At First Volunteer Insurance, we often examine how outside influences and trends affect the insurance marketplace here in Tennessee and around the world. Businesses should follow suit to determine what factors impact their insurance coverage. For 2022, there are a number of sweeping market developments to consider, so we have outlined a few here for our blog.
The past year has definitely impacted Tennessee and we have seen labor shortages across many industry lines. According to a recent study from the Society for Human Resource Management (SHRM), nearly 90% of organizations are having a hard time filling open positions. The industries experiencing the most substantial labor shortages include manufacturing, hospitality, health care and retail. Of the positions currently available, the majority (79%) of organizations are experiencing difficulty filling entry-level positions. Additionally, most (61%) organizations reported that hourly positions have been the hardest to fill.
A variety of factors have contributed to these widespread labor shortages. Primarily, the impact of the COVID-19 pandemic has caused many workers to reevaluate their employment priorities and made unemployed individuals apprehensive of returning to the workforce—with the proportion of people who have been out of work for six months or longer at its highest point in 60 years. The SHRM study found that nearly one-third (32%) of unemployed individuals have remained out of work due to concerns over COVID-19 exposure on the job, while 27% have done so because of salary issues. Further, over 20% of unemployed individuals with caretaking responsibilities have stayed out of a job because they lack access to reliable care. This issue is especially prevalent among female employees, as 3 million women left the workforce during the pandemic. As such, many individuals are seeking jobs with greater flexibility (e.g., nontraditional hours and remote capabilities), additional paid time off, higher pay and workplace arrangements that promote health and safety.
To help combat these labor shortages and attract skilled job candidates, organizations have had to make a number of workplace adjustments. The SHRM study found that 57% of organizations have started offering referral bonuses to fill open positions, while 43% have increased pay and 23% have provided sign-on bonuses for these positions. In addition to monetary offerings, 23% of organizations have begun offering extra workplace benefits, discounts or other incentives (e.g., flexible hours, caretaking support, more advanced technology and remote options) to attract employees. Looking forward, organizations will need to remain innovative in meeting their employees’ shifting expectations and attracting talent.
Since the onset of the pandemic, a range of supply chain disruptions have taken place. The majority of these issues stemmed from increased demand for various items and materials amid a slowdown in production and subsequent lack of availability during pandemic-related closures. Even as organizations have resumed their normal operations and increased production levels, consumer demand for certain items and materials has continued to outweigh inventory. This is likely attributed to a greater number of consumers making large purchases from accumulated savings throughout the pandemic. Creating further supply chain bottlenecks, an ongoing shortage of warehouse workers and truck drivers has slowed shipment and delivery times for high-demand goods.
These supply chain disruptions have impacted a number of industries. According to the U.S. Census Bureau, the sectors that have experienced the greatest supply chain difficulties include the manufacturing, construction and retail trade industries. Some of the most significant supply chain concerns have included shortages of building materials (e.g., steel and lumber) and vehicle parts (e.g., car chips). These particular inventory issues are directly associated with new home and vehicle sales spiking to their highest level in over a decade, as well as an increase in home improvement projects and accidents on the road that require vehicle repair services.
Several economic experts believe these supply chain issues will continue into at least the first half of 2022 before eventually subsiding. With this in mind, it’s important for organizations of all sectors to be prepared for potential supply chain bottlenecks in the months ahead and have contingency plans to help them stay operational amid any disruptions.
The culmination of widespread labor shortages and supply chain disruptions have largely contributed to rising inflation issues in the commercial insurance space. In fact, the Bureau of Labor Statistics (BLS) reported that the consumer price index (CPI) for all urban consumers increased by 6.2% throughout the past year, thus inflating total loss expenses in the property and casualty markets.
Within the property insurance space, the cost to repair or rebuild structures following a loss has soared. This is because worker shortages within the construction industry have led to increased labor costs. At the same time, supply chain issues related to various essential building materials caused the price of these items to skyrocket. According to the National Association of Home Builders, the costs of lumber and steel have more than doubled amid the COVID-19 pandemic. According to the BLS, such inflation is further evidenced by a substantial increase over the past year for a number of structural elements—including floor coverings, window coverings, major appliances and overall construction materials.
