Approaching the midpoint of 2019, a look back reveals a period of flux; a look forward beckons the expectation of continued dynamics. Market movement spanned underwriting terms, conditions, capacity and pricing across the majority of lines. It was also a theme for Insurers and brokerages as key players changed jerseys in both arenas.
A firming in pricing and tightening of underwriting terms gained a degree of momentum that is continuing into renewal expectations for the remainder of the year. While firming conditions span a number of lines, it is being led by the Property and Marine markets. Both lines were dealt significant blows in 2017 and 2018, as CAT losses caused the most and third-most costly years, respectively, in industry history. Along with Property and Marine, an upward pricing trend is playing out across Casualty, Aviation, Environmental, Executive and Professional Risk lines.
In the Cyber arena, advances in technology, high-profile breaches and regulatory changes continue to drive the Cyber Insurance market. Overall capacity is strong and pricing is generally favorable, especially for companies not operating in high-risk areas. Cyber risk awareness continues to grow and momentum in the small to mid-size (SME) segment has grown. Supply continues to keep pace with demand.
Year-over-year accumulation of losses pushed Lloyds to institute a formal initiative to return to profitability, requiring syndicates to enact plans to achieve specific profit goals. This led a number of syndicates to significantly reduce capacity or exit certain lines altogether. Marine lines were the most impacted by the actions taken to achieve profitability, most significantly Ocean Cargo. While Lloyds remains extremely relevant to many programs, there has been a migration of business to other markets in the U.S., Europe, Bermuda and Asia.
Though no blockbuster M&A deals were announced by Insurers in the first half of 2019, there were a number of high-profile moves of underwriting leaders, as strategies changed for some carriers and fresh initiatives and directions were put in place. These changes bring a degree of disruption in relationships and messaging.
In the brokerage community, the effects of the more significant mergers that occurred in 2018 are now playing out in the form of leadership realignments and team movements between brokerages, which is either good or bad, depending on which side of the equation one sits.
Overall, the combination of the industry entering a hardening phase in the pricing cycle, leadership changes at some large carriers, and team shifts among some brokers created a general feeling of uncertainty and cloudy expectations as insurance buyers approach the second half of 2019. The old adage of getting out there early to survey the playing field is more applicable than ever. Knowing the motivations and goals of each stakeholder puts one in a better position to attain their own.
This review is intended to be informative and useful. It is presented in the following sections:
- Market Overview: provides a high-level summary by market segments.
- Industry Overview: offers a macro look at the Property & Casualty marketplace through analysis provided by ALIRT Insurance Research, which specializes in the analysis of insurance company financial performance trends.
- Detailed Market Overview: includes deeper commentary and observations by specific market segments.
While the Aviation market was in transition over the past year, overall, Aviation Insurance remained stable. Carrier departures and acquisitions/consolidations resulted in a constricted market and higher premium levels across all lines. Premium increases are expected throughout 2019. Total available capacity remained high, yet the highest capacity levels came at an increased cost.
Overall, the Casualty market remained stable, with moderate tightening in Auto Liability and Umbrella Liability areas, and slight decreases in Workers’ Compensation and International Casualty. General Liability rates rose gradually from the previous soft market. Many factors contributed to increased Auto Liability rates, including more cars on the road and distracted driving. Capacity remained abundant. Correction in the Umbrella/Excess Casualty market is expected throughout 2019.
The Domestic Construction Insurance market remained strong through the first half of 2019 with abundant capital deployed to support risk and generally broad coverage grants available across most lines. Sustained U.S. economic growth and projected gains in virtually every U.S. construction sector should drive an overall increase in construction-related premium levels in 2019.
View Construction Market Report
The Cyber market remained strong, with robust capacity and active competition. By the end of 2018, global Cyber premium was $4 billion with projected growth globally to $20 billion by 2024. Competition for market share remained strong, especially for businesses with less than $250 million in annual revenue. Pricing remained relatively stable and the supply of capacity kept pace with demand. The global Cyber market will continue to grow in 2019.
