Today’s Market: Q4 Update
Across the insurance markets considered in this fourth quarter report, nearly all are firming or hard. The trend toward flat or higher rates that begin in late 2019 and accelerated through the year, was in many cases, exacerbated by the coronavirus pandemic. In some markets, poor underwriting results stemming from non-pandemic related issues drove the firming. In others, the pandemic contributed to more claims, higher rates and further hardening. With carriers in many markets cautious on renewals, Insureds are advised to begin the renewal process early and maintain ongoing communication with underwriters throughout it.
Accountants Professional Liability
Firming conditions that began in the second half of 2019 expanded steadily throughout 2020, particularly for top-100 accounting firms. As 2020 pushed on, the market morphed from purely London insurers and few select domestic carriers requiring modest rate increases, into a consistent demand for higher rates from both primary and excess participants for firms of all sizes.
In 2021, rate increases have started at 2% and ranged as high as 25% for firms with paid losses. While certain high-performing firms may temper these rate changes with higher premiums due to growth, nearly all CPA firms have experienced some type of rate adjustment. Self-insured retentions (SIRs) are not expected to increase; however, any premium increases may be reduced by electing a larger SIR.
The pandemic has acted as a trigger for Insurers to press for higher rates due to worries over the effects of depressed economic activity, higher bankruptcies, and losses in other lines of business. However, pre-pandemic increases in cost of defense and claims severity, combined with a low interest rate environment and years of rate deterioration, are larger factors than the pandemic in that market shift. In reality, Insurer profitability heading in to 2020 was already putting pressure on rates; the pandemic simply became an opportunity for more forceful rate action.
Insurers continued to be selective with capacity both in terms of levels and positioning. There has been limited interest by excess Insurers dropping down further in programs to take advantage of higher premiums, and also some minor interest from new markets looking to write higher level excess coverage.
With the Cyber market significantly in correction mode, there has been a push to expressly address coverage (or the lack thereof) for Cyber claims in Professional Liability policies. While language negotiation for these efforts is ongoing, broad Cyber coverage under large firm Professional Liability policies will be greatly scaled back in 2021. Despite challenges with rate, and Cyber exposure, additional significant tightening of policy wording often associated with a hardening market is not expected. In most cases, Insurers continue to offer broad coverage for the services that firms perform.
Current conditions are expected to continue into 2021. As a result, Insureds should not delay in providing submission materials to brokers, who may negotiate alternative structures, including increased SIRs/deductibles, alternative program layering, and possibly the identification of new alternative support capacity if Insurers become too aggressive with rate need.
Throughout the fourth quarter of 2020, the Aviation insurance market continued to experience a significant upward rating trend and hardening environment due to new losses and the development of existing losses.
Aviation insurance carriers, under continued internal economic pressures, remained unwavering in achieving underwriting profitability. Entering 2021, continued price escalations are expected, due to a continued increase of reinsurance costs. Price increases and coverage reductions have affected the entire Aviation class of business.
While these changes may be more prominent in some coverage lines or sectors of the business (e.g., rotorcraft, aircraft OEMs, critical parts suppliers, etc.), virtually all renewals have experienced increased rates and premiums. Self-insured retentions and/or deductibles have minimal impact on pricing and, as in previous years, do not provide the risk/reward benefit to make them a viable option.
The coronavirus pandemic hit the Aviation market hard. Reduced air-travel (whether self-imposed or government-mandated) caused air traffic to decrease significantly. Airlines and many other operators reduced their coverage, which pulled millions of dollars of premium out of the market, making profitability even harder to achieve. No claims for illness caused by the virus have been presented to Aviation Insurers to-date, but Insurers have continued to increase pricing as a result of lost premium.
A positive change in market conditions is not expected through the first quarter of 2021 and beyond. The latest airline loss in Indonesia so early in the year puts Aviation Insurers in a position where they must continue to push rates and premiums even further upward to achieve profitability.
Insureds are best served by using strong relationships with underwriters, emphasizing any safety efforts employed, and approaching all renewals earlier than usual. Beneficial relationships with underwriters may help minimize the levels at which pricing will increase.
The firming trend of the first three quarters of 2020 continued through the end of the year. Auto and General Liability rates continued to climb, particularly for Insureds with large auto fleets and/or adverse loss experience. Additionally, Workers’ Compensation rates were subject to increasing pressure due to rising medical cost inflation, low interest rates and evolving presumptive legislation relative to the coronavirus pandemic.
Terms and conditions also tightened, with fewer enhancements being offered and more restrictive wording, such as Communicable Disease and Cyber exclusions, being added to General Liability and Excess programs. Moreover, there has been an effort to shift from occurrence to claims-made coverage to reduce exposure to long-tail risks.
The Umbrella market continued to deteriorate due to increasing severity of Auto Liability and General Liability claims. The trend of Umbrella markets limiting capacity and raising attachment points continued in an effort to reduce volatility in underwriting portfolios. Increasingly, Umbrella markets focused on writing supported business in order to bolster their primary underwriting counterparts and offer more creative solutions.
