It’s been a difficult couple of years for buyers in the US commercial insurance market as, in line with markets around the world, pricing skyrocketed in some sectors, terms and conditions tightened and capacity diminished. The hard market is still in place and there is absolutely no suggestion that a soft market is on its way anytime soon, but there is a ray of hope for buyers as prices moderate and competition grows.
To set the scene, the US saw prices increase by 14% in the fourth quarter of 2021, representing the 17th consecutive quarter of increases, according to Marsh’s Global Insurance Market Index. Despite this, the US property and casualty (P&C) industry recorded a $4.1bn net underwriting loss in 2021, following a $6.7bn gain in 2020, on increased losses and expenses, according to AM Best, although P&C insurers were still able to increase their net income year over year by 4.5%.
So, how is the pricing environment in the US market for large corporations and multinationals? Paul Horgan, senior adviser to Zurich North America CEO Kristof Terryn and, until recently, head of US national accounts for Zurich North America, says that overall the pricing environment in the US is moderating for good risks that have traditional exposures.
“In property, after more substantial rate increases over the past couple years, rates have moderated into low single-digit increases,” he says. “Where there still seem to be challenges is in catastrophe-exposed property, particularly when the cat environment is elevated for secondary perils such as wildfire, convective storms, freeze and hail. Customers who have that exposure can expect to see continued challenges in capacity and pricing. The same holds true in excess casualty. The casualty market in general is moderating but if you have losses or a heavy fleet, you will continue to see rates coming up and pressure on capacity.”
David Perez, chief underwriting officer of global risk solutions at Liberty Mutual, says he is seeing some moderation across the insurance industry in some lines of business, but it varies by class of business and region. He says some areas are increasing such as cyber, which is still a very tough line of business, and the rate increases are still holding strong due to the uncertainty built into that product line.
“Property prices are moderating but there is a big unknown: how much has the industry priced for inflation, the impact of supply chain and activists. Is the industry properly pricing for all of that additional exposure?” he asks.
And he points to the secondary perils associated with property, which are becoming the majority of losses impacting the industry. “The industry is still trying to price that right as they are very difficult to model at this point. That may sustain pricing at a certain level. Northeast floods in the US, flooding in Germany, the freeze in Texas, the wildfire and tornado activity in the US, all of these are significant cat losses for the industry but I’m not sure how well anyone priced for the impact of them. So it is a growing concern across the board,” says Perez.
Cyber is the one area that insurers and brokers point to as the most distressed class and where rates are still increasing, with no moderation. Matt O’Malley, US country manager, AXA XL, says cyber is currently seeing substantial hardening. “The current cyber insurance market is very challenging. Increased frequency and severity of cyber incidents are driving significant and much-needed change in the cyber insurance market. Insurers in the cyber market have had to pull back on capacity and retool policy exclusions and language to reduce their own risk to the volume of claims.”
He says loss trends are unsustainable at recent rates, so cyber insurance rates have seen double- and, in some cases, triple-digit rate increases. And as cyber rates increase, capacity falls. “Where limits of $10m were once common not so long ago, now insurers are reducing lead limits to $5m. Insurers are asking much more of policyholders’ efforts during the underwriting process, carefully examining clients’ cybersecurity requirements as part of the policy application and especially as a precursor to getting ransomware coverage in a policy,” says O’Malley.
“Cyber is a risk without borders and almost indefensible for the most part, and there is a lot of uncertainty in that product line,” says Perez, while Zurich’s Horgan calls it “really dysfunctional right now”.
Around the globe, social inflation is a concern, but particularly so in the US. “The nuclear verdicts and the underlying erosion of tort reforms of the ‘90s have really created a major challenge, where we have the funding of plaintiffs’ cases by the plaintiffs’ bar and investors,” says Horgan. “It has really changed the dynamics of large losses. Before, there would be an incentive for a client to settle at a reasonable amount of money. Now, the litigation has already been funded and there’s no desire to settle anymore. That has fundamentally changed the dynamics of how litigation is carried out and what the desired outcomes are. It’s really going for home runs rather than reasonable settlements.”
