As originally featured in the VGM Playbook: Forecasting 2022
By RACHEL HARRIS

It’s been a wild ride for the insurance industry over the past two years. From the global COVID-19 pandemic to catastrophic natural disasters that will make history books, to the exponential increase of cyberattacks, and the severity of automobile accidents. Then there’s the rise of social inflation, and of course, the hard insurance market. Beyond impacting the insurance industry itself, these factors have had significant impacts on businesses purchasing insurance—a trend that will continue as we head into 2022.

While accurately predicting the future is, of course, impossible, this article will examine current insurance market trends, and provide predictive analysis from the experts at VGM Insurance as to where we see the market heading in 2022 and how business owners can prepare for what’s to come.

The Hard Insurance Market...Will Remain Hard

Like every market, the insurance industry fluctuates in cycles. As a business owner, understanding the difference between soft markets and hard markets in the insurance world can help you better prepare and protect your organization when the cycle swings in a new direction.

When the market is soft, insurance premiums remain stable. Insurance companies offer broader coverage and have a higher capacity for risk. During a soft market, companies will often compete over new business to a buyer’s advantage.

On the other hand, a hard market drives premiums up. Catastrophic losses, high claims costs, and low interest rates all contribute to market hardening. These, and a variety of other factors, were already at play at the beginning of 2020—and that was before the COVID-19 pandemic. The combination of these factors meant we saw a true hard market throughout 2020 and 2021, with expectations it will continue into 2022.

“With less underwriting capacity and more restrictions on coverage, insurance companies are less competitive. If you’re not prepared, a hard insurance market can negatively impact your business as pricing increases and certain coverages become more difficult to obtain. But smart planning and preparation can help you minimize the effects of a hard market and successfully make it through to the other side.” - Ron Green, Vice President of Underwriting, VGM Insurance Services

Social Inflation Is Here to Stay

In addition to the hard insurance market, another factor contributing to rising insurance premiums is social inflation—a trend that dominated 2020 and 2021, and experts say is here to stay for 2022 and beyond.

Social inflation is a term used to describe increased loss costs stemming from claims far more severe than what could be anticipated under the usual scope of economic inflation and claims trends, which in turn drives up the costs of coverage.

While we can’t control it, understanding what causes social inflation is the first step to protecting your business from its repercussions. Here are three major drivers of social inflation in the past decade:

3 Major Drivers of Social Inflation

1. Distrust of big business – From policy to public sentiment, society’s general disdain for large corporations fuels more than social media rants. The result is a climate that makes it easier to sue companies and win large settlements, thereby driving up the costs of claims and coverage.

2. Increased litigation – Another impactful trend is litigation funding. In the past, high attorney fees deterred plaintiffs from pursing trials. Today, third parties can cover the costs of litigation in exchange for receiving a portion of the settlement. Litigation funding leads to more lawsuits that go farther and last longer.

3. Massive verdicts – All of this adds up to the normalization of huge settlement awards by juries. As juries decide to hold businesses accountable and cultural sentiment assumes big corporations can afford anything, multimillion—or even multibillion—dollar settlements have become typical and expected. From 2015 to 2020, the median cost of a “nuclear verdict” jury award over $10 million increased by 35%, from $20 million to $27 million, according to Advisen’s loss database.

The Evolution of Cyber Liability Insurance

For the past several years, Cyber Liability coverage has been viewed by many business owners as “nice to have” rather than “need to have.” Despite cyberattacks making headlines daily, many organizations still operated under the assumption that it would never happen to them.

This is no longer the case. Businesses are more at risk of a cyberattack than ever before. Many contracts now require businesses to have Cyber Liability coverage in place, and for good reason. Across industry lines, cyberattacks have surged in frequency and sophistication, resulting in a rise in cyber losses, especially for small- to mid-sized businesses. According to Coveware, Q3 of 2021 saw 43.6% of ransomware attacks targeted at firms with 101 to 1,000 employees and 34.7% at firms with 11 to 100 employees.

“We are seeing massive increases in the probability of having a cyber loss, so Cyber Liability coverage is no longer optional for businesses. Due to the increased claim activity, we are seeing the cost of Cyber Liability insurance rise steadily, and it will continue to do so—particularly in industries like healthcare that have greater cyber exposures.” - Lizzie Kelly, Director of Operations, VGM Insurance Services

In addition to pricing increases, here are some additional trends businesses should expect when it comes to Cyber Liability insurance in 2022:

Cyber Liability Insurance Trends in 2022

Coverage restrictions
Businesses may encounter coverage restrictions or exclusions for losses stemming from specific types of cyber incidents, while still having more generous coverage terms for other exposures.