Unlike previous hard markets, capacity restrictions have resulted from contractions in appetite, rather than from restrictions in capital. Excess markets continued to deploy capacity conservatively, cutting their limits back to $5 million, $10 million or $15 million. In an effort to reduce the volatility in Excess Casualty underwriting portfolios, more than $700 million in capacity has been sidelined over the last several years in response to the rise in nuclear verdicts, expanding “judicial hellholes,” litigation funding, and social inflation. Without substantial tort reform, this trend is expected to continue unabated.
Additional capital of nearly $20 billion was raised, adding new capacity to the marketplace in 2020. New entrants included Arcadian, Ark, Bowhead Specialty and Vantage Risk, with more entrants expected in 2021. The new capital tended to be opportunistic and is not expected to help soften the market in the near term.
Pricing continued to be an issue across all lines of Casualty business, especially for Insureds with heavy vehicle fleets. Insureds have been exploring the impact of higher retentions, corridor deductibles, clash deductibles, variable retentions, multi-year single aggregates and captives (e.g., single parent, group, industry, rent-a-captives, etc.) to mitigate premium increases.
Rates continued to climb in the last quarter of 2020, but likely would have done so in the absence of the pandemic. Markets began asking for detailed information, including questions about Insureds’ coronavirus preparedness, training, operational changes, supply chain risks, financials and resumption of operations early on in the pandemic. Businesses providing essential services, as well as habitational and hospitality risks experienced a greater level of underwriting scrutiny. Communicable Disease Exclusions have become more commonplace; however, in some instances, these exclusions were narrowed or removed altogether with detailed underwriting information.
The pandemic is putting pressure on Workers’ Compensation rates, given the unknowns associated with evolving presumptive legislation. The impact of coronavirus on third party liability claims remains to be seen, as it will be challenging to establish causation due to the insidious nature of the virus.
The global pandemic has exacerbated the already deteriorating (re)insurance market. The firming trend is expected to endure in 2021, and possibly into 2022, as loss trends continue to outpace rate increases.
As more markets pull back underwriting authority from the field, continued underwriting scrutiny is expected to be placed on each risk, including questions about loss prevention measures and emerging operational risks.
Accounts that have already experienced pricing corrections over the last several renewal cycles may experience more modest rate increases in the primary and lead umbrella layers. Program structure adjustments may be necessary to mitigate premium increases and replace lost capacity in excess towers. This includes risk sharing in the lead umbrella layer through corridor retentions, and greater use of captives to fill gaps in capacity.
Renewals are taking longer to complete as a result of the surge of submissions into the marketplace and increased underwriting referrals. Therefore, it is imperative to begin the renewal process early and maintain constant communication with underwriters. All stakeholders within an organization should be engaged throughout the renewal process in order to appropriately manage expectations, allow for necessary adjustments to insurance budgets, and avoid the backlash of last-minute surprises.
Insureds can make their risk more appealing by producing a complete, accurate and straightforward submission that is easy to understand. Submissions should also demonstrate what proactive risk mitigation efforts are being taken through comprehensive safety and quality control programs. Brokers should help Insureds anticipate questions the market may have about their operations/risks. Providing a summary document outlining changes in operations/risks, exposures and loss experience as a cover to the submission will help underwriters properly assess the opportunity, and will therefore receive priority.
A focused marketing effort will yield more favorable results than a “shotgun” approach, especially if the account has been heavily marketed over the past several years. Midterm meetings to develop relationships with new markets may serve to improve overall engagement and renewal results.
Underwriter meetings are increasingly important in differentiating Insureds from one another. Including carrier senior leadership in these discussions will help to solidify relationships and expedite the decision-making process. Current travel restrictions require increased creativity (e.g., video conferences, pre-recorded videos, etc.) in meeting with markets. Providing these videos in advance of the underwriter meetings will allow more time for individual Q&A.
Until very recently, the Cyber insurance market had been coasting along without too much commotion. For years, robust capacity, broad coverage terms and stable pricing existed. This all changed, abruptly and significantly, during the final weeks of 2020. The shift to a remote work environment, coupled with rapid escalation of cybercrime, has resulted in a significant increase in claims impacting Cyber policies. More specifically, the increase in frequency, severity and complexity of ransomware claims has sent the market into lockdown mode. Markets are racing to revamp their risk appetites, recalibrate their approach to underwriting and revisit the coverage they are willing to extend.
Rates and retentions are increasing substantially. Companies with no claims and strong ransomware controls are seeing anywhere between 25% to 50% rate increases.
Companies with claims and/or those with weak ransomware controls are experiencing 50%+ rate increases. Retentions are increasing as well, often doubling.
Capacity is constricting, competition is diminishing, and coverage is tightening. Markets have become more selective. Underwriters are reluctant to compete on risks with inadequate or questionable network security/data privacy controls. They are not afraid to decline or non-renew risks that do not meet certain baseline standards. Alternatively, underwriters may opt to severely reduce limits, apply sub-limits, impose strict subjectivities or attach exclusionary endorsements.
