Author: Peter Persuitti
We've included our overall U.S. general insurance market report, given the world is truly impacted by the stress on reinsurance, which is playing out with the January 1 treaty renewals. All industries — throughout the world — will see the negative effect.
Given the diversity of operations and constituencies served, it's imperfect to use a broad brush to paint a picture of the third sector's insurance market conditions, but suffice it to say the reinsurance crunch is sure to influence all carriers' need for rate and premium in 2023. Gallagher is prepared to navigate these important relationships, especially with the nonprofit specialist carriers, and to reinforce good claims experience and loyalty with a consideration of options of carriers wanting to grow through new business development.
The combination of pressure from demand on services (increased exposures) and price escalation in the cost of goods overall (inflation) have created significant challenges for nonprofits. With carriers continuing their messages about rate increases in 2023, we'll leverage our data analytics — and in some cases alternative risk financing expertise — to navigate pressures on total cost of risk and reduced margins.
The world has learned a great deal about youth protection especially, and consultants, carriers and nonprofits with this exposure have worked tirelessly to make youth protection a core strategy, committing to a culture of safety.
We are encouraged by the quality of emerging leaders coming to the third sector from the corporate world — success moving to significance.
Understanding the facts about the current nonprofit insurance market
Tell your story.What surfaced most in our reaching out to carriers writing in the nonprofit sector was the importance of controlling the narrative — highlighting the best practices and ways the nonprofit may have overcome any adversities and excelled. Get ahead of old news lingering on websites.
Umbrella limits.We've witnessed limits evaporate or become exorbitant in cost. Social inflation is accentuated with nonprofits for whom there is a higher standard of care from the public at large. Some carriers are reducing limits for this class of business, including abuse. Be prudent in your analysis — jurisdictional considerations, concepts such as limits as targets and your overall confidence in your duty of care should come in to play going forward.
Claims development requires details.Carriers want to see correction strategies in place and proven outcomes from those actions. Demonstrate positive momentum and change.
Auto insurance continues as a key driver of premium.Clearly this exposure is heavily scrutinized, given the development of losses over time. Be proactive in fleet management, training, telematics and safety protocols.
Cyber is in stress mode.This coverage is in a state of pressure for all industries, and with many nonprofits not achieving full multi-factor authentication (MFA) across the enterprise, there is an ongoing threat of nonrenewal, let alone significant increases in premium and deductibles. Take advantage of the free assessments that certain providers offer.
Property.What used to be an asset has become a challenging liability for nonprofits relying on physical properties. Have you been proactive in maintenance and valuations?
It may be time to market the program.We see growing opportunity to control costs with leveraged options that create competition.
2022 Fall/Winter Insurance Market Update
Commentary for nonprofits from Gallagher insurance specialists
Insurance for human service agencies
Bruce Tindal and Amy Kansay
National directors, Gallagher Nonprofit practice
There's been some easing of the rate increases we have seen over the past three or four years for agencies with favorable loss experience. Smaller agencies — under $50 million annual budget — with favorable loss experience may also see rate reductions if their coverage is marketed to alternate carriers. More carriers than ever are interested in writing these agencies and looking for new business. We find it strange that carriers on renewal are still requesting rate increases of 5 to 7% on the agencies with favorable losses and then offering rate reductions on new business accounts that they're quoting. But this trend is the norm in our entire insurance marketplace at this time.
We separate these smaller agencies from the larger ones that normally are located in larger U.S. cities, as the insurance marketplace tends to struggle with the larger agencies. We have seen carriers refuse to provide quotes and non-renew even well-performing larger agencies.
We see number of issues that all should be aware of:
- Many smaller agencies have failed due to the pandemic just like other businesses have. As they fail, larger agencies assume their clients.
- With pandemic-related homelessness, mental health issues and substance abuse have increased dramatically.
- Clients have been moved from shelters to hotels and back to the agency's shelters over these last three years.
- Agencies are receiving increased funding from the states and building or leasing new buildings to create facilities to serve the growing population of people at risk.
