Here’s why insurance companies say they’re raising rates

It’s no secret that property/casualty insurers have been on a tear with rate increases. Finance teams may be scratching their heads as to how and why this keeps happening.

Insurance companies say they aren’t jacking up your rate for funsies. Rather, they’re responding to a host of adverse (i.e., increasingly expensive) market trends, like the tight labor market and recurring “storms of the century.”

To put these trends in perspective, we dug into several key earnings calls to understand what execs at major carriers and brokers say are their biggest pain points in the P/C marketplace.

The latest. Before getting into the commentary, let’s start with the latest data on premium increases. US composite insurance pricing increased by 3% on average in the first quarter, in line with Q4 2023, according to a report from insurance broker Marsh.

US commercial property insurance rates increased 8%, a moderation from the 11% uptick in Q4. Casualty rates grew 4% on average, up slightly from 3% the prior quarter. Rates declined for financial and professional lines by 5% on average, about in line with the 6% declines seen in the previous two quarters.

While it’s true that rate increases have slowed down in some lines and declined in others, the market still isn’t necessarily favorable to buyers, John Doyle, CEO of Marsh’s parent company, Marsh McLennan, noted during the company’s earnings call on April 18. In other words, while CFOs may appreciate that insurance premium increases aren’t as bad as they were, rates are still going up. This means that finance leaders looking to rein in costs likely won’t find help at insurance renewals.

“I would say that it doesn’t feel like a soft market to our clients after five years of price increases,” Doyle said in response to an analyst who suggested the latest insurance pricing data suggested market softening. A “soft market” is insurance nomenclature for a market cycle characterized by decreasing prices and expanded coverage.

Expensive risks. Insurers are raising rates in reaction to a number of “headwinds and some uncertainty out there,” Alan Schnitzer, CEO of insurance giant Travelers, said in the company’s Q1 earnings call. These headwinds, Schnitzer said, include geopolitical instability, a tight labor market, inclement weather (he noted elevated losses in central and eastern parts of the US), economic inflation, and social inflation, a ”term that describes increased loss costs for insurance due to increasingly expensive legal settlements and growing jury verdicts,” CFO Brew previously reported.

Travelers reported $712 million in catastrophe (CAT) losses in Q1, a $177 million increase from the same quarter last year. CAT losses added 7.1 points to the carrier’s combined ratio, which is a measure of underwriting profitability.

Social inflation is “a tax on everybody, if you look at it in a clear-eyed way,” Evan Greenberg, CEO of insurance carrier Chubb, said in an earnings call.

This is a popular refrain of insurance industry groups, which argue that policyholders bear the ultimate cost of social inflation, since carriers recoup losses from large jury awards by raising rates. For instance, research by the Insurance Information Institute last year found that a “double whammy” of economic and social inflation added as much as $105 billion in claim payouts for personal and commercial auto liability lines between 2013 and 2022.

“We reflect the inflation that we see, whether it comes from social inflation…or other causes in the prices and the rates we ultimately charge corporate America for the business,” Greenberg said.

Reinsurance. Another driver of insurance rates is, well, insurance…for insurers. When reinsurance—a risk-transfer mechanism that lightens the load insurers take on when writing policies for organizations—gets expensive, companies pass on the added cost to policyholders.

On the reinsurance front, Marsh McLennan execs shared good news and bad news.

The good news is that, on the whole, the reinsurance market “remained stable” at April renewals, according to Doyle. There was enough reinsurance capacity to meet increased demand from insurance companies, known as cedents in this transactional relationship. Property CAT reinsurance rates were flat, with some decreases for insurers that had no losses and increases in the range of 10%–20% for insurers that did have losses, he added.

Doyle said he was optimistic for the near-term prospects of carriers looking to transfer property CAT risk in the challenging Florida market. “Early signs for June 1 Florida CAT risk renewals point to improved market conditions for cedents,” he said. “Increased reinsurance appetite for growth should be adequate to meet higher demand.”

Now the bad news: The reinsurance market for casualty risks was more of a challenge, Marsh McLennan leaders said. There was adequate casualty capacity at April 1 renewals, but reinsurers increased rates in line with renewals in January, with certain contracts seeing double-digit increases, according to Dean Klisura, CEO of Guy Carpenter, the reinsurance broker subsidiary of Marsh McLennan.

Klisura said the tough casualty reinsurance renewals were due to “continued reinsurer concern with the adverse development, driven by social inflation and increasing loss cost trends.”