Underwriting is becoming more comprehensive and more sophisticated. Most Cyber markets now require the completion of a ransomware supplement. Rates, terms and conditions are determined, largely, by the company’s responses to the questions on the supplement. If the responses suggest inadequate network security, the rates, terms and conditions will reflect that security posture. Underwriters are also beginning to rely more heavily on security scans to get a deeper view of the strength and maturity of an organization’s cybersecurity.
Current market conditions are expected to continue throughout 2021. Coverage for ransomware could narrow further if claim frequency and severity remain consistent or increase. Increased activity is expected from the U.S. Department of Treasury, Office of Foreign Asset Control (OFAC), in designating additional cybercriminal organizations and individuals under its cyber-related sanctions program as well as other economic sanctions programs – specifically targeting those entities/individuals responsible for perpetrating or facilitating ransomware.
The privacy regulatory landscape continues to evolve, creating new and expanded regulatory and civil liability exposures for organizations. In November 2020, the California Privacy Rights Act (CPRA) was passed. The CPRA amends and expands the California Consumer Privacy Act (CCPA) and will become effective on January 1, 2023. The CPRA strengthens the rights of California residents and imposes additional obligations on entities conducting business there. One of the most notable provisions of the CPRA is the establishment of a new government enforcement agency called the California Privacy Protection Agency. New York State has also been crafting new privacy legislation. In early January 2021, the New York State Legislature introduced the Biometric Privacy Act. The proposed Act imposes restrictions on the use and disclosure of biometric data and allows individuals a private right of action to pursue violators of the law.
The pandemic has pushed many healthcare providers to rely on telemedicine as an alternative to in-person visits. The rapid and significant increased use of video conferencing and messaging apps by healthcare organizations has created security and privacy vulnerabilities similar to the issues seen with Zoom and other videoconferencing platforms at the beginning of the pandemic. A rise in security and data breaches could occur with telemedicine-related platforms and apps.
With 2020 in the rearview mirror and the reluctance to seek care continuing to ease, preliminary indications of future medical costs are beginning to re-emerge. The severe bounce, which some predicted, has not materialized. Routine costs have not fully resumed; instead, they have been moderated by the series of coronavirus waves surrounding the Thanksgiving and year-end holidays. The redirection of services to more appropriate settings of care, lower telemedicine unit costs, and an increased usage of telemedicine have created some benefit for employer plans. While the use of telemedicine is down from the highs seen in the second quarter of 2020, its use remains significantly higher than before the onset of the pandemic.
Direct costs of treating coronavirus have not been as severe as initially feared. During the course of this pandemic, medical professionals gained experience that led to more precise care, shorter hospital and ICU stays, and far fewer intubations. Unfortunately, the vaccine rollout has been slower than hoped. Based on current distribution speed and scope, enough vaccine will likely be available for those who want it by the end of June. Success will depend, at least in part, on the number of Americans willing to take the vaccine. With large numbers not trusting it, achieving widespread immunity may prove elusive. The one bright spot in this area is the fact that the government is funding the drug costs – employer plans will only be responsible for vaccine administration, and this cost has been relatively small thus far.
Overall, costs have continued their steady return to pre-pandemic levels without the volatility that preoccupied many during renewal planning sessions. There are undoubtedly some problematic areas. Cost increases continued to center around high cost specialty medication, particularly new gene therapies that can cost millions of dollars per patient. Stop loss coverage pricing continued to spike as fears of these and other large claims weigh heavily on underwriters’ risk assessments. Most projections for this year were flat to no change. Considering available information and accounting for relevant and material sources of uncertainty, costs are expected to hold steady for 2021. For self-insured plans, costs are being measured against prior years’ expected results and not against the depressed levels of 2020, so on a cash basis there will be an increase.
Dental costs seem to be back, with normal dental trends expected to re-emerge in 2021.
Looking to 2022, market activity is expected to increase. Faced with low or no change to costs in 2021, many employers maintained their existing plans in 2021 and will look to restart cost management strategies. Chief Financial Officers, in particular, are weighing in loudly on the need to do so.
Entertainment & Sports
Coverage terms continued to exclude all communicable disease, virus, bacteria and pandemic-related losses. Allianz will no longer write a film or TV show with a budget under $10 million. All Entertainment markets are removing coverage for Cast insurance unless an exclusion was approved in the state where production was occurring or the New York Free Trade Zone (NYFTZ) could be used.
Pricing was up across all lines of business but especially on the Property, Production and Management Liability lines, with no end in sight. This was particularly true of Chubb and Allianz, who explicitly said price increases were necessary to offset coronavirus-related losses.
Cancellation/non-renewal notices took on a new tone, with notice language stating, “We will not renew this policy – the reason for nonrenewal is Reserve Our Rights.” This language not only defies comprehension, but is likely improperly stated due to a lack of specificity.
Despite commitments to the Entertainment sector, markets are expected to continue to harden. Contingency market capacity presented a cause for concern as Insureds encountered difficulty purchasing coverage for live events; even with new entrants, capacity continues to be an issue. Whereas coverage used to span across an entire tour, limits currently available are causing tours to be insured in segments in order to provide full limits.