There were a series of broad trends in the marketplace that had the potential to impact employer sponsored health plans in 2019 and beyond. These included vertical integration, an increase in the number and severity of large claims and reference-based pricing plans. Employers focused attention on voluntary benefits programs including Critical Illness Insurance, Hospital Indemnity, Student Loan programs, Identity Theft Protection and Pet Insurance. Democratic control of the U.S. House of Representatives could provide greater agency review and oversight, which might lead to a slowdown on regulatory and enforcement activity. It is also now less likely that any serious ACA reform will occur.
The Environmental market was more stable overall than it has been in several years. Acquisition activity continued, but no longer defined the market. Rate increases tended to be driven by specific risk criteria or as a direct result of loss experience, and most incumbent carriers sought to keep rates very near flat. An increasingly strong economy provides optimism, and the current market capacity suggests that a meaningful hardening of the market is unlikely.
View Environmental Market Report
EXECUTIVE & PROFESSIONAL RISK
The Executive and Professional Risk market evidenced some hardening during the first quarter of 2019. While capacity remained robust, primary and excess carriers sought premium increases across the board. Plentiful capacity helped stabilize pricing in the Crime and Fiduciary Liability markets. Despite hardening premium trends, coverage remained broad and competitive with no new restrictions. As long as abundant capacity remains available, no significant changes are expected throughout the remainder of 2019.
The Medical Professional Liability (MPL) market retained significant capacity, yet continued to experience premium tightening. The increase in the severity of MPL claims continued and similar increases are expected throughout 2019. Managed Care Organization E&O remained competitive, as health systems continued to form Accountable Care Organizations. The Medical Stop Loss and Reinsurance market continued to see upward pressures on rates, a trend noted in the Healthcare market overall as continued tightening is expected.
The Marine market for cargo/stock throughput was in a firming mode due to actions taken at Lloyds. U.S. Marine markets were more balanced, but responded aggressively on accounts with poor loss records. Numerous syndicates exited the market and major players consolidated, which caused capacity to shrink. An upward trend in pricing and more restrictive terms and conditions in the Marine market continues to build momentum and is expected to continue through at least one renewal cycle. If losses improve for the industry, competitiveness may return in 2020.
Soft market conditions and healthy capacity should continue into the second half of 2019 for Accountants Professional Liability (APL). Abundant capacity and broad coverage terms should continue in the Lawyers Professional Liability (LPL) market, yet there will also be more significant upward pressure on pricing and self-insured retentions than usual.
View Professional Lines Market Report
There was a rapid and significant hardening of the Property market in 2019. The majority of renewals saw high single-digit to low double-digit rate increases. Closely controlled coverages attracted heightened underwriting scrutiny. Though CAT losses have been light to date, there is already an excess of $1 billion in property damages to a number of carriers. Insureds with renewals in the second half of 2019 should prepare to give back rate to underwriters looking to correct the pricing of their books and move closer to technical underwriting standards.
Both the Contract and Commercial Surety industries are on track to grow 5 – 10% in 2019. ENR 400 contractors continued to experience significant growth in their backlog. Reinsurance continued to be plentiful and relatively cheap.
TRANSPORTATION AND LOGISTICS
The Transportation Insurance market has been hardening for the last few years and that trend is set to continue. While the market remained stable, carriers were selective in the accounts written. There were modest premium increases as underwriters became more selective in the submissions they quoted. Capacity remained limited. Rates on customs bonds remained mostly unchanged. An increase in claims activity could push Logistics Liability rates higher in 2019.
Taking the Industry’s Temperature
The “Big Picture” Q1 2019 Property & Casualty Insurance Industry
UNDERWRITING AND OPERATING RESULTS AND PREMIUMS
The reported combined ratio (C/R) improved in 3/2019, helped by firming rates and reserve releases, while the accident year (AY) combined ratio showed modest deterioration, perhaps due in part to an uptick in weather/winter related losses vs. the prior year period.
% CHANGE IN PREMIUMS WRITTEN
Direct premiums rose an annualized 2.0% in 3/2019 reflecting stronger U.S. economic conditions along with measured rate increases. Annualized net premiums fell 1.8% due in part to large reinsurance cessions and other changes within intercompany pools in 3/2019, and perhaps some premium flow seasonality.
SURPLUS GROWTH AND PREMIUM LEVERAGE
Surplus for the ALIRT P&C Composite rose 5.0% in the first three months of 2019 as decent operating profitability and very strong net capital gains were somewhat offset by net capital paid to parent companies.
