Hard Market Challenges Spur Opportunities for Independent Agents: Study

The insurance industry is facing its toughest market conditions in a generation, with rising rates and stricter underwriting creating headaches for agents in the form of difficult renewal conversations and challenges placing new business.

The 2024 Agent-Customer Connection Study, conducted by Liberty Mutual and Safeco Insurance, examined how independent agencies and their clients are navigating this hard market environment. The research found 83% of agents say it’s the hardest market they’ve ever experienced, while 90% of consumers reported their insurance rates increased over the past year. However, despite the difficult conditions, the study also identified opportunities for savvy independent agencies to continue growing their business.

Communication Gap

A concerning gap exists between insurance agents and their customers when it comes to understanding and communicating about rising insurance rates. The survey found that only about 20% of customers say they understand the market forces driving rate increases. The vast majority, 62%, said it’s important for their agent to educate them on the changing dynamics of the insurance market.

This gap persists despite efforts by agents to address the issue. While 70% of independent agents surveyed said they proactively discuss market conditions with clients, about one in three customers still expressed dissatisfaction with their agent’s explanation of market forces and the impacts on their specific policy.

Perhaps most troubling, customers are more likely to first learn about rate increases from their bill than from their agent. The survey found that only 20% of customers first heard about their rate hike from their agent, while 58% said they noticed their bill amount change before receiving any communication about it.

So, what do customers want from their insurance agents? Overwhelmingly, they are looking for help understanding their policies and coverages, the survey found. Eighty-five percent said it’s important for agents to review policy coverages with them, and 79% want their agent’s help to better understand their policy. Additionally, one-third of customers said they want more frequent reviews of their coverages and insurance needs.

Opportunities to Show Value

Insurance agents have clear opportunities to demonstrate their value to customers, according to survey findings. To build trust, agents should focus on the traits customers value most highly: experience with insurance (cited by 79% of respondents), responsiveness to requests (77%), and making insurance options easy to understand (75%).

At the same time, the survey revealed areas where agents have room for improvement. While 67% of customers value proactivity in knowing their needs, only 31% of agents consider this a strength. Similarly, 64% of customers appreciate excellent listening skills, but just 22% of agents self-identify listening as one of their strong suits. Closing these perception gaps represents a major opportunity for agents to better meet customer expectations.

“Insurance is a relationship business. In a hard market, those relationships have become even more important,” said Luke Bills, president of independent agent distribution at Liberty Mutual.  He added that “today’s customers are turning to their agent for even more. They want their agent to educate them on changing market conditions, help them better understand policy changes and provide advice on risk mitigation.”

Growth Strategies

Our research examined agencies that reported annual revenue growth of more than 10% and found three strategies that set their agencies apart. These strategies are working to fuel success today and prepare for when market conditions improve:

  • Diversifying book of business: Higher-growth agencies were 50% more likely than lower-growth agencies (32% vs. 21%) to report that they are diversifying their book of business. This often means shifting toward markets less impacted by the hard market, such as commercial lines.
  • Investing in new retention programs: Higher-growth agencies were twice as likely (14%) as lower-growth agencies (7%) to invest in new retention programs aimed at keeping existing clients satisfied. While retention is always important for sustainable growth, it’s even more crucial during a hard market when carriers restrict new business.
  • Positioning for future success: Agencies experiencing increased retention rates and growth are continuing to invest in new client acquisition programs and hiring additional staff members. By investing today, they’ll be well-positioned for future success.

Rising to the Challenge

Independent agents maintain a strategic advantage due to the ease, choice and expertise they provide to insurance customers.

Many agencies have nimbly adapted to the changing market conditions, implementing strategies to maintain customer satisfaction and keep their businesses afloat. In fact, 65% of agents said their customer retention is stable or better than a year ago, while 69% reported acquiring new clients at the same or better rate. Agencies focused on commercial lines saw even stronger year-over-year retention and growth compared to those concentrated on personal lines or with an equal focus.