Push for standalone policies
In the midst of growing cyber risks, many standard property and liability policies have begun implementing exclusions for cyber exposures to avoid unexpected losses. As such, it’s critical for organizations that don’t already have one to seriously consider securing a standalone Cyber Liability policy.

Multi-factor authentication requirements
Research from both Microsoft and Google suggests that multi-factor authentication (MFA), also known as two-factor authentication or 2FA, can block over 99% of account compromise attacks. However, reports suggest that only 57% of global businesses are using MFA. As a result, most insurance carriers are now requiring MFA protection for remote network access, privileged/administrative access, and/or remote access to email. Many free and low-cost MFA options are now available, and businesses should establish this protection as soon as possible.

The Challenges of Business Auto Insurance

Auto insurance hasn’t been profitable for insurance carriers for the past decade. This has led to premium increases, tougher renewals, and stricter policies for businesses. Unfortunately, industry experts see this trend continuing due to a variety of factors ranging from litigation to deteriorating public roads. Here are some of the key trends continuing to drive pricing increases and coverage restrictions:

Business Auto Insurance Trends in 2022:

Severity of accidents
Accidents are becoming more severe, and fatalities are increasing every year. According to the National Highway Traffic Safety Administration, there were over 20,000 vehicle fatalities in the first half of 2021 alone, up 18.4% over the same period in 2020, and the highest since 2006.

More vehicles on the road
Businesses (like yours, perhaps) added more delivery drivers and in-home services, leading to an increase in vehicles on the road, added exposure for businesses, and increased chances of claims. And the trend is forecasted to continue. The Department of Transportation estimates there will be over 290 million registered vehicles on the roads in the United States in 2022.

Unsafe driving behaviors
Distracted driving incidents became more prevalent. While many factors can lead to a crash, distracted driving, including eating, drinking, texting, and talking on the phone, are some of the most common causes.

As a business owner, the best thing you can do to mitigate auto losses and ensure you’re able to get the coverage you need, is to manage your risk effectively.

“Each company should focus on risk management strategies that help to make them an above average account for an underwriter. Do you require regular driver training? Do you have a driver safety policy in place? Do you check the Motor Vehicle Records of all new drivers you hire? Do you have documented and enforced incident and accident reporting? The more organizations take control of their risk, the more likely they are to, most importantly, secure coverage, but also control premium costs.” Ron Green, Vice President of Underwriting, VGM Insurance Services

Preparing for What's Ahead

While no one can change market conditions, there are several steps you can take to reinforce and prepare your business for the 2022 trends outlined above:

Steps to Take in 2022

Budget for premium increases
With pricing increases expected to continue over the coming year, it’s important to be proactive when it comes to budgeting. “Planning ahead for the possibility means your business won’t be blindsided at renewal time,” said Kelly.

Proactively manage your risk
As mentioned above, managing your risk proactively can have a significant impact. Ensure your organization has updated and sound policies on safe driving, cybersecurity, sexual harassment, workplace violence, and other key exposures. This can go a long way toward protecting your business from claims and controlling your losses. Your insurance provider can help you with this, which in turn can help you secure more favorable quotes.

Document your loss history
Being able to readily explain losses to an underwriter can make the process smoother.

Get the coverage you need
Consider procuring Commercial Excess coverage, which provides coverage beyond the limits of your standard policies so you can be prepared in case of large lawsuits. Additionally, standalone coverage for Employment Practices Liability, Cyber Liability, and others that may not be covered by standard business policies are options worth discussing with your insurance agent or broker.

Work with a trusted partner
A solid relationship with an insurance provider who understands your unique business and the industry in which you operate can make all the difference during challenging market conditions. From reviewing and looking for gaps in your existing coverage, to providing you with a variety of options to ensure you have the most competitive quote, to providing best practices for proactively managing your risk, you’ll be in better shape with a trusted insurance adviser by your side.

For additional information about 2022 insurance market trends, and to ensure your business is covered, reach out to VGM Insurance today at [email protected] or 800-362-3363.