- Agencies are providing housing for and treating many immigrants crossing the southern border who have mental health or substance-abuse issues.
The above issues have led to rapid growth in the larger human service agencies in the country and the insurance marketplace — and the carriers that have serviced this niche — are struggling with this growth and this change.
The key is to get far ahead of your renewals and tell your individual story. We suggest you engage with your carrier at least four months prior to your renewal date. And tell your story by highlighting what the agency does in the areas of loss control, claims meetings and managing facilities, safety training and driver training.
Most of all, get the account out to other carriers that may wish to look at it. You may find that moving the account can save premium dollars that are better used to serve the at-risk population you deal with daily.
Gallagher Nonprofit practice
Transformational organizations (TOs) share diverse perspectives and objectives, but the most common thread is that they believe social crises are usually symptoms of deeper issues that need to be addressed first. For example, transformation-focused organizations generally look to address spiritual and/or mental health issues that result in homelessness, poverty and addiction before assisting with placement in more-permanent housing. (This approach is opposite from the "housing first" philosophy.) We usually see faith-based organizations as key leaders in this transformational model of social service, with remarkable long-term results.
Unfortunately, among these TOs, we've seen some poor hiring and vetting processes over the past 10 years. These flawed processed often are a result of inexperienced boards and management — and has culminated in a variety of losses, most notably embezzlement, wrongful terminations and retaliation. Even well-run organizations are experiencing some significant discrimination claims that are causing management to re-think their practices and processes. These losses, typically resulting in non-renewal, are creating costly premium increases for many years.
To help our TOs reduce losses and keep their dollars focused on services that bring transformation, it's important that we share lessons on how others' poor vetting decisions resulted in losses and then go one step further and talk about organizational protection. Peers, clients, associations and like-minded agencies all need to discuss these lessons.
As risk management consultants, we have a responsibility to promote both culture and standards of operation that have sufficient internal accountability and controls. Some associations have established professional standards for member accreditation, which is a very good place to move the discussion forward. Another option for helping leaders move the conversation forward (and uncover problems to be addressed) can start with Gallagher's risk survey or enterprise risk management (ERM) evaluation. Nevertheless, we have a steep hill to climb, since many TO leaders seem to underestimate the risks and therefore are reluctant to invest time and resources in the efforts to address risks before a major loss.
Gallagher Y Programs leader
Fostering risk awareness among every staff person and volunteer is key to an effective risk management program. It's not one person's job. A risk-aware staff creates a safer organization and ultimately reduces your total cost of risk.
Empowering youth to speak up and know acceptable behavior and boundaries are important components of abuse-prevention programs. Organizations need to walk the talk and model acceptable behavior so kids can do it, too.
Nonprofit Management Liability insurance
Taylor (Quinn) Feeney
Gallagher Management Liability practice
Nonprofits need to pay attention to diversity, especially its importance in reflecting the constituencies they serve, beginning with their board of directors and key executives. In addition, environmental, social and governance (ESG) focus has been elevated in the third sector, and underwriters are putting a heavier emphasis on ESG. We must pay attention to employee wellbeing and documenting human resource issues. There is still some pressure on umbrella limits (availability, affordability) as nonprofit negligence hits the front page of the newspapers, reminding us of the higher standard of care human service organizations need to achieve.
We're seeing more stability in the management liability marketplace. New directors and officers (D&O) carriers are entering the space, which is creating carrier competition and helping rates decrease. We're expecting to see flat to single-digit increases in D&O premiums.
Underwriting nonprofits in the U.S.
Charity First Insurance Services, Inc., a Gallagher division
Rates are still going up moderately, in the 5 to 10% range in most lines, maybe slightly higher in auto insurance and specialty lines of coverage like Sexual Molestation and Abuse (SAM). Of course, there are exceptions to this trend.