“Hard insurance markets are challenging, but they don’t last forever. It’s with a sense of optimism that I can say – and this research validates – that independent agents are well-positioned to weather this market and come out stronger, more resilient and customer-centric,” Bills said.

View the full report from Liberty Mutual and Safeco here.

Triple-I/Milliman: Personal Lines Drag
on Underwriting Profitability Continues

By Max Dorfman, Research Writer, Triple-I

The property and casualty insurance industry posted its second consecutive year of underwriting losses, driven primarily by personal lines, according to the latest industry underwriting projections by actuaries at Triple-I and Milliman.

The net combined ratio for 2023 was 101.6, according to Insurance Economics and Underwriting Projections: A Forward View, a Triple-I members-only webinar. Combined ratio is a standard measure of underwriting profitability, in which a result below 100 represents a profit and one above 100 represents a loss. 

The newest results are an improvement from 2022. Additionally, premium growth is expected to further improve underwriting results in 2024, with the 2024 industry net combined ratio forecast at 100.2.

Michel Léonard, PhD, CBE, Triple-I’s chief economist and data scientist, discussed how P&C replacement costs are increasing more slowly than the consumer price index (CPI).

“P&C replacement costs benefited from greater deceleration of key CPI components, such as construction material and used auto costs,” he said. “We expect this trend to continue until early 2026.”

Léonard noted that personal and commercial auto replacement costs decreased in the first four months of 2024, continuing their 2023 trend, largely due to double-digit declines in used auto prices.

“Even homeowners’ replacement cost changes – the segment subject to some of the highest replacement cost increases over the past few years – is now lower than overall CPI,” Léonard said.

Dale Porfilio, FCAS, MAAA, Triple-I’s chief insurance officer, discussed the overall P&C industry underwriting projections and premium growth.

“The overall picture from prior quarters remains the same with commercial lines performing better than personal, but to a lesser extent,” Porfilio said.

The 2023 commercial lines net combined ratio was 96.2, 1.4 points worse than the 2022 result. While still unprofitable, personal lines improved 3.2 points relative to 2022. For 2023, the personal lines expense ratio improved by almost 2 points over 2022, most dramatically in personal auto. The net written premium growth rate for personal lines surpassed commercial lines by over 7 points in 2023.

“Continued personal lines premium growth should lead to further convergence in underwriting performance in 2024,” Porfilio said.

Jason B. Kurtz, FCAS, MAAA, a principal and consulting actuary at Milliman – a global consulting and actuarial firm – said that for commercial auto, the 2023 net combined ratio of 109.2 is 3.8 points higher than 2022, and 10.3 points higher than 2021​. 

“The improved underwriting results following the COVID-19 pandemic appear to have been short-lived, as the commercial auto underwriting results have once again deteriorated and adverse prior year development has returned to pre-COVID levels,” Kurtz said.

Looking at the workers compensation line, Kurtz noted that the 2023 net combined ratio of 87.3 is nearly identical to 2022 and the second lowest in over 15 years​. 

“2023 net written premium growth rate of 1 percent is expected to increase to 2 percent in 2024 and remain at that level of growth through 2026,” Kurtz said. “Favorable underwriting results are expected for our forecast horizon​, which in turn will dampen premium growth going forward.”

Donna Glenn, FCAS, MAAA, chief actuary at the National Council on Compensation Insurance (NCCI), said the workers comp system is in a period of extraordinary performance. 

“WC leads the P&C industry with the lowest combined ratio compared to all other lines of business,” Glenn said. 

Further highlighting the strong results, she said, 2023 is the tenth straight year of underwriting gains and seventh consecutive year with combined ratios under 90.

