“The insurance industry has been around forever,” said Scott Kerestesi, CEO, Cragin & Pike. “It started with ships sailing across the ocean with goods and when [there was an event], it took forever for things to happen. When a building burns down it takes six, nine, 12 months to rebuild. Today with cyberattacks it’s like, ‘Hey, we’ve been hacked and we need to know what to do and we need to get this fixed ASAP.’ That’s a big change in the industry on how to react with our clients [and] dealing with claims.”
The Evolving Basics
“On the property and liability side, insurance has lot of mandates,” said Nick Rossi, president, LP Insurance. “For example, your commercial auto insurance, just like your personal, in order to drive a vehicle, you have to show evidence of financial responsibility or insurance. If you are leasing a building, if you own a building, if you buy equipment, lenders or lessors will require that you carry property insurance and/or liability insurance to protect the asset they’re trusting you with. From that perspective, there’s quite a lot required.”
But from the perspective of the state, and legal requirements in general, just what types of insurance are businesses mandated to have as long as their doors are open for business? Surprisingly little. The only insurance coverage required by state law is workers compensation.
“That’s the only one you’re required to have, but any sophisticated or operating business is going to have a variety of insurance products,” said Kerestesi. The basics are property and liability. Property for buildings and equipment. “Liability is in the event someone sues you, slip and fall, a variety of other issues so property and liability [insurance] are the backbone of any business.”
Employee benefits is the other insurance concern for businesses. “That’s the package of benefits you offer your employees when they come to work for you, such as medical insurance, dental, vision, life, disability,” said Valerie Clark, president, Clark & Associates. Employee benefits aren’t mandated like workers compensation – companies with fewer than 50 employees aren’t required to offer them – but in a tight labor market benefit packages can be an important part of attracting and retaining top talent.
One newer trend falling under the employee benefits umbrella is personal lifestyle accounts. “Employers make accounts available for employees and set up parameters to access this money for personal growth or welfare, things like that which insurances don’t cover,” said Clark. An employee might purchase a sports watch to track their workouts, or further education as they study for advanced degrees. For businesses with more sophisticated risk management, there’s also captive insurance solutions, where businesses self-fund risk management. Those are becoming more prevalent, according to experts.
Emerging Lines
Those are the basics. But insurance is evolving just as businesses are evolving. Currently the biggest new product on the block is cyber insurance. This insurance is important, but not every business is purchasing it. However, it’s something every business probably needs. In the wake of events like the cyberattack on SolarWinds, a major US information technology firm, that exposed US information to Russian espionage forces, or the September cyberattack on MGM Resorts and Caesars Entertainment, cyber insurance is a hot topic when brokers meet with clients.
“With regard to what lines of coverage have emerged recently and are the fastest growing, I think in the product liability area it’s cyber liability,” said Rossi. “Fifteen years ago businesses didn’t even carry that coverage and today it’s one of the hottest topics when we meet with clients. [They ask,] ‘How do I protect myself from electronic breaches?'”
The need for cyber insurance is so high that today’s insurance agencies are hiring IT specialists, dedicated teams of cyber security experts, compliance and legal experts, to work on client claims after an attack. Businesses need to know the cost of restoring their systems, and the liability the business might incur as a result of the attack, said Rossi.
Because the number of cyberattacks continues to grow, insurers are requiring businesses to present evidence of good risk management techniques, like requiring multi-factor authentication for logging in.
“We used to log in without a password. Then [we logged in] with a password,” said Rossi. Now users need a separate device or account, the answer to a secret question or must run a facial or fingerprint scan. “It’s not just insurance itself but what precautions, safeguards and measures the potential insured is taking in order to reduce the risk of a hack.”
“There are so many pieces that go into a breach situation that they have dedicated teams,” said Kerestesi. “You’ll be talking to IT specialists familiar with the type of code that’s locking the system down or whatever the attack looks like. They’ll be able to tell you if they’ve seen that type of situation before, what happened and who are these attackers? Are they the better of the bad guys, meaning are they going to leave you alone after you pay the ransom. And then they’ll help you deal with all the compliance stuff, to make sure if you have to make notifications or if you need to monitor your client’s credit, they’re going to help you move through all of that.”
It’s not just giant companies with deep pockets that get hacked; the risk is there for every size of business. “The crazy thing about this is, hackers don’t necessarily discriminate based on size of the company or a company’s mission,” said Kerestesi. “Just about every business is vulnerable. Some of the tougher [cases] we’ve dealt with are not for profit clients. It just kind of breaks your heart a little when you’re dealing with organizations that give back so much to our community that aren’t able to operate because they’ve been hacked and are requiring ransom and other issues to get them up and operational.”
Cyber isn’t the only new product. Some insurance policies are now excluding things like active shooter, sexual abuse, pollution/mold issues that aren’t typically covered in standard policies, so standalone products are evolving that cover those areas.
Long-term care is another emerging line of healthcare insurance. Most policies don’t offer coverage unless it’s through Medicaid, so policies offering long-term care coverage are becoming at least more obviously necessary.
“It’s been around for years, but it’s hard to access and it’s very expensive, so we’re seeing some states start to mandate coverage because there’s just no coverage out there,” said Clark. “It’s an evolving type of coverage that we are trying to get more access to for our employees.”
The Cost of Protection
Insurance has never been cheap, but having it there when it’s needed matters, whether or not the coverage is mandated.
But insurance costs continue to grow, and there is more than one reason behind rising costs. Within the different product lines like property and liability, health insurance and pharmaceutical coverages, inflation factors into all of them, but it’s not the only cause of rising prices.