GROSS AND NET PREMIUM LEVERAGE
Gross and net premium leverage declined slightly in 3/2019 as surplus growth outpaced premium growth, reflecting increased underwriting capacity.
* Represented by the ALIRT P&C Composite, which consists of the 50 largest U.S. property/casualty insurers (excludes professional reinsurers).
The Aviation Insurance market was in transition throughout 2018. Carrier departures, acquisitions and consolidations resulted in a constricted market and higher premium levels across all lines of Aviation Insurance, escalating through the last quarter of 2018 and into the first quarter of 2019. The recent events involving Boeing 737 800 Max aircraft are likely to result in significant losses to the Aviation Insurance market, and continued premium increases across the market are anticipated. This may also result in further carrier departures and consolidations, causing a spiral of premium escalation through 2019 and beyond.
|General Aviation||15% increase|
|Products Liability||10% to 20% increase|
|M/MRO||10% to 20% increase|
|Airlines||10% to 25% increase|
The increases clients faced in early 2018 were relatively modest and largely dependent on the Insured’s loss experience. Those increases escalated throughout 2018 into early 2019 as market consolidation and regulation drove the firming trend. Increases were influenced by individual experience, though the overall Aviation Insurance market experience was the driver. Consolidations and the loss level of the carriers’ respective aviation portfolios versus its total aviation premium income could have an additional affect on potential rate increases.
Underwriting criteria is likely to become stricter than in the past. As such, clients should work to ensure that their relationships with Aviation Insurance carriers are strong.
Total available capacity throughout 2018 remained high, at more than $3 billion, with an effective capacity of at least $2.5 billion. This capacity remains largely the same into 2019; however, the highest capacity levels will come at an increased cost.
While no additional consolidations within, or departures from, the market were known, it remains likely that if the anticipated market losses develop in the next several months, there may be additional departures and/or retractions of capacity in the market.
Overall, the Aviation Insurance market remained stable in 2018 and continues to do so in 2019 in terms of both available capacity and breadth of coverages offered by carriers trading in this market. Carriers remained financially strong and competition for market share drove the terms, though within the context of the firming market.
The two major airline losses that occurred in the past six months, Lion Air and Ethiopian Airlines, as well as the resultant grounding of all Boeing 737 800 Max and 900 Max aircraft, cast an increasing pall over the Aviation Insurance market and will likely create far-reaching consequences. In addition to these spotlight issues, there were the usual number of general aviation, products manufacturers and other aviation losses, including several large open losses that occurred in prior years, which have increased Aviation Insurance carriers’ focus on lack of profitability.
Based on current market conditions and anticipated current loss consequences, carriers will be looking for greater price increases across most, if not all, lines of Aviation coverage throughout the balance of 2019 and beyond.
Developing and maintaining strong relationships with carriers and approaching renewals with complete and detailed information remain crucial steps for obtaining and securing the most favorable renewal terms.
Overall, the Casualty market continued to remain relatively stable in the first quarter of 2019, with moderate tightening in the Auto Liability and Umbrella/Excess casualty space. However, a rapid change began in the market, caused by poor underwriting results from historical underpricing, lack of underwriting discipline, loss inflation and rising jury verdicts. The result was increased underwriting discipline and more restrictive risk appetites.
Markets such as AIG, Liberty Mutual, Lloyds, Swiss Re and Zurich remediated their portfolios, particularly in the large account space. As a result, these markets either retreated or scrutinized how they deployed their limits and reduced volatility by cutting back on capacity and increasing attachment points. In response to the contracting admitted Umbrella market, some Insureds turned to the Excess & Surplus market, where there was greater flexibility in rate and form.
|Auto Liability||+5% to +15%|
|General Liability||Flat to +5%|
|Workers' Compensation||-6% to +1%|
|International Casualty||-5% to flat|
|Umbrella Liability||Flat to +8%|
|Excess Liability||Flat to +3%|
Capacity remained abundant. However, markets that historically provided large blocks of capacity cut back due to a lack of premium value in providing the additional capacity. Additionally, a shift in access points began to occur. Business dipped below historical levels in Bermuda as it lost traffic to the more competitive domestic and London markets.
