The insurance industry continues to see rapid growth and change as new regulations present themselves as well as previous methods of insuring going by the wayside as clients require more and more from their insurance. 2023 is here, and this article shares predictions and projections.
By Randy Sadler
Insurance has been in practice since the oldest civilizations in history came into existence. Babylonian merchants were known to have policies in place with premium costs based on the dangers and risks attributed to the routes their goods went on. Ancient Greeks had what amounted to life and health insurance policies. In the U.S., it was founding father Benjamin Franklin who established the first American-based insurance company. Issues often arose in early insurance as there was a lack of regulatory guidance or consumer protections in place, resulting in many losing out on the investments they made in their own personal or business related insurance.
Fast forward several hundred years and global health insurance market on its own is valued at approximately $2.1 trillion with an expected growth past $3.5 trillion by 2028. In 2021 alone Statista reports that a record total value of insurance premiums written in the U.S. soared to $1.36 trillion. Regulations and consumer protections have also come a long way with state, federal and international regulations making sure policy holders are adequately protected. Suffice it to say over the course of over a thousand years, insurance has transformed from a concept and loose practice to being one of the most necessary and well-regulated industries in the world. This is thanks to continued growth and changes in the scale and scope of insurance, and in 2023 more of these changes are coming.
Increase in Premiums/Insurance Rates
In an article by KFF, data collected from 72 traditional insurance provider in the U.S. market indicated that insurers are shifting to increase premium and insurance rates. This is cited as largely having to do with rising costs insurers pay to hospitals, doctors and pharmaceutical companies as well as an overall increased rate of use of services by insured parties. The median rate taken from the data showed a 10% increase with 21 of the 72 insurers selecting between 5-10% increases. The next closest category, featuring 15 insurers, showed a preference of increasing rates and premiums between 10-15%. Inflation has also played a large part in this shift and increase and the COVID-19 pandemic referenced as a reason for the increases as well.
More Captives after Supreme Court Win
CIC Services stared down the IRS and received both U.S. Supreme Court and Federal District Court victories. In the case, the argument made to the court was whether the IRS possessed a special privilege no other government agency had to pass and enforce regulations, even illegal ones. All without the involvement of the courts per the IRS’s interpretation of the Administrative Procedures Act (APA) and Anti-Injunction Act (AIA). This ultimately unconstitutional use of power CIC Services disagreed with and the Supreme Court unanimously sided with CIC Services over the IRS.
This decision was an achievement for CIC Services, and it opened the door for taxpayers who felt wronged by the IRS. It also showed that captive insurance could not and should not face the scrutiny the IRS had unfairly put upon it. With the IRS’s scope of power limited and captive insurance’s pertinence to businesses emphasized, more businesses are expected to form captives in 2023.
Who Needs Captive Insurance the Most?
Captive insurance would behoove many different businesses and entrepreneurs considering that traditional insurance takes, on average, 12-18 months to create new insurance products. With Deloitte also reporting that it takes another three to six months for traditional insurers to modify existing policies. Imagine waiting all that time for a policy to be made and released that a business needs to protect a vulnerable area of its business. Then imagine that the policy lacks the necessary coverages and another three to six months go by without any insurance for that risk. For businesses and/or private citizens alike that is negligible. With traditional insurance, that is just an unfortunate reality.
According to PWC, automotive, telecommunications, technology, retail/consumer, manufacturing, healthcare, pharmaceutical, and energy are the top industries that require and use captive insurance to bridge gaps in traditional coverages. Conceptually, this is very easy to understand for healthcare considering if a physician’s private practice were to be sued for something not covered by their insurance, then it could mean bankruptcy and permanent reputational damage. Incorporating a captive into the hypothetical physician’s insurance plans means that the premiums paid to that captive are retained and act as a reservoir which can be tapped into when encountering unexpected or uninsurable crisis.
Retained profits in captives not only covers uninsurable risk unique to specific fields and industries, but also in covering unforeseen losses. While business interruption is insured by traditional providers, not every loss or real-world interruption of a business activates this policy. This is where the reservoir of funds retained from premiums paid to a captive can be accessed to bridge the gap in down periods or instances where there is a temporary shutdown. Allowing for employees to stay on active payroll and not be furloughed as well as businesses stave off losses from a system malfunction and required unexpected maintenance.
Cybercrimes caused $6 trillion of damages globally in 2021. With that cost expected to go up each year, captive insurance plays a big role in mitigating losses sustained from possible theft of intellectual property (IP) as well as sensitive client and/or employee data. Organizations not adequately covered for the threat of cybercrime face steep penalties for not shoring up their defenses. Just look at Target having to shell out $18.5 million to 47 states for their 2013 data breach of over 40 million customers’ information. Which is a sum of money that would bankrupt most businesses.
Other Considerations for 2023
For insurance’s long history, the coverages and purposes the industry served have always been predicated on the needs of those who seek protection of their assets, businesses and loved ones. With everchanging threats, continually advancing industries and technologies, traditional insurance will continue to see gaps in coverage and challenges to support businesses’ specific risk profiles. Making claims and receiving subsequent payouts also pose more challenges as traditional insurers continue to move towards artificial intelligence (AI) in approving or dismissing of claims. While Insurance Newsnet reports that the European Union (EU) is tightening its restrictions and regulations placed on insurance AI, traditional insurers still have lofty goals of 70-75% claims being decided by AI. Adding another concern to consumers and businesses as it remains to be seen the effectiveness of AI in deciding claims all while lacking the very important human element of transactional business.
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