Perez says: “We are seeing large verdicts across the board, with a dramatic increase in attorney representation. Litigation funding also plays a role – it is a huge and very profitable business in the US and commission rates can be as high as 40% or more. But it is not going anywhere and we have to learn to deal with it and price it.”
Social inflation is still a big concern, particularly in commercial auto, says O’Malley. He points to a recent study by the US Insurance Information Institute and the Casualty Actuarial Society that found social inflation alone was responsible for commercial auto claim payouts increasing by more than $20bn between 2010-2019. “The trend is driven by distrust of big corporations and new ways to finance lawsuits, like litigation funding. Plus, medical expenses keep climbing too. Social inflation was a significant driver of many of the corrective actions that insurers have had to take in recent years,” he says.
It is not just social inflation that is a concern, but inflation in general. “Inflation is a new phenomenon for all of us, and it has caught many of us flat-footed – carriers, brokers and clients,” says Zurich’s Horgan. “We’ve seen this come through particularly in the property and auto market. We see where people haven’t adjusted values on their property schedules in three or four years, and we know those values have increased. We see that come through in losses. We are seeing bigger gaps in terms of losses and coverage, and the cost to replace.”
One area that was a major concern for buyers, D&O cover, appears to be improving, with rates moderating. Christine Williams, global specialty products leader, Aon, says the D&O market is more stable and Aon is anticipating single-digit increases across the board for D&O globally.
But she warns: “With D&O, there is always a three-year lag from when the suit comes in to when it is actually paid, so you are looking at 2017 settlements currently, and 2018 doesn’t look that great for insurers either. So insurers are continuing to be concerned about securities class actions and derivatives, and cyber and subsequent D&O suits.”
The general consensus seems to be that, with the possible exception of certain lines such as cyber, capacity is not such a problem, and in fact the US market is seeing increased competition and market entrants in some areas.
Aon’s Q4 Global Market Insights Report states: “The 2021 capital commitments took more time than expected to mobilise and, while some new capacity has entered the market, more is expected to become available in early 2022.” And Gallagher’s Winter Market Report says that with improving rate adequacy comes increased carrier competition. “There are a number of new entrants to the market and increasing competition as underwriters look to write new business,” it states.
However, Liberty Mutual’s Perez notes that in classes with volatility, capacity can still be an issue. “For cyber and excess casualty and property in particular, we are seeing carriers reduce their lines. And there is an increase in business into the wholesale market from retail as a result of the difficulty in putting together towers for large risks,” he says.
For traditional D&O, Aon’s Williams says there are no capacity issues, and there is ample capacity in the US, Bermuda and London markets now, which was not the case for most of 2020 and early 2021. She notes there have been 20 new entrants across the three markets.
“Where we are seeing some capacity constraints, and expect to for the rest of the year, is in cyber. Even though there is access to all the same insurers and some new entrants, they are all managing their limits,” says Williams. “We used to be able to get significant limits for ransomware but insurers have really scaled back, so now there are sub-limits for ransomware and exclusions, and captives are certainly being explored as an option.”
She adds: “Clients are still looking to buy the limits that they have – they are not looking to increase limits because of the costs right now, which are prohibitive, but it is a challenge to fill large programmes of $200m or more. Where an insurer would give $25m last year, now it will be more like $10m, so it is a struggle.”
End in sight?
So the million-dollar question is: has the hard market peaked in the US, and if not, how long are prices expected to continue to increase?
“It depends – it is a line-by-line thing,” says Zurich’s Horgan. “It has peaked in many areas. But in those identified areas of cat, cyber and E&O, it has not crested yet. And in the case of long-tail liability, it may have moderated but it will continue to have significant pressure until there is tort reform and judicial reform to bend the curve.”