The trend of limiting capacity to $10 million or $15 million in the lead umbrella layer continued, especially where the carrier wrote the primary layers or where there was real auto exposure. Some Umbrella markets continued to provide $25 million in lead capacity, but they deployed that capacity judiciously – typically for low hazard risks with clean loss experience.
Excess markets were more mindful of the deployment of their capacity. Markets with more than $25 million in capacity no longer offered $50 million in capacity in single blocks; that capacity must have been well ventilated. Higher minimum premiums were required when deploying more than $25 million in capacity on a single program.
Auto Liability rates continued to rise due to the increase in frequency and severity of losses. Contributing factors included: a growing economy; more cars on the road; safer vehicles with more expensive repairs; distracted driving and failing infrastructure. Other factors worth noting were more accidents, legalized marijuana, speeding and weather.
Markets cited eight years of combined ratios over 100 percent. In an effort to mitigate losses, many carriers looked to incentivize the adoption of technology like advanced driver assistance systems (ADAS) and telematics equipment.
General Liability rates rose gradually from the previous soft market. Flat to low single digit rate increases were offered for accounts with clean loss experience. Conversely, accounts with adverse loss experience and tough Products Liability exposures encountered double-digit rate increases. Carriers noted that the current litigious environment will impact General Liability going forward and anticipated a market correction.
Carriers continued to add specific exclusions on renewals (e.g., cyber and drones where separate/stand-alone coverage was available) and for emerging risks such as opioids and glyphosate. In addition, several anticipated changes to the ISO GL policy form were anticipated.
The U.S. saw a 1.8% average increase in employment over the past two years, and states reported increases across all sectors. Additionally, statistics supported longer life expectancy and a growing number of workers 65 years of age or older.
The Workers’ Compensation market continued to be competitive, but medical inflation and the aging workforce could curtail this trend. Accounts with adverse loss experience encountered single-digit rate increases. The market continued to be limited for companies with high employee concentration exposures.
The International market continued to be competitive, and guaranteed cost coverage was readily available. The number of carriers interested in writing international business for U.S.-based Insureds continued to increase. Generali and Swiss Re were new last year, leveraging their international platforms.
Hartford continued to develop solutions for middle market business and actively sought to grow their platform. CNA continued to make significant investments in people, processes and content. A number of key markets were global carrier sponsors of the Worldwide Broker Network, including: AIG, Allied World, AXA XL, CNA, Generali, Lloyds, QBE, Starr Companies, and Zurich.
The North American Liability marketplace continued to be hit by significant catastrophic liability losses stemming from many issues, including: California wildfires; violent events; the opioid epidemic; MeToo litigation; and liberal class action certification. As a result, the lead Umbrella marketplace began to see a correction after years of providing rate reductions, despite the increase in frequency and severity of losses. Where accounts were considered to have been underpriced for years, some markets sought double-digit rate increases.
Attachment points for auto exposures continued to increase. Attachments varied by the size and scope of fleets, as well as loss experience. Accounts with large (over 1,000 vehicles) or heavy fleets were required to provide underlying limits ranging from $2 million to $10 million. The increased limits were achieved through the primary market, a limited auto buffer layer market, and/or through reinsurance purchased by the umbrella carrier. In some cases, Insureds with particularly challenging fleet risks self-insured Auto buffer layers.
General Liability attachments were also on the rise. Factors contributing to the rise in attachments included:
- litigation funding (attorneys and outside investors fronted legal fees)
- “nuclear verdicts” resulting from the “lottery effect”/desensitized jury pools
- social inflation/social justice (the “millennial effect”)
- dramatic increase in the number of “judicial hell holes” and left-leaning judges
- venue shopping
- increase in traumatic brain injury claims
- medical inflation
- opioid epidemic
- aging population/overall decline of health in the population
Punitive damage awards also increased in frequency and severity. Umbrella markets wrote over $1 million GL attachments going back to the 1980s and noted that inflation alone suggested they should be attaching at $3 million.
Lead Umbrella markets traditionally focused on the risk management space increasingly looked to write middle market accounts and mid-excess layers to balance loss ratios and premium scale within their portfolios.
Excess markets sought rate increases after years of holding premiums flat, irrespective of underlying exposure growth, loss experience or rate increases.