Insureds will continue to need to adjust their operations to account for testing, potential quarantine periods, and increased production costs due to PPE, testing and onsite EMT personnel requirements. Some will need to move to online events, meetings and services to sustain operations until business resumes as normal. Deploying releases with employees and participants will remain critical in avoiding liability claims.
The Commercial Crime market was relatively steady, with minor rate increases of 5% to 15%.
There was heightened attention by underwriters to affirmatively address cyber-related exposures within Crime policies. Cyber coverage restrictions began to be added to Commercial Crime policies to clarify and contain the coverage being provided.
Social Engineering Fraud coverage continued to be a focus as underwriters struggled with the exposure. Accordingly, capacity remained limited. Underwriters remained mindful that the economic downturn could create more desperate behavior from employees/former employees, who may look to steal from their employers/former employers.
Directors & Officers Liability (D&O)
The D&O insurance market continued to be challenging for insurance buyers. Primary markets continued to seek rate increases between 25% to 50%+ for public companies (sometimes higher, depending on the industry). Rate increases were less drastic (10% to 25%+), but still apparent for private/nonprofit companies, depending largely on the industry class.
In addition to rate increases, markets increased retentions (sometimes doubling or even tripling them). The majority of markets re-adjusted their risk appetite, which often resulted in limit reductions. Similar behavior was noted by Excess markets, with increases of 25% to 75%.
The market for Side A/Difference in Condition coverage is no longer soft. In June 2019, the Delaware Supreme Court issued a decision in Marchand v. Barnhill. The decision opened the door to derivative claims based on critical failures of board oversight. The plaintiffs’ bar has already begun to take advantage of the opportunity this precedent provides and is expected to continue to test the limits of the case throughout 2021. Markets have been responding to this trend by increasing rates, up to 30%, and some carriers are asserting minimum premiums. This legal development has resulted in a reduction in derivative investigation sub-limits.
With competition and capacity limited, Insurers were more aggressive with pricing and coverage. Enhanced underwriting was still present. Markets continued to use coronavirus questionnaires and focused on overall crisis preparedness. Questions related to Board and Executive level diversity as well as Diversity and Inclusion programs and initiatives began to appear as well.
Employment Practices Liability (EPL)
EPL markets routinely increased rates between 10% to 30%+ rate, with little-to-no room for negotiating terms or conditions. Excess markets followed suit. Many markets also reduced limits and increased retentions. Separate retentions for highly-compensated employees began to appear, along with employees in certain high-risk industries (e.g., Healthcare, Financial Institutions, etc.) or states (California and New York).
Most markets significantly enhanced underwriting scrutiny regarding the overall impact of the pandemic and social movements; return to work protocols; planned approach to vaccine distribution; expected reductions in workforce; equal pay programs; and diversity and inclusion initiatives. Carriers began adding biometric privacy law violation exclusions as well as coverage restrictions for reductions in workforce.
The Fiduciary market began to shift and signs of firming emerged. The markets routinely sought increases between 10% to 25%+, depending on the risk and size of the contribution plan. Some markets added Mass/Class Action Retentions and limited or reduced capacity. Firming market conditions were being driven largely by a growing number of excessive fee cases and fears that these types of cases will ultimately impact smaller plans.
Kidnap & Ransom
Markets sought relatively modest increases of 5% to 10%+ on Kidnap and Ransom policies. Some markets also looked to reduce limits. Markets made a definitive move to reduce exposure to cyber extortion within Kidnap and Ransom policies. Most markets were significantly reducing or entirely removing limits associated with cyber extortion (ransomware).
Across all Executive Risk lines, a hard market is expected to continue throughout 2021 and into 2022. Trends worth watching include the following items:
- Rapid increase in derivative litigation
- Focus on board and C-Suite level diversity, which creates increased liability and reputational exposure for public and private companies
- Board diversity litigation, together with new diversity legislation and regulation, increasing liability risk
- Social pressure related to diversity and inclusion, which increases reputational risk
- Significant and growing momentum for environmental, social and corporate Governance-related activism
- New policies implemented by the Biden Administration that may impact Executive Risk lines going forward. The proposed Pandemic Risk Insurance Act of 2020 (PRIA) is particularly important because it could create a fund for businesses impacted by future pandemics
State legislative action and public sentiment promoting expanded protections for employees will continue to have an impact on EPL insurance going forward. Gig economy/various lawsuits involving classifying workers as independent contractors versus employees is an upcoming issue to watch, especially in California. D&O and EPL underwriters are very attentive to emerging risks associated with coronavirus vaccinations. This could result in coverage restrictions in various forms.
There may be movement in Congress or by the insurance industry to the Terrorism Insurance Act that we see attached to most policies for the pandemic. This is most applicable for warding off the impacts of a future pandemic by creating a fund for impacted businesses the next time around.