In the auto insurance market, vehicle repair expenses and subsequent accident costs have also surged. This trend is predominately caused by worker shortages in the auto industry generating elevated labor costs and supply chain disruptions for several critical vehicle parts (and vehicles overall), leading to higher prices for such items. These concerns are reflected in an increased CPI throughout the last year for auto parts, motor vehicle repairs and used cars and trucks, according to the BLS.
Going into 2022, economic experts predict that rising inflation will continue to be a pressing concern. While it’s currently making the most significant impact on the property and auto insurance markets, such prolonged inflation will likely begin to affect additional segments—such as the workers’ compensation and liability insurance spaces—over time. This means that insurance carriers will face challenges as it pertains to maintaining insurance pricing to keep up with more volatile loss trends. To prevent unanticipated loss costs and increased loss ratios due to rising inflation concerns, carriers may need to increase premium expenses and make other coverage adjustments. Nevertheless, it’s important to note the insurance industry as a whole is better positioned to incur losses to its reserves when compared to previous periods of prolonged inflation in U.S. history (i.e., the 1980s).
As an insurance buyer, you may have heard the term “social inflation” used to explain one of the factors driving up the cost of insurance in today’s market. In general, this term refers to societal trends that influence the ever-rising costs of insurance claims and lawsuits. As the insurance market changes, it’s important for businesses to understand what’s currently driving social inflation.
One of the factors driving social inflation has to do with increased litigation or, more specifically, litigation funding. Litigation funding is when a third party provides financing for a lawsuit. In exchange, the third party receives a portion of the settlement. In the past, the steep cost of attorney fees would often scare plaintiffs away from taking a lawsuit to trial. But, through litigation funding, most or all of the costs associated with litigation are covered by a third party, which has increased the volume of cases being pursued.
Not only is litigation funding becoming more common, but it also increases the cost of litigation, sometimes to seven figures. This is because plaintiffs can take cases further and seek larger settlements.
Tort reform refers to laws that are designed to reduce litigation. Specifically, tort reforms are used to prevent frivolous lawsuits and preserve laws that prevent abusive practices against businesses.
Many states have enacted tort reforms over the last several decades, leading to fewer claims and caps on punitive damages. However, in recent years, a number of states have modified tort reforms or challenged them as unconstitutional. Opponents believe tort reforms lower settlements to the point where attorneys are less likely to take on new cases and help victims get justice for their injuries or other damages. Here in Tennessee, back in 2011, the state passed tort reform legislation which impacted compensatory damages in several key ways. … Now, non-economic damages have been capped at $750,000 for most cases. In rare situations, non-economic damages are capped at $1,000,000.
Further complicating matters, tort reform is subject to uncertainty, as it’s largely tied to political leanings and the interests of individual states. Should tort reform continue to erode, there could be fewer restrictions on punitive and noneconomic damages, statutes of limitations and contingency fees—all of which can drive up the cost of claims and exacerbate social inflation.
Plaintiff-friendly Legal Decisions and Large Jury Rewards
The overall public sentiment toward large businesses and corporations is deteriorating, and anti-corporate culture is more prevalent than ever. A number of factors are contributing to this increasing distrust, including highly publicized issues related to the mishandling of personal data and social campaigns.
This has had a considerable impact on how businesses are perceived by a jury in court, and organizations are held to a high standard for issues related to the way they conduct their business. In fact, juries are increasingly likely to sympathize with plaintiffs, especially if a business’s reputation has been tarnished in some way in the past. As a result, plaintiff attorneys are likely to play to a jury’s emotions rather than the facts of the case.
Compounding this issue, there’s an increasing public perception that businesses—particularly large ones—can afford the cost of any damages. This means juries are likely to have fewer reservations when it comes to awarding damages. In the current environment, nuclear verdicts (awards of $10 million or more) have become more common.
Extreme weather events—like hurricanes, tornadoes, hailstorms and wildfires—continue to make headlines as they become increasingly devastating and costly. Making matters worse, these events aren’t limited to one geographic area or weather event, impacting businesses and residents across the United States. Tennessee suffered 66 tornadoes in 2021 causing over $1 billion in damage and sadly, taking four lives.
