The COVID-19 pandemic caused many economic challenges. Many non-profit organizations experienced a reduced level of donations and limited options for fundraising. Unfortunately, they may also be facing another crisis in the making, increased insurance premiums as the insurance industry continues to “tighten” or “harden” from social inflation.
Non-profits and for-profit organizations alike need to deal with social inflation; however, smaller non-profit organizations may feel the effects harder as their insurance premiums become a larger percentage of their overall budget, which is already stretched thin.
What is Social Inflation?
Social inflation, as defined by Independent Agents Magazine, “happens when juries and courts increasingly side with plaintiffs in claims against corporations, which in the insurance world leads to rising litigation costs and their impact on insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage, according to the Insurance Information Institute.”
The result of juries and courts siding with plaintiffs can eventually lead to changes to laws regarding statutes of limitations. These changes extend the amount of time someone can file a lawsuit claiming they are the victim of a crime. A recent example is the #MeToo movement that has caused changes in many states’ laws around sexual crimes, including the extension of the statute of limitations.
Another example, which is a hot topic of discussion right now, is the COVID-19 pandemic. The government mandates to work-from-home caused loss of income to for-profit and non-profit organizations alike. Standard business income insurance is not currently covering most of the business losses caused by the pandemic. [See our last blog post]. However, future laws that are retroactive, could award funds against those insurance policies to thousands of organizations who filed claims.
Social inflation and the economic crisis are two major factors in the hardening or tightening of the insurance industry. This combination of issues is in the midst of causing a reduction in capacity, especially for non-profit organizations who already bring additional risks to policy underwriters.
Decreased Capacity Hurts Non-Profits the Most
The insurance requirements of non-profit organizations require insurance carriers who specialize in the space, so their options are already limited. Not all insurance companies are willing to underwrite policies for non-profits due to some of the complexities and risks. Very few, if any organizations have all their insurance coverage in a single policy or from a single carrier. Now non-profits will need to contend with additional risks from social inflation, higher premiums, and fewer carrier options.
This situation may have long reaching affects on the national economy and local communities. With less capacity, it’s possible that some smaller non-profits may be without the coverage they need to operate. This could cause them to close.
In addition to standard business insurance, such as general liability, some funding sources, including grants and/or government agencies and municipalities, can dictate the coverages, levels, and limits that need to be on non-profit policies. Inability to meet these requirements due to unavailable coverage or cost prohibitive premiums may jeopardize the funds that non-profits rely on to survive. No other sector has this type of threat to their existence!
Review Policies and Coverage Now
The best plan of action for non-profits is to review their coverage now, while they are still in good standing with their carriers. Working with their insurance agents, they’ll be able to walk through the terms of each policy and gain clarity on changes that are coming to the industry.
Agents who specialize in non-profit policies have the most experience navigating through the carriers and understanding where they will obtain the greatest options. Since the non-profit insurance sector was already feeling the tightening before the pandemic started, agents have already been building relationships with carriers and underwriters.
It can’t be understated the value of an agent with non-profit policy experience. They can bring the right mix of carriers for the coverage a non-profit requires. They also bring an understanding of a non-profit’s mission, volunteers, services, and board requirements.
During the policy review, expect a knowledgeable agent to discuss risks, funding sources, and the organization’s activities as well as coverage, limits, and pricing. Additionally, agents can offer guidance on processes and procedures as well as important documentation that will help reduce risk and potentially reduce premiums.
2020 is a challenging year for everyone and has brought additional financial challenges to non-profits at a time when the country needs them the most.