Property insurance has suffered losses as an industry. According to Kerestesi, prior to 2017 there were only two years with $100 billion in total losses globally. Since 2017, every year but two has seen $100 billion in property losses. Interestingly, the two years prior to 2017 saw catastrophic events like Hurricane Katrina. Claims post-2017 have been from a combination of smaller events, like wildfires in California and the West, tornados and smaller, but no less deadly, storms in other parts of the country. Those events have driven up the need for and cost of reinsurance, where carriers cover their own losses by purchasing excess coverage. In areas more apt to be hit with catastrophic natural events or human-caused catastrophes, the reinsurance market has seen rates go up significantly to cover the costs of claims.
“In Nevada we’re more fortunate than other parts of the country, particularly in [areas that] have huge catastrophe exposure like California with earthquakes and wildfires, and Florida and the Gulf Coast with storms. But, we all share in that burden,” said Kerestesi.
Inflation plays a part, increasing the costs of repair and new construction when property is damaged. Climate change has also been a factor. “The increasing change in our climate has contributed to loss and probably the best example right here locally is that we’ve had a severe disruption in our fire insurance availability both for commercial and for residential,” said Rossi. “Particularly if you happen to fall in an area in and around the Truckee Meadows that’s associated with a higher incidence of fire frequency or severity. The best example for those of us who live there is the Tahoe area. That’s something really impacting the property [insurance] lines.”
In a global economy, supply chain disruptions are also causing higher insurance prices. The pandemic-caused interruption of the flow of goods and services contributed significantly to the cost of insuring properties. A contractor insuring a house under construction during and post-COVID might see the cost of lumber skyrocket due to supply chain disruptions. As the cost of materials went up 4 to 600 percent, the cost of insuring the house rose significantly.
Human-caused events like terror attacks also drive up insurance prices, as do third-party litigations. Part of the cost is when carriers are paying out more in claims than they’ve charged in premiums, they’re not making an underwriting profit.
An emerging trend is new private equity-backed plaintiff’s litigation fundings. “It’s an interesting concept where private equity is basically funding third-party litigation, like plaintiff’s lawyers, to get big judgements against economic issues. You can invest with these guys, who are going to put this much money into litigation and get this much money in the settlement. That doesn’t have any bearing on whether or not interest rates are going up or down. It’s an economic hedge and it makes total sense. [However], that means we don’t know when [they’re going to] have private equity funding and the ability to take people to court, generate large insurance settlements that can have a negative impact on policy holders because they’re going to have to pay more on premium because there’s more claims,” said Kerestesi.
Leaving aside the question of ethics, it’s a new practice and it’s changing the industry. From an investment standpoint it makes sense, Kerestesi said. For insurance carriers, it’s still something they’re trying to get their arms around.
In the area of health insurance, one factor driving up cost is zip code, because the age of the population is taken into account when setting premiums. “The older the population, the more expensive care gets,” said Clark. “An aging population is going to see the cost of care increase depending on the general health of the population. The more demand for care there is, the more expensive things get.” The constant evolution of pharmaceuticals plays a part too. There are new drugs on the market daily, creating a demand for expensive pharmaceuticals and a subsequent increase in the costs of health insurance.
The High Cost of Health
According to the Wall Street Journal, health insurance premiums are expected to rise more in the next year than they have in recent years, largely due to operational costs as insurance companies are having to pay hospitals more, prescription drug prices are rising, and the cost of hiring quality personnel is extremely high.
One way small businesses can work to keep health insurance costs down is through association health plans, essentially a group health plan where multiple employers join together to create affordable health plans for their members.
Such plans are only for small businesses. The Department of Labor made them available in 2017. “We have seen tremendous opportunities for small business success with quality health insurance plans for their membership at greatly discounted pricing because you’re aggregating all the different groups together and they form a large group. Generally, we can see savings anywhere from 20 to sometimes all the way up to 50 percent off what they would pay in the small group marketplace,” said Clark.
While business owners can’t control healthcare costs, there are ways to manage health plans by working with a broker and looking over a variety of different types of plan structures, including self-insured plans. “You can create wellness programs that have a direct impact on company’s healthcare costs and absenteeism and morale, and ultimately what you’re trying to do is create a culture that supports your employees when they’re struggling with their health or that of a family member,” said Kerestesi. Health insurance is the most personal form of insurance, and it’s difficult to navigate while dealing with health concerns and unfamiliar hierarchies like insurance and the healthcare system.
There’s one bright spot with insurance costs. After Nevada became an open market for workers compensation insurance, rather than requiring employers to buy from the state, competition became fierce; Nevada rates continue to drop, so when looking for ways policy holders can find premium savings, that’s one line that continues as an industry average to perform well.
Generally, the insurance industry does perform well. When there’s a problem, recourse is available through Nevada Division of Insurance, which protects consumer rights and the public’s interest when dealing with the insurance industry. The first step in finding coverage for a business is sitting down with a broker.
“There’s a tool on our site that allows the individual or the business to look up and see if [the broker] is correctly and adequately licensed,” said Scott Kipper, insurance commissioner with the Nevada Division of Insurance. “There’s hardly ever a problem, but it’s a great place to start in making sure that the broker or producer that you’re dealing with is property licensed. When making those individual purchasing decisions, an experienced broker is the way to go.”
“My dad told me when I got started in this business, insurance is tough. It’s a product that no one understands, everyone always thinks they pay too much for, and you never, ever want to use,” said Kerestesi.
In today’s business climate, it’s a product every business needs to have in case it needs to be used.
