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.

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.