Liberty Mutual’s Perez points out that what drove this hard market was not an issue of strained capital, but a recognition of years of underpricing in multiple lines of business. “It is driven by the dependency on analytical and predictive models. Carriers generally don’t make drastic changes in pricing until it shows up in incurreds. By then, they may have a significant amount of underpriced risk embedded in the portfolio,” he says.
He adds: “Many long-tail loss trends are still going up, and insurers can’t be comfortable until we see some sort of levelling out of these trends, and we are not expecting that soon, so we might see a lull in certain long-tail lines, but as we go back to our models, we may see that we need to readjust pricing based on what comes out of the tort systems around the world. People need to realise that the aggregate sum of the output of a particular tort system is what sets the price.”
AXA XL’s O’Malley notes that in some lines, rate increases have levelled off or started to decelerate from higher levels. He points out that in the latest Marsh Global Insurance Market Index, global commercial insurance rates jumped by 13% in the fourth quarter of 2021. “However, while 13% still seems substantial, it is more tempered than the earlier rate increases that we saw a year or so ago,” he says. “This double-digit overall increase is reflective of some lines like cyber and for account-specific property and casualty accounts where losses or hazards have increased. We’re currently seeing single-digit increases in many property and casualty lines that started to take corrective actions a couple of years ago.”
Aon’s Williams notes that, for insurers: “It has gone from being a very optimistic environment in January to being definitely more guarded around some of the emerging issues and macro issues such as the economy, inflation, and social inflation. There is also a big focus, especially in the US, on people returning to the office and concern about employment practices liability and whether there will be a surge in claims activity.”
What does all this mean for buyers? For a start, risk managers need to start the renewal process early in order to work through any challenges with the underwriter, says Zurich’s Horgan, especially as terms and conditions continue to tighten in the marketplace, and manuscript policies are being much more scrutinised.
“The other reason to start early is that, as the market has become more moderated, risk managers are starting to take a breath and think about, in the new elevated state of pricing… what is the right structure for my programme?” Horgan says. “How do I utilise my captive more? How do we think about some integrated products for some lines of business? As risk managers look for alternative solutions, they need to allow more time for preparing submissions.”
He also thinks differentiation is crucial, as underwriting is increasingly based on the quality of the customer: “So, risk managers need to really spend time on the application, get complete information out there, talk about your safety culture, and think about how you differentiate yourself, which will entice the underwriter to talk with you about what structure works for you. The better you’re able to market yourself as a differentiated risk in the market, the better reaction you’ll get from the underwriting community.”
Liberty Mutual’s Perez agrees: “Buyers want carriers that can differentiate. They understand about the tort system and the state of the market, but they want a carrier that will differentiate them from the rest of their class and recognise the investments made in risk management and mitigation. And also carriers that can provide specialised services, because specialisation equals differentiation. We are going to see a growing trend towards partnership and long-term commitment. Pricing on a one-year basis does not give a lot of flexibility, but pricing a relationship or a multi-year period makes it a lot more manageable. Insurers like customers that understand that insurance is not a commodity.”
On the issue of partnerships, Horgan believes that buyers and carriers need to work and campaign together to tackle the underlying issues. “In every other hard market previously, it has changed because the marketplace has changed. There were cats and then a few years of no cats. There was a workers comp crisis, then comp reform. There was a liability crisis and then liability reform. There has been nothing in the market yet that would change the dynamics of this hard market. With social inflation contributing significantly to higher rates, companies need to partner with carriers to create tort reform, to create legislative reform.”
He adds: “Companies like Zurich have targeted legislation in some states where we are looking to energise policyholders to support changing the laws and rules to bend the curve on this. There is a change beyond the current rate of inflation that has caused the hard market. Continuing to increase rates isn’t the solution. The solution is going to be tort reform and judicial reform. And that’s going to take companies making it a priority with their government affairs arms. There are coalitions we’re looking to build, and we would encourage you to be active in supporting those coalitions if you want to create permanent improvement in the casualty lines of business.”