Frequency and severity have been on the rise, yet the Excess market has been providing rate decreases over the last several years. During the first quarter, these markets sought rate increases.
Correction in the Umbrella/Excess Casualty market is expected throughout 2019. The market is changing rapidly and putting pressure on premium budgets. It is imperative to get ahead of renewals well in advance so that risk managers can handle senior management expectations on market conditions.
Increases may be mitigated through differentiation between industry competitors, strong loss control programs and business continuity/disaster recovery plans. In addition, creative solutions like increasing retentions, captives, spreading increases over multiple years and consolidating product lines with Insurers may help control costs.
Industry classes particularly vulnerable to significant rate increases include: transportation; habitational real estate; New York construction; utilities due to wildfires; and agribusiness due to historical underpricing and/or high loss ratios. There are also numerous emerging issues that may impact renewals, such as the opioid crisis, benzodiazepines, mass shootings/violent events and climate change/wildfires.
The domestic Construction Insurance market remained strong through the first half of 2019 with abundant capital deployed to support risk and generally broad coverage grants available across most lines. Sustained U.S. economic growth and projected gains in virtually every U.S. construction sector should drive an overall increase in construction related premium levels throughout 2019.
While the marketplace for construction risks remained healthy and competitive, there were notable exceptions. Insureds faced challenges in coverage availability, capacity, scope and pricing on the following lines: Commercial Auto Liability; Lead Excess Liability; Wood-Frame Construction risks; Wildfire Exposures; and New York Labor Law Liability. Increased losses experienced by carriers on long tail liability lines affected renewals on existing program structures, capacity and retentions. Consolidation of markets and changes in underwriting appetite by some carriers impacted the market, requiring a change in approach for certain risks.
|Contractor's Pollution/Professional Liability||Flat to -5%|
|Builder's Risk||-5% to -20%|
|Project Wrap-Up Liability||Flat to +5%|
Premium increases were expected in the Primary Casualty line due to poor loss history, large or heavy fleet exposures, reduced reinsurance support and tightened underwriting. Increases were expected in the Excess market as well, driven primarily by losses. Increased premium basis helped offset rate increases. The Contractor’s Pollution and Professional Liability markets remained competitive with the exception of condo exposures. Wood frame and fire-exposed properties drove rate increases up within the Builder’s Risk market. Increases in the Project Wrap-Up Liability market were driven by wood frame, condo, apartment and poor soil properties.
The Primary Casualty market remained stable and competitive in the first part of 2019. However, accounts received increased scrutiny from underwriters around exposures, operational procedures, safety and historical losses. The large volume of work-in-progress, coupled with significant backlog in the industry, allowed carriers to become more selective in an effort to pursue underwriting profitability without jeopardizing overall premium volumes. Higher deductibles were imposed in some instances and broad coverage extensions were reexamined in terms of attachment, applicable retentions and pricing.
The five costliest wildfires in the U.S. occurred in California during the last two years and spanned a period of less than twelve months (December 2017 to November 2018). According to the Insurance Information Institute, Insured losses from these fires alone are estimated to cost insurance carriers as much as $35 billion. While causation has been largely attributed to overhead utility lines, 90% of all wildfires in the United States are caused by human error. As a result, contractors with operational and geographical exposures involving fire risk experienced a virtual loss of market, even when those risks represented only a small percentage of their overall work.
Insurance requirements from utility companies mandating large limits of liability coverage from contractors exacerbated the strain on the marketplace around wildfire exposures. Contractors working exclusively in urban areas were not spared from the impact of increased in fire losses, and a number of metropolitan areas experienced high profile fires on wood frame construction projects in recent years. While those losses had a much more significant effect on the Builder’s Risk market, third-party liability exposures to adjacent properties drove higher insurance costs and availability issues for contractors focused on wood frame construction.
Through the end of 2018, the Council of Insurance Agents & Brokers (CIAB) reported that Commercial Auto Insurance experienced average premium increases for the last 30 consecutive quarters dating back to 2011. Even with those increases, Commercial Auto Liability and Physical Damage coverage combined generated seven consecutive years of underwriting losses, with the industry combined ratio rising to a 16-year high of 111% in 2017. Reasons for the continued, adverse results included the following (virtually all of which affected contractors given the nature of their industry):
- Strong Economy and More Miles Driven – The low unemployment rate put more cars and drivers on the road.