Healthcare – Trends and Insights
The close of 2020 brought the healthcare professional marketplace to its highest rates experienced since the last hard market cycle. The dual effect of the pandemic’s closure of elective procedures and government response caused healthcare systems increased financial strain and further underwriting scrutiny. Underwriter uncertainty led to technical actuarially-driven pricing. Underwriters focused more on profitability than market share, creating additional rate pressure. Hospitals with favorable claims history and long-term underwriting relationships saw 5% to 15% rate increases in good jurisdictions. Others approached 20% along with increased retentions due to venue and loss severity.
On the heels of the exit of Swiss Re in 2019, Zurich and QBE exited the Healthcare Professional Liability market in 2020. The Zurich departure has been the most impactful, as it has historically provided lead capacity on many captive reinsurance programs across the U.S. In spite of these exits and current market conditions, capital continues to flow into this line of coverage, as is evidenced by two new entrants: CapSpecialty and Arcadian, BDA.
Nearly every renewal program was marketed, adding to underwriters’ strain, while trying to balance corporate edicts, maintain their book of business and underwrite to a profit. As a means to return to profitability, underwriters reduced capacity in many instances and implemented exclusions where necessary.
Rates on excess layers were most impacted, due in part to historical inadequate pricing at those layers, as well as an increase in both severity and frequency of severity. Batch claims continued to drive excess pricing concerns.
Impact of the Pandemic
While domestic markets did not place coronavirus exclusions on fourth quarter renewals, there was a push driven by the London and Bermuda markets. As underwriting profitability drops, there will likely be additional exclusionary language and rising premiums. The renewal process should begin a minimum of 120 days prior to obtain options. Extra underwriting scrutiny related to coronavirus protocols, financial impact and vaccine distribution has significantly impacted the process.
Healthcare Trends in 2021
Coronavirus: Focus on coronavirus therapies and vaccine delivery will dominate the first part of 2021. Financial demands within healthcare organizations include the need to keep patients and healthcare workers safe. Due to the impact of delayed elective surgeries, the reduction in patient revenue is being felt by many healthcare institutions.
Delayed Diagnosis and Treatments: Coronavirus has created a backlog of patients for other ailments, including people either voluntarily delaying visits or hospitals ceasing elective surgeries to make room for coronavirus patients. As a result, underwriters are concerned with a potential increase in claims alleging delayed diagnosis and treatment.
Information Security: The need to keep up with innovative hackers continues to drive information security risk management. Ransomware attacks, social engineering fraud, and selling PHI on the dark web threaten organizations daily.
Telemedicine: The concept of treating patients via video is nothing new, but coronavirus has amplified usage, sometimes tenfold. Issues surrounding information security, licensing across state lines, lack of tort reform protection when outside of current jurisdiction, and quality controls for safe patient care are some of the increased risk factors affecting use of telemedicine.
Mental Health of Health Care Workers: There has been a significant increase in stress for healthcare workers during the pandemic. It has been a daunting task for healthcare works to watch suffering, deliver bad news, manage families’ stress when not able to be at a loved one’s bedside, and be away from family for periods of time — all while endeavoring to remain mentally and physically well.
Forecast & Recommendations
Claim costs and severity will continue to increase. Labor and Delivery-related losses top the charts with the highest claims severity. This year will not bring any reduction in rates until meaningful reforms are implemented, and coronavirus immunizations reach a broad population. Claims in venues in South Florida, Cook County and high-risk areas of Pennsylvania will continue to be problematic. Pressure on increasing deductibles and retentions as well as rate will continue throughout the first half of 2021.
Advance submission preparation, supplemental coronavirus information and solid financial forecasting will assist Insureds in securing timely renewal quotations. Exclusionary language is beginning to materialize in areas of sexual abuse/molestation; communicable diseases (although not direct patient care facilities at this time); and more restrictive batch language as carriers predict increasing claims coupled with the unknown of impact of the coronavirus.
Rate Change Estimates
Rates are expected to continue to increase and the capacity deployed to decrease as the year progresses. Carriers will continue to focus on profitability, and reliance on actuarial analytics will drive underwriting decisions. Rates will vary based on retentions, losses, jurisdiction, attachment point, and type of coverage.
Treaty reinsurance renewals at January 1 may affect carriers’ rating and coverage. The hard market is expected to continue into 2022, with some carriers opting out of this line of coverage. This will put further pressure on rates, with slight increases of 10% to 15% on average for clean risks in desirable jurisdictions, and up to 20% to 35% in many others. Current partnerships will be critical in negotiating renewals, but full marketing to assure best-in-class coverage and competitive rates will also continue to be the norm.
Further, it is critical to determine cost implications of retaining versus transferring risk in developing strategy for 2021 renewals. Understanding any financial impact of higher retentions will be of tremendous benefit during the process.
Hospitality accounts can expect a continued firming pricing trend on most lines of coverage, particularly on Excess Casualty. Several large risk purchasing groups, providing Excess Liability capacity, have exited the marketplace or severely limited their underwriting appetite.
In California, capacity remained plentiful and competition was strong for Workers’ Compensation. However, the rest of the market experienced a lack of competition and increased requests from underwriters related to coronavirus protocols. Many Workers’ Compensation carriers have pulled out of the Hospitality market.