IRC: Homeowners Insurance Affordability Worsens Nationally, Varies Widely by State

By Max Dorfman, Research Writer, Triple-I

Average U.S. homeowners insurance premiums have increased at a rate that has outpaced household income from 2001 to 2021, according to a new report by the Insurance Research Council (IRC). In 2021 – the latest year for which data is available – homeowners spent an average of 1.99 percent of their income on homeowners insurance, up from 1.54 percent in 2001.

Affordability varies widely from state to state, and affordability rankings have fluctuated over time. In 2021, Utah was the most affordable state and Florida was the least affordable. Kansas, New York, and Washington, D.C., have demonstrated improvements from 2015 to 2021, and California, Montana, and Wyoming saw the greatest deterioration during the same period. Florida and Louisiana have consistently been the least-affordable states in the nation.

The analysis by IRC – like Triple-I, an affiliate of The Institutes – looks at homeowners insurance affordability at national and state levels and examines underlying cost drivers by state. It does not address affordability for specific demographic or geographic risk profiles. The report found that frequency and severity of natural disasters, economic conditions, rising construction costs, and litigation all significantly contributed to rising homeowners insurance costs.

“An understanding of what drives the cost of insurance is essential for consumers navigating the current insurance market,” said Dale Porfilio, FCAS, MAAA, IRC president and chief insurance officer for Triple-I. “Efforts to promote homeowner awareness and adoption of protective measures, strengthen state and local building codes, and encourage community resilience programs can all improve insurance affordability.”

Learn More:

Louisiana Still Least Affordable State for Personal Auto, Homeowners Insurance

Homeowners Claims Costs Rose Faster Than Inflation for 2 Decades

As Building Costs Grow, Consider Your Homeowners Coverage

Legal System Abuse/Social Inflation Adds Costs and Challenges for US Casualty Insurance: AM Best

The impacts of legal system abuse-driven social inflation has become a significant challenge for the U.S. casualty insurance industry, particularly driving up loss costs in lines such as products liability, general liability, commercial auto, and medical professional liability, according to AM Best.

Loss severity for these lines has exceeded the rate of economic inflation, in most cases by double or more, with social inflation likely being a key factor, Best noted. For example, the average loss severity increase over the past decade to 2023 in the product liability line was 20.4%, compared with average annual economic inflation of 2.7%.

On the other liability–occurrence line, which captures excess liability and umbrella coverage, loss severity increased by an average of 11.1% in the last decade, the report found.

The growing involvement of attorneys in commercial lines is leading to an ongoing rise in claims costs, which negatively affects insurer loss ratios.

The social inflation phenomenon is characterized by dramatic increases in verdicts and settlements without the necessary legal or factual basis to support them, Best stated.

“The ‘social’ part of social inflation refers to shifting cultural attitudes about who is responsible for absorbing risk—the insurer or the plaintiff—and these dynamics continue to evolve, which makes social inflation tough to quantify and even more difficult for insurers to predict and mitigate,” said Justin Aimone, associate analyst, AM Best.

Public sentiment toward large corporations has been declining, with approximately two-thirds of jurors believing that companies prioritize profits over safety. Attorneys have capitalized on this sentiment, employing strategies like “reptile theory” and “juror anchoring” to obtain outsized awards.

A 2022 study by the Insurance Information Institute and the Casualty Actuarial Society found that “social inflation accounted for $20 billion in commercial auto liability claims between 2010 and 2019,” AM Best noted.

The rise in legal spending on class action lawsuits has also contributed to the issue. According to Carlton Fields’ 2023 survey, defense spending on class actions rose 8% in 2022, following a 5% increase in 2021. Companies cite larger claims and more class actions as the primary reasons for this increase.

Nuclear verdicts, characterized as those exceeding $10 million in punitive and compensatory awards, have been growing in both amount and frequency. A U.S. Chamber of Commerce review found that median nuclear verdicts were up 27.5% from 2010 to 2019, outpacing inflation. Product liability, auto accident, and medical liability cases accounted for roughly two-thirds of reported nuclear verdicts.

