State of the Insurance Market: Dealerships Should Brace for More Rate Increases

It is time to take stock of current conditions in the

commercial insurance marketplace.

As we near the end of Quarter 1, the insurance industry is now firmly in a hard-market cycle.

Dealerships are facing lingering obstacles for the year ahead. Rising costs, an unprecedented number of natural disasters, and uncertainty surrounding the pandemic are fueling increases in rates.

Rate changes on individual accounts will be affected by the dealership location and risk level. Well-managed dealerships with sensible safety, human resources, claims management procedures, and lower losses will receive preferred pricing. Dealerships with mediocre controls and loss ratios will pay more as the market imposes more stringent terms.

The pandemic and other catastrophes hit many hard in 2020, with $6.8 billion in incurred losses. Despite challenging economic conditions, Dealerships must concurrently manage three phases of the COVID-19 crisis to accelerate longer-term recovery efforts. Respond, recover, and thrive.

Business Interruption Coverage

Dealerships faced unusual business interruption situations in 2020. Because of the pandemic and stay-at-home orders in various states, some of the disruptions are likely to continue through 2021. Without legal precedence, many insurance carriers have denied the initial claims for COVID-related business interruption. As lawsuits make their way through the court systems to determine whether coverage applies to pandemic-related closures, the effects of potential losses to the insurance market remain uncertain.

Commercial Property

Fires, hurricanes, and other natural disasters dotted the headlines in 2020. With wildfires unlike any seen in years past and a record-breaking hurricane season, losses for the insurance industry mounted quickly, affecting domestic insurers and the reinsurance community.

Dealerships with preferred properties in protected locations and decent loss histories can expect increases in the 10 to 25 percent range. Dealerships in coastal or CAT areas will be subjected to much higher premiums.  With capacity shrinking, and rates rising, insureds should consider accepting more “risk” in the form of increased deductibles and retentions to hold pricing down.

Inventory/Dealers Open Lot

Inventory has also been heavily affected by losses. With a limited market, the insurance carriers have drastically altered their position concerning risk. Increased pricing, weather exclusions, and the absence of weather aggregates are standard for renewals in states where CAT exposure exists.

Dealers need to be prepared to accept more risk and, where necessary, look to the open market for flood and wind coverage where exclusions arise. Additionally, a review of parametric products may be prudent to assist with higher deductible structures.

Garage Liability

With litigation on the rise for bodily injury-related accidents, whether auto-related or slip and fall incidents, garage premium increases will continue in the 10 to 15 percent range, even for high-performing dealerships. The threat of policy limit jury verdicts has prompted insurance carriers to post higher reserves on claims and adopt a “settle quickly” mentality, which raises the anticipated “loss picks.” Thus, the projected premiums.

Workers’ Compensation

Due to COVID-related job losses, workers’ compensation payrolls declined and may not return to pre-pandemic levels until 2022.

Workers’ compensation claims for dealerships have been unique, with allegations of at-work contracted COVID-19 cases and uncertainty in HR departments concerning employment-related procedures.

While lower payrolls equate to lower initial premiums, the long-term effects of claims versus premiums will impact experience modes in the upcoming years, moving workers’ compensation costs higher.

Employment Practices Liability

The sheer number of employees that lost their jobs is causing employment-related claims to spike. Coverage for the dealership industry continues to be a perplexing placement due to historical turnover. Premiums will increase in the 20 to 50 percent range with increased pressure on higher retentions, especially for larger dealerships and groups.

Umbrella and Excess Liability

The price for excess coverage is increasing significantly. Yet, the capacity offered by individual carriers has reduced dramatically. A rate increase is 25 to 100 percent is not uncommon in today’s market. There are several reasons for this, but the leading cause is the rise of jury awards, which increased in frequency and severity claims over recent years.

Cyber Coverage

Cyberattacks pose a growing threat, frequently targeting dealerships. New risks created by an increased number of data breaches, business email compromise schemes, malware, and other cyber threats will continue to drive cyber coverage demand. Coverage remains competitive, despite having more claims-related activity. Rate increases are within the five to 20 percent range. In 2021, look for more holistic prevention and mitigation.

Shopping the Market

In 2021, insurance carriers will pull all the levers to maintain financial resilience and the capital reserves needed to underwrite this new risk. As a result, there will be substantial shifts in available capacity and a continuation of increased pricing.

In times like this, dealerships need to be aware of the market. Remember, insurance coverage is only one component of the total cost of risk. You must also factor in the money spent on deductibles, uninsured losses, safety programs, training, and other things. This cost quickly adds up.

Purchasing a policy with the cheapest premium is one option for controlling insurance expenses. However, in a hard-market cycle, this approach requires a reduction in coverage. A better solution is to increase deductibles. Dealerships should counter this “risk retention” approach with increased risk management efforts, which will reduce the frequency and severity of the claims. Furthermore, the long-term investments in risk control will yield more significant dividends for years to come!