Property and Commercial General Liability lines firmed, but less so than Excess lines. Auto rates, particularly where livery exposure exists, increased by double digits. Wholesalers were being accessed more frequently, and traditional package coverage was being separated between Insurers willing to place General Liability and those willing to place Property coverage.
Pricing and deductibles remain unchanged from mid-2020 levels, unless the Insured was in a high fire risk zone in California. In that area, large increases in premium and deductibles have occurred. Carriers have routinely issued conditional renewal notices on nearly all accounts, indicating a potential premium increase of 25% or more. These conditions are unlikely to change in the coming months, as the Hospitality industry continues to be heavily impacted by the coronavirus pandemic.
Insureds should begin the renewal process early and maintain collaborative, effective communication with brokers to create the best possible narrative concerning subject operations. Insureds should highlight loss control measures that set them apart from the competition, and ensure they have revised their payrolls and sales downward to reflect decreased exposures.
Lawyers Professional Liability (LPL)
In the large law firm segment (+200 lawyers), a limited number of primary participants willing to compete for the lead position has stifled competition. Primary Insurers obtained rate increases in the 7.5% to 15% range on renewals. Continued conservative deployment of excess capacity in this segment also increased excess rates and made it more difficult for firms to obtain desired limits of liability without accessing additional Insurers.
In the mid-size law firm segment (50 to 199 lawyers), more Insurers willing to compete for business helped keep rate increases at more manageable levels – in the 2.5% to 7.5% range. Excess Insurers have sought rate increases and been willing to walk away from accounts if increases were not in line with expectations.
There has been an increased focus from the underwriting community on deductible and Self-insured retention adequacy which is expected to continue into 2021. Firms with adverse claims experience or, those which have grown substantially, will see pressure to increase deductibles/SIRs at renewal. Some firms will also look to increase deductibles as a cost-saving measure in the face of significant rate increases from the marketplace.
The LPL marketplace was already firming before the pandemic. The virus only accelerated the pace of hardening and provided Insurers more resolve to continue underwriting discipline. In order to support the need for continued discipline, underwriters have pointed to the risk of working in non-traditional remote settings and desperate economic conditions related to the pandemic.
From a policy language perspective, rapid movement is expected from domestic and international LPL Insurers to affirmatively address “silent cyber.” Coverage for cyber exposures, within LPL policies, will be significantly reduced or eliminated. Firms will no longer be able to rely on LPL policies to protect against cyber-related risk.
Insurers are expected to continue to deploy capacity more conservatively, which will increase the cost of excess insurance and may challenge large towers of insurance to meet limit objectives.
Firms need to fully explain their business operations to the underwriting community and their efforts to deal with the impact of the pandemic. They should be ready to demonstrate to underwriters steps taken to preserve liquidity and financial stability, as well as procedures and policies implemented to minimize or avoid risk during the pandemic. It will be important to submit a full and detailed submission to the marketplace and to undertake renewal negotiations well in advance of renewal dates.
Over the past three months, market capacity remained steady although carriers became more selective in their appetite. There was no urgency to put premium on the books as was seen during the soft market. Underwriters are receiving more submissions as market forces continue to show rate resiliency into 2021.
Communicable disease exclusions are now an industry standard. Excepted from this are Protection & Indemnity Clubs, which will continue to provide the coverage in its current form/limits, through the completion of their two-year reinsurance program expiration in 2022. As Business Interruption is not a mainstay of the Marine market, there has been little legal action taken by policyholders in response to the coronavirus pandemic.
The market is expected to drive rate through the second quarter of 2021. Additional capacity entering the London market will not appreciably move the needle competition-wise. The market must work toward establishing a creditable price point for products in order to positively impact stability and shareholder relations.
Insureds need to consider the use of higher retentions with a greater emphasis on loss control and safety. The long-term effects of such action will ultimately reduce insurance costs and limit the disruptions claims create.
The Personal Lines/Private Client market continued to deliver mixed results. In Personal Auto, a reduction in usage driven by the pandemic caused carriers to generally forego rate adjustments. While Travelers reported record profits from auto results in the fourth quarter, auto-related fatalities were up 13% year over year with a suggestion that the pandemic has created a window for increased driving under the influence. Auto rates are expected to remain flat for the short term and some carriers may decide to pass along additional savings to their policyholders, despite the fact that no further coronavirus-related refunds are expected.
Climate-related catastrophes have sent the Personal Property market into a frenzy. Wildfire activity is having a major impact in California and parts of the west, while hurricane activity is having a similar effect on the Gulf States and east coast. Admitted markets have seized in many of the most exposed markets, particularly in California and Florida. Excess & Surplus Lines markets, usually on point for such opportunities, are struggling for product and capacity. This will clearly result in higher premiums, and where permissible, more aggressive non-renewal activity.
High single-digit increases in non-catastrophic (CAT) areas are expected (inclusive of the normal inflation adjustments). In CAT areas, significantly higher increases are anticipated. Carriers are exploring contractual changes in deductibles, and specifically, coverage areas like Additional Living Expense and Smoke Damage. The situation remains fluid, with a negatively-trending outlook. Excess Liability rates are also trending up. Ironshore’s announcement that it is pulling out of the Group Excess market will leave Chubb as the sole carrier, and will put additional pressure on the Group Excess Liability market.