“When a nuclear verdict is awarded, it affects not just the one claim, but also all other open claims, as plaintiffs, guided by their attorneys, seek a similar verdict or settlement, rendering an insurer’s existing reserves inadequate,” said David Blades, associate director, industry research and analytics, AM Best. “The impact on adverse loss development then flows into pricing, as insurers adjust their view for the affected lines.”

Third-party litigation funding has become a $17 billion global industry, with over half that amount spent in the United States. Swiss Re estimates that investment in this market will reach $31 billion by 2028. When third-party funders back plaintiffs, the pressure to settle early or for reasonable amounts declines significantly, leading to prolonged legal battles and increased costs for insurers, according to the AM Best report.

Insurers face challenges in quantifying and predicting the impact of social inflation, as it affects the adequacy of reserves and shifts development patterns. When a nuclear verdict is awarded, it impacts all open claims, rendering existing reserves inadequate. This, in turn, flows into pricing as insurers adjust their view for the affected lines.

To navigate the complexities of social inflation, insurers must improve their understanding of portfolio risks and claims duration for better actuarial adjustments. Pursuing tort reform legislation on litigation funding disclosure and consumer protection may also help mitigate the impact. However, as social dynamics continue to evolve, addressing social inflation will remain an ongoing challenge for the insurance industry, according to AM Best.

To view the full report, visit AM Best website.

Legal Reforms Boost Florida Insurance Market; Premium Relief Will Require More Time

Legislative reforms put in place in 2022 and early 2023 to address legal system abuse and assignment-of-benefits claim fraud in Florida are beginning to help the state’s property/casualty insurance market recover from its crisis of recent years, according to a new Triple-I Issues Brief.

Claims-related litigation is down, the “depopulation” of the state’s insurer of last resort continues apace, and underwriting profitability – while still in negative territory – has improved significantly. Insurers also benefited from a relatively mild 2023 Atlantic hurricane season and a meaningful increase in investment income, posting a net profit for the first time in seven years.

But it’s important to remember that the crisis wasn’t created overnight and that it will take time for the reforms and other developments to be reflected in policyholder premiums. Homeowners should not expect their rates to decline in 2024, despite the improved industry performance, although some regional insurers have filed for small decreases.

“Rates may moderate some compared to prior years,” said Mark Friedlander, Triple-I director of corporate communications, “but rising replacement costs – combined with expected higher reinsurance costs for the June 1 renewals – are going to continue to drive average premiums upward in 2024.”

One factor keeping upward pressure on rates is fraud and legal system abuse. With only 15 percent of U.S. homeowners insurance claims, the state accounts for nearly 71 percent of the nation’s homeowners claim-related litigation, according to Florida’s Office of Insurance Regulation.

There are early signs that recent legislative reforms are beginning to bear fruit. In 2023, Florida’s defense and cost-containment expense (DCCE) ratio – a key measure of the impact of litigation – fell to 3.1, from 8.4 in 2022, according to S&P Global.

But the catastrophe-prone state faces a number of natural challenges, from a projected “extremely active” 2024 hurricane season to wildfires, flooding, and severe convective storms.

“Hurricanes get the most media attention,” Friedlander said, “but severe convective storms inflict comparable losses. And it only takes one bad hurricane season to wipe out the benefits of one or more mild years.”

Learn More:

2024 Wildfires Expected to Be Up From Last Year, But Still Below Average

CSU Researchers Project “Extremely Active” 2024 Hurricane Season

Lee County, Fla., Towns Could Lose NFIP Flood Insurance Discounts

FEMA Reauthorization Session Highlights Importance of Risk Transfer and Reduction

Triple-I “State of the Risk” Issues Brief: Hurricanes

Triple-I “State of the Risk” Issues Brief: Flood

Triple-I “State of the Risk” Issues Brief: Convective Storms

Triple-I “State of the Risk” Issues Brief: WildfireTriple-I “State of the Risk” Issues Brief: Legal System Abuse