The Weekly Thought

When Will Gravity Apply to Commercial Insurance Renewal Pricing?

As I mentioned last month, I am curious as to when the hardened commercial insurance marketplace will crest and then soften in the face of the economic slowdown caused by the Covid-19 pandemic. The government forced economic shutdowns, intended to stifle the spread of Covid-19, were heavily subsidized by unprecedented federal government fiscal and monetary stimulus. That government money succeeded in softening the pain, with much apparent short-term success. Some $6 Trillion, by some measures and counting.
Nevertheless, business volumes in certain industries have plummeted. Airlines, hospitality, including restaurants and accommodations, the travel industry, entertainment including professional sports, to name a few are deep at depression levels. Temporary furloughs are turning into permanent layoffs for many struggling industry segments. Bankruptcies in retail are mounting. Commercial real estate is in limbo given the fact that many office dwellers may remain remote for extended time periods if not permanently, thus suppressing the demand for office space and the support space need for restaurants, etc. that catered to said office dwellers.
Financial institutions may soon see the damage done as rent and mortgage deferrals expire at around the same time that extended unemployment benefits also expire, which may cause increases in nonperformance in their loan portfolios. At some point the jobless figures, and the reduction in disposable income that will occur when government stimulus money expires for those folks, will ripple through the economy.
Early reopenings of various states are not going as planned as Covid-19 seems to be resurging dramatically in Florida, California, Arizona, Texas and dozens of states that reopened early. Some are considering re-imposing restrictions to contain the outbreaks. Schools may open this fall or maybe not.
During all of this the hardening of rates in the commercial insurance marketplace seems to be accelerating through the early weeks of summer 2020. Reasons given include the concerns of the underwriting community regarding pandemic related exposure in addition to the expected normal loss experience. Despite the general insurance community opinion that coverage for Covid-19 is virtually non-existent, ranging from denials of business interruption matters to controversies in workers’ compensation for sickened workers, to legislated liability shields for health care institutions, the insurance industry still fears increased successful Covid-19 claims activity negatively impacting their portfolios.
What will the next round of governments stimulus look like? It is, after all, an election year. Most certainly there is incentive for both political parties to compromise and pump more money into the economy in the run up to November. If such action occurs, how will that added stimulus further distort normal business economics? How long will the pandemic hold sway over the economy? How will the November election results affect the economic outlook? Will insurers be forced to pay Covid-19 related claims beyond their expectations? Will the government eventually bailout both the insurance industry and their policyholders for Covid-19 claims?
The pandemic has distorted the economy as has, by necessity, the expansionist governmental fiscal and monetary intervention which attempted to create a bridge to a post pandemic economic recovery. Those distortions seemingly have also facilitated the means to support a continuation of the hardened insurance marketplace. This hard insurance market began and matured with restrictions in the supply of insurance, i.e., capacity. Availability and limits offered reduced considerably and the price of what was made available increased dramatically. Aggregate demand for insurance most certainly is now dropping, yet supply remains constricted and price continues to skyrocket as if the economy was in full bore recovery.
The question remains, when will a balance of supply and demand occur and when will the normal insurance pricing cycle resume? Pricing cannot continue to increase in the face of declining aggregate demand. Something must give way.
There is an old phrase that we have all heard, that has many purported origins: “May you live in interesting times.” Be that a blessing or a curse, we do find ourselves in interesting times!

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