The steady rate increases, capacity cutbacks and tightening of policy terms and conditions that began in 2019 held throughout 2020. The fourth quarter brought continued communicable disease exclusions; a narrowing or exclusion of non-physical damage cyber coverage; strikes, riots, and civil commotion limitations; and increased deductibles, especially for convective storm (tornado and hail) and water damage.
From a CAT loss perspective, a record number of named storms (30) in the third quarter kept the Property market on edge. While wildfires raged along the west coast and civil unrest gripped many urban areas, losses to the commercial market were not devastating and the aggregate severity of named storms did not reach record levels.
According to the Swiss Re Institute, total CAT losses for the year stood at $83 billion. Though a significant increase over 2019, it was only slightly above the 10-year average and well below what the industry saw in 2017 and 2018. Nevertheless, the trend of more frequent, larger losses continued with reinsurers having paid out $400 billion in CAT losses since 2017, a 150% increase over the $160 billion paid by reinsurers in the 2013 – 2016 period, according to reinsurance broker Howden.
Cases continued to test policy wording in Business Interruption policies, pressing for coverage of policyholders’ coronavirus-related economic losses. To date, the overwhelming majority of court rulings have favored Insurers, backing their position that the presence of the coronavirus does not, in itself, constitute physical loss or damage to insured property. However, in North State Deli, LLC et al. v. Cincinnati Ins. Co., et al., a trial level court granted partial summary judgment to plaintiff-insureds, interpreting the loss of use of property as a covered loss to the business. Other cases spanning a broad range of industries from hospitality and retail to manufacturing and sports and entertainment, continued to push any ambiguity in exclusions for virus and/or infectious disease in “all risk” Property policies. Such cases and subsequent appeals are expected to continue through 2021.
Looking forward, terms and conditions are expected to tighten and rates to continue hardening, yet there is hope that the magnitude of rate increases will decrease as underwriters move closer to the technical rating thresholds used in 2019 and 2020.
Despite significant capacity cutbacks over the past two years, there has been some additional capitalization of historical carriers (i.e., Ark, Beazley, Canopius, Hiscox and Lancashire), as well as new players entering the marketplace (i.e., Convex, Fidelis and Ki). Additional capacity is expected to fill a few program holes, and introduce competition that should subsequently blunt program rate increases.
The January 1, 2021 Treaty Reinsurance renewals saw an average increase of 6% (8.5% for U.S. accounts), which was lower than the expected 10% increase. This could provide some rate breathing room for Insurers who budgeted for higher reinsurance costs than they will actually pay. As reinsurers looked to capture market, Insurers may lean in a similar direction in 2021.
As is true of any hard market, underwriter submissions are up significantly. This can overwhelm the underwriting process as everything must pass through modeling, rating tools, engineering reviews and more. With so many submissions in front of them, underwriters are forced to focus on those providing the best opportunity to renew, or write a quality piece of new business. Insureds are advised to start the renewal process early and perform as much of underwriters’ work for them as possible. This includes:
- Placing Schedule of Values in a clear, logical order on an Excel spreadsheet that the underwriter can easily upload to their models and rating tools
- Including Construction Occupancy Protection Exposure (COPE) information
- Providing carrier loss reports showing the deductibles that applied at the time of loss
- Including descriptive risk control reports in addition to carrier recommendations
Moving submissions to the next level of underwriting and optimizing the capacity offered at the broadest terms and lowest cost requires showing underwriters why an account is worth writing.
During the fourth quarter, results were flat within the Surety market. There is no change expected to that trend during the first quarter. While the ongoing vaccine distribution has driven optimism surrounding a potential positive impact on Surety production, such impacts will likely not be realized until at least the second quarter of 2021.
In alignment with the second and third quarter, essential public works construction continued with an emphasis on essential construction. A normally slow fourth quarter was made slower by the pandemic and the normal, end-of-year wind down. Bonding for sub-trade contractors is expected to increase in 2021. General contractors are expected to use subcontractor bonding as evidence of the subcontractors’ financial qualifications post-pandemic. Privately-funded, new housing (single and multi) remained consistent with previous years. While the demand for housing has seen an increase, the issue for private construction remains the availability of the necessary labor to perform the work.
Larger commercial clients used surety bonds to protect their cash holdings with better credit terms from surety companies than what they had with banks. There is no evidence to suggest that this situation will change. With continuing low interest rates, the use of surety credit for large commercial clients will be more focused on a cost savings basis. While this is not always a favorable point of view from the surety company side, it does eventually cycle out.
Technology & Life Science – Middle Market
The Middle Market Technology and Life Science market continued to push innovation and efficiency in the fourth quarter of 2020. In the new year, companies continue to evaluate return to office plans; many may choose to operate with a smaller office footprint. Even after the coronavirus pandemic ends, some employers may choose work-from-home environments for employees.
