affect everyone who works with the insurance industry. Not only will individuals and businesses pay higher premiums, but the insurance industry will be less willing to underwrite various risks. Reinsurance organizations will also become less willing to underwrite certain risks exposures that pose a greater risk than can be justified by higher premiums. In effect, higher costs for the insurance carriers are passed on to everyone else.

The big picture for the insurance industry

Eventually, these effects will reach all corners of the market, from car insurance to the way that general liability insurance is underwritten. With new events come ideas for new risks. These new risks will be written into new insurance policies and new risks that consumers wish to insure come with a premium. 

The good news is that the United States’ federal government will most likely play a large role in supporting new insurance surrounding the pandemic--just as they did with new insurance surrounding terrorism, following 9/11, and all the way back to the first unemployment insurance in wake of the Great Depression.

However, it’s important to note that the trend has been steady since 2013, and as risks rise, so do premiums, along with the need for tighter underwriting, all of which will lead to a hardening of the insurance industry. 

Pepper, Johnstone & Company is independently owned and locally operated to handle your insurance needs, be it commercial insurance, home insurance, or just general insurance.  We focus on Athens and offer affordable and reliable insurance choices all across Alabama, Georgia, Mississippi, North Carolina, South Carolina, Louisiana, and Tennessee.  We will help you find the right combination of tailored, personalized insurance coverage at just the right price to fit your needs. Contact us today to learn more about how we can help you.