One of the most devastating weather events from this past year was Hurricane Ida. According to the NOAA, this Category 4 hurricane generated 150 mph winds upon making landfall in Port Fourchon, Louisiana—one of only three hurricanes in history to generate such strong winds in that state. The hurricane destroyed 100% of the homes in Grand Isle, Louisiana, and severely damaged the energy infrastructure across the state—leaving millions without power. The remnants of the hurricane then led to immense flooding from Pennsylvania to New York. In total, the hurricane caused nearly 100 fatalities and incurred $64.5 billion in total damages.
According to data from the National Oceanic and Atmospheric Administration (NOAA), wildfires again plagued the West Coast in 2021, recording a year-end total of more than 52,000 wildfires and burning over 6.6 million acres. Widespread drought and several heatwaves in the Western and Central United States caused over 200 fatalities and cost billions in damages. Hundreds of tornadoes wreaked havoc across various Southeastern and Northeastern states, while hailstorms, strong winds and heavy snow impacted the Midwest. On the East Coast, the 2021 hurricane season recorded the third highest number of storms in history, causing over $70 billion in damages and affecting multiple states along the Atlantic coastline.
Another notable weather event from 2021 was the Texas winter storm. During this storm, the NOAA reported that a historic cold wave swept across the state, with temperatures 40 degrees Fahrenheit below average. The prolonged, below-freezing weather damaged many structures due to burst pipes and caused widespread power outages—leaving 10 million people without power during its peak. The storm became the costliest U.S. winter weather event on record, incurring $20.8 billion in damages and causing 172 fatalities. As a whole, the storm contributed to over 456,000 property and casualty insurance claims.
Many experts believe severe storms, extreme temperatures, wildfires and flooding are the new norm. As these catastrophes become more frequent, the insurance industry will need to adopt innovative solutions to keep up with weather-related losses. Moving forward, expect to see more emphasis on weather readiness, especially from an insurer’s perspective.
Several social movements rose to prominence in recent years, with the implications of these movements expected to affect organizations for the foreseeable future. The Black Lives Matter movement was initially founded in 2013 but resurged in 2020 in the form of nationwide protests and civil unrest. This movement has pushed for increased accountability regarding racial injustice (both at the corporate and individual level) and encouraged organizations of all sizes and sectors to make strides in promoting racial equality and diversity within their workforce.
In addition to the Black Lives Matter movement, the #Me Too movement—an anti-sexual harassment campaign founded in 2006 but resurged in 2017 across social media—has repeatedly reigned as a relevant topic for many organizations in recent years. Since its resurgence, this movement has empowered employees to call out instances of inappropriate behavior, contributing a sharp increase in work-related sexual harassment claims, especially regarding employees alleging sexual harassment from senior leadership. The movement has highlighted the need for all organizations to implement sexual harassment prevention and response measures (e.g., a zero-tolerance policy, awareness training and well-documented reporting procedures).
These movements have contributed to the rising trend of increased corporate accountability regarding social issues, thus elevating the risk of employment-related claims alleging discrimination, harassment or other forms of unfair treatment. Moving forward, employers need to respond accordingly amid such social movements, routinely adjusting organizational practices to ensure a positive, inclusive and diverse work environment. Failing to do so could result in increased losses and subsequent claims, as well as severe reputational damages. Policyholders who take the necessary actions to avoid such claims by documenting workplace inclusivity, diversity and social awareness initiatives may reap the benefits of reduced premiums.
Price forecasts are based on industry reports for individual lines of insurance. Forecasts are subject to change and are not a guarantee of premium rates. Insurance premiums are determined by a multitude of factors and differ per organization. These forecasts should be viewed as general information and not insurance or legal advice.
|LINE OF COVERAGE||PRICE FORECAST|
|Commercial property||Overall: +5 to +15%|
|General liability||Overall: +2.5 to +15%|
|Commercial auto||Overall: +10 to +25%|
|Workers’ compensation||Overall: -2 to +5%|
|Cyber liability||Overall: +15 to +50%|
|Directors and officers liability||Private/nonprofit entities: +5 to 35%
Public companies: +5 to +25%
|Employment practices liability||Overall: +10to +25%|
For more business guidance or help making sure your business is adequately protected, contact First Volunteer Insurance today at 423-668-4888