Some industry segments, such as lab and medical device companies, had experienced reduced revenues due to coronavirus, but saw some strengthening in the fourth quarter. Also due to the pandemic, many clinical trials had been delayed due to complications related to enrollment and dosing subjects; however, enrollment and activity appeared to rise in the fourth quarter.
The P&C market, which was already beginning to harden pre-coronavirus, continued to harden through the fourth quarter, with D&O, EPL and Cyber lines seeing the most significant rate hardening. Due to higher prices and lower capacity, D&O buyers evaluated lower ABC towers, and replaced higher limits with Side A coverage. Underwriters were cautious on renewals; in many cases they increased retentions and cut back significantly on capacity, while applying rate increases. New Tech & Life Science underwriting specialty units are beginning to emerge from Insurers that may not have traditionally focused in the space. The policy language, appetite, capacity and pricing of new entrants will need to be evaluated, along with their possible impact on the market.
Now more than ever, it is critical for Insureds and their brokers to allow plenty of time to negotiate coverage offerings with underwriters. Underwriter calls with Insureds, and complete and accurate submissions, have proven necessary and productive when securing renewal options. Insureds who cannot answer questions to underwriters’ liking (or if underwriters feel the entire story has not been told) are experiencing proposals with significantly higher retentions, limitations of coverage, and in some cases, no proposal at all. The partnership between broker and Insured has always been important, and has become more so for the Technology & Life Science sector in this hard market.
|Line of Coverage||Rate Change|
|Rotorcraft/helicopters||+40% to +100% (+100% for high risk ops.)|
|Light Aircraft||+25% to +30%|
|Corporate Aircraft||+25% to +50%|
|Fixed Base Operators||+30% to +40%|
|Component Product Manufacturers||+25% to +35%|
|Aircraft Manufacturers||+50% or more|
|*All based on no loss history past 10 years|
|Auto Liability||+10% to +35% or more for higher hazard risks|
|General Liability||+10% to +15%|
|Workers’ Compensation||+3% to +7% or more with adverse loss experience|
|International Casualty||+5% to +10%|
|Umbrella Liability||+30% or more for higher hazard risks|
|Excess Liability||+75% to +150% or more for higher hazard risks|
|Cyber||+30% to +70%|
|*Rate increases appear to be less pronounced on the small, non-complex risks, at this time.|
|Insured Medical Renewals||+10% to +20%|
|Self-Insured Medical Renewals||+0% to +5%|
|Medical Stop Loss Renewals||+20% to +30%|
|Dental||+2% to +6%|
|Entertainment & Sports Primary Lines|
|Loss free accounts||+0% to +5%|
|Moderate Risks||+5% to +15%|
|High Risks – larger projects||+15% to +25%|
|Management Liability||+30% to +50%|
|Contingency Rates||+3% to +5% on limit|
|E&O/Professional Lines||+0% to +5%|
|Workers' Compensation||Adding scheduled mods +5% to +10%|
|Excess/Umbrella Lines||+5% to +15%|
|Commercial Crime||+5% to +15%|
|Directors & Officers Liability*|
|Private Company||+10% to +30%|
|Public Company||+25% to +50%|
|*Certain industry classes are experiencing higher rate increases in addition to retention increases.|
|Employment Practices Liability||+10% to +30%|
|Fiduciary Liability||+5% to +15%|
|Kidnap & Ransom||+5% to +10%|
|General Liability||+10% to +15%|
|Property||+25% to +30%|
|Umbrella||+25% to +30%|
|*High risk fire zones in California are experiencing premium increases of +25%|
|Cargo including STP||+5% to +20%|
|Excess stock/warehouse ||+15% to +25% (when capacity is available)|
|Hull||+5% to +10%|
|Primary P&I ||+10% to +15%|
|Primary MGL ||+5% to +15%|
Excess of $1 million
|+20% to +25% (very limited capacity)|
Excess of $5 million
|+10% to +15%|
|Medical Professional Liability|
|+10% to +15%+ for clean risks in desirable jurisdictions|
|+20% to +35%+ for loss impacted and difficult jurisdictions|
|Auto||Flat to +2%|
|Homeowners*||+6% to +10% and higher in high CAT areas|
|*Homeowners in high-risk fire and hurricane/wind areas are seeing fivefold rate increases in some cases.|
|Accountants Professional Liability||+2% to +25% depending on claims, revenue/growth and firm size|
|Lawyers Professional Liability ||+2.5% to +15%|
|Overall Professional Liability||+0% to +15%|
|Property||+5% to +25% no losses; not CAT-exposed
+15% to +50% CAT-exposed
+25% to +60% losses; CAT-exposed
|Surety (Construction and Commercial)||Flat|
|Technology & Life Science – Mid Market|
|Product Liability, E&O/Cyber||+3% to +10% clean, no losses. Cyber tightening may push increases higher.|
|D&O and EPLI||+10% to +20% (clean, private company)
+15% to +50% (clean, public company), with higher retentions
Important disclaimer: the ranges above are macro observations only. Every risk is comprised of its own characteristics (such as industry, loss history, geography, etc.) that may impact renewal pricing.