- Quality Labor Shortages – The estimated loss of 50,000 experienced truckers by year-end 2018 have been replaced by inexperienced drivers.
- Distracted Driving – Smartphones, navigation and increased vehicle technology contributed to higher accident severity.
- Drugged Driving/Marijuana – Washington, Colorado and Oregon saw accident frequency increase in the years after marijuana was legalized, and more states have since enacted similar legislation.
- Escalating Repair Costs – Advances in vehicle safety systems, including cameras and sensors, have increased repair costs significantly.
- Litigation – An active plaintiff’s bar, restrictive medical records laws, cost shifting and litigation funding have driven up settlement values substantially.
Pressure from carriers seeking higher rates led to Insureds absorbing significantly larger deductibles for both Liability and Physical Damage coverages to control their fixed premium costs. Contractors with large fleets and/or heavy over-the-road exposures (particularly those with a poor loss history) found markets increasingly difficult to secure. Many carriers writing stand-alone auto exited the market altogether or required supporting lines of coverage to entertain a quote. Required attachment points on Lead Excess Liability for auto shifted, with many unable or unwilling to write directly above the traditional $1 million CSL limit; some required underlying limits as high as $5 million. The need for increased underlying limits led some to change carriers (if possible), or buy expensive buffer layers to reach the required attachment point and open up the excess market.
New York Labor Law
New York’s labor laws related to contractor safety and equipment (LAB § 200, 240(1) and 241(6)) and the legal liability they impose upon contractors continued to have a huge impact on the New York Construction Insurance market. This was especially true in New York City where historical levels of vertical construction and increased gravity-related work exposures, have generated Liability Insurance rates five to 15 times higher than anywhere else in the country. The primary culprit is Labor Law Section 240(1), which imposes absolute liability on owners and general contractors for elevation-related risks, regardless of the comparative fault of the injured worker.
The inability of carriers to mount a defense to these claims coupled with expanding liability through interpretation of the law, has forced many carriers to leave the New York Liability market altogether. Those who remain continue to restrict coverage, heighten minimum premium thresholds and increase retentions. While Primary Casualty rates at renewal varied greatly across the state, most Insureds experienced increases of 5% to 10%; New York City contractors saw mid-to-high double-digit spikes in pricing.
Excess casualty showed some signs of hardening, particularly as lead excess carriers reevaluated their positions on exposures, attachment point and limits offered. While residential exposures, large auto fleets and wildfire exposures remained unchanged, carriers reduced limits offered on select contracting risks and increased pricing. Required attachment points over primary coverages changed for some carriers, which required a restructuring of the excess program and/or shuffling of carrier participation (by layer) to minimize cost impacts.
Loss experience, operational procedures and safety plans received increased attention as markets sought profitability in their overall book of business. Similar to the January 1 reinsurance renewals, April 1 contracts were marked by high levels of market capitalization both from traditional reinsurers and insurance-linked securities markets. In terms of pricing and terms, with the notable exception of Auto Liability (up 5% – 10%) and continued restriction on New York construction, North American reinsurance terms and pricing were relatively unchanged from 2018.
With the exception of wood frame construction, the overall Builders Risk market continued to be competitive, with numerous domestic and international carriers aggressively pursuing master programs and single project risks. Abundant capacity and the introduction of new carriers seeking market share drove broad coverage offerings and competitive rates. However, wood frame risks continued to present significant challenges. Catastrophic single project losses in metropolitan areas, the loss of reinsurance support and the overall risks associated with project site and work product protection continued to adversely affect capacity and pricing. Carriers remaining in the space heightened security requirements, which increased project costs associated with third party site monitoring. Other impacts included:
- Reduced single project limits/multi-carrier programs on projects above $25 million
- Heavy Timber and Type III risks viewed as Type V (wood frame) construction
- Differing risk appetites from carriers (i.e., geography, project characteristics and loss history)
- Increased attention to builders (i.e., reputation, financials, losses and site controls)
- Loss of coverages/warranties and higher retentions
Pollution & Professional Liability
The Pollution Liability and Professional Liability market for contractors and construction risks remained stable for both practice programs and single project placements. With ample capacity and dozens of carriers providing coverage, increased competition continued the trend of broad coverage and soft rates. This included the loosening of restrictions on protective professional coverages and rectification coverage grants as well as definitions covering professional services mirroring those found in Architects and Engineers (A&E) policies. Combining forms with a single carrier and linking pollution and professional policy limits, reduce costs without reducing coverage.