With inflation, everything is going up, including claims costs. On the property side, materials and goods cost more, as does labor. On the liability side, we're continuing to see higher judgement awards. To get the best rate, a nonprofit really needs to be proactive when it comes to risk management and make sure that proactiveness comes across in its insurance application. The more an agent or broker can tell an underwriter about the risk, the more opportunity the underwriter has to be flexible with pricing.
Excess Casualty coverage for nonprofits
RPS Public|Nonprofit, A Gallagher wholesale division
Analysts are predicting a slowdown in rate increases for 2023 and beyond that we have seen since continual rate escalation since 2019. We have not seen the de-escalation of rate for early 2023 risks.
The rate project is broken down into the following nonprofit categories:
- Low Hazard Risk and Great Loss Ratio - 10% Decrease to 5% Rate Increase
- Medium Hazard Risks and Fair Loss Ratio- 2% to 5% Rate Increase
- High Hazard Risks to Poor Loss Ratio Flat to 10% Rate Increase
Unfortunately, we haven't seen numerous new entries into the nonprofit excess casualty space, especially in the high-hazard risk or poor-loss-ratio segment. The high-hazard risk or poor-low-ratio risks are up against a supply challenge with limited appetite for almost all carriers, especially foster care and adoption risks.
From the UK — Underwriting Charities
Sarah Smith ACII
Charity Underwriting Direction, Gallagher Charity and Healthcare Division
As an underwriting team serving charities in the UK, we use one main insurer for capacity, but I'm part of a division that works with countless carriers. We work incredibly hard to deliver a consistent approach, but that consistency isn't being seen elsewhere in the market place.
We're seeing the emergence of dual-approach risk appetite and pricing, so we're starting to see some softening for new businesses. Insurers are asking for business, which puts pressure on account executives for new clients, which feeds into the fact that most UK insurers are looking for sizeable organic growth in 2023.
In contrast, those same insurers on their renewal book are looking for rate and generally between 5 to 10% on profitable risks, and are taking bespoke action on clients that are in distress or are unprofitable. We're still seeing insurers cleaning their books, either exiting some cases, classes and risk profiles, or applying sizeable rate increases for no real reason other than a change in stance. An insurer might be in the position of prospecting for new business while at the same time deciding to no longer insure clients who have become too high risk.
Here are 8 things you can do to navigate/get ahead of your next renewal…
- Work with specialist brokers — such as Gallagher — that know the sector, know which insurers have a proven track record and can navigate mixed messages and inconsistency to try to deliver the reverse.
- Check the breadth of your policy cover with your specialist broker. When the market was soft pre pandemic, a number of insurers added additional covers for free, but as the market has hardened post pandemic, those additional covers now incur a cost. Do you need all of them?
- Revalue your buildings and assets and ensure the reinstatement values are accurate. Inflation is rising, and insurers are applying index linking from 10 to 20% on Building and Contents/Machinery declared values. While this rate may not always be appropriate, without it there's the risk of underinsurance and average applying. Try to steer this coverage, rather than accepting whatever indices the insurers dictate.
- Thoroughly review your Business Interruption coverage, which is often insured on the wrong basis, with an overinflated sum insured but set against a too-low indemnity period.
- If wages are up due to inflation rather increased headcount, tell that story. Wages are a rating factor for Employer's Liability, and while some insurers still might increase the premium in line with inflation, others might take a more lenient and pragmatic approach if the headcount is unaltered.
- Provide breakdowns in income/turnover/funding, explaining any changes — especially increases, which are a rating factor for Public Liability and financial lines such as Directors and Officers (D & O).
- Make sure your broker tells your insurer if you've invested in risk management. Clients might spend a fortune on risk management, but not tell their broker, or the broker might not tell the insurer if the insurer doesn't ask.
- If you've had a claim in the last 12 months, document every post-loss action you've taken, share in detail with your broker and ensure your broker shares with your insurer.
Because of the highly nuanced nature of this market, it's imperative that you are working with an insurance broker who specializes in your particular industry or line of coverage. Gallagher has a vast network of specialists that understand your industry and business, along with the best solutions in the marketplace for your specific challenges.