Habitational risks continued to pose challenges in terms of availability and pricing for Professional Liability coverage due to HOA claim concerns and other errors of repetition. Defense expenses related to a third-party claim became the most exposed portion of coverage and as a result, those providing coverage imposed sublimits and/or attached much higher retentions to residential projects.
The large volume of construction work over the last several years resulted in an increase in mold-related pollution claims, both prior-to and post project completion. The frequency and dollar severity of professional liability claims for contractors have increased as well, due in part to the inclusion of professional negligence allegations in construction defect claims by plaintiffs.
Project Liability Wrap-up
Competition remained strong in the Project Liability Wrap-up market with notable exceptions. Dedicated limits, broad coverage, low deductibles and the absence of required collateral against future losses continue to propel their wide use. Written exclusively out of the E&S / non-admitted marketplace, they also respond well to the subtle differences in coverage needed, and in many cases, have replaced standard market wrap-up programs for contractors. However, certain geographical areas and product types continue to present challenges. Wood frame projects saw numerous changes in lead markets, terms, excess support and pricing over the first part of 2019. That trend will continue for the balance of the year and well into 2020 given wildfire, arson and construction defect risks.
California and Florida, where both the litigation environment and soil conditions create concerns for carriers, saw much more stringent underwriting reviews and pricing for each project. While capacity should remain abundant in the near term, the lead excess layers (up to $10 million above primary and up to $50 million on some risks) has seen a hardening in rates and a reshuffling of participating carriers. As a result, the marketplace should be approached well in advance of project commencement and quotes refreshed monthly to ensure cost estimates reflect current conditions. Pricing was affected up to the $50 million limit layer for many risks.
In general, market rates across the Primary Casualty lines should remain relatively flat for the balance of 2019 with minimal increases on most risks. However, for accounts with all other exposures covered above, pricing and availability could be much different. New York construction, auto programs tied to large and heavy fleet schedules, Insureds with poor loss histories, new condominium construction and wood frame construction in the West and Metro areas will all see increased underwriting scrutiny and potential changes in carriers, retentions, excess attachments and pricing. Contractors and project Owners should approach the market early and implement self-assessments / corrective action plans on exposure areas underwriters consider problematic to show how those areas are being addressed relative to loss prevention and mitigation.
The Cyber Insurance market is almost as dynamic as cyber risk itself. Year after year, the market transforms in response to advances in technology, high-profile breaches, legal developments and regulatory changes. Over the past 12-18 months several significant events in all categories occurred, including:
- 5G revolution
- Facebook/Cambridge Analytical scandal
- Marriott/Starwood breach
- Rare joint alert issued by U.S. and UK intelligence agencies warning that Russian hackers were targeting American and British corporations and government infrastructure
- News of the settlements (shareholder derivative and breach class action) in connection with the Yahoo breach – both settlements reported to be among the largest in U.S. history
- Sweeping changes in domestic and international privacy regulations like the GDPR and the California Consumer Privacy Act (CCPA)
Each of the foregoing events has the potential to impact the market in different ways, whether in changed purchasing behavior, underwriting requirements/conditions, coverage offerings or restrictions. Notwithstanding the challenging and rapidly changing risk landscape, the Cyber Insurance market remained strong. Robust capacity and active competition continued to be evident.
PREMIUM & CAPACITY OVERVIEW
At the end of 2018, the global Cyber market was approximately $4 billion, with the majority of that attributable to U.S. companies. By the end of 2024, global premium is expected to rise to $20 billion.
Historically, medium to large size organizations in high-risk classes of business such as health care, retail, and finance have been the primary buyers of stand-alone Cyber Insurance. Penetration rates within the small to medium size (SME) organization segment (those with less than $250 million in annual revenue) remained relatively low, especially as respects SMEs not within high-risk industry classes. However, SMEs slowly but surely became a larger part of the overall Cyber Insurance market. In 2018, cyber risk awareness grew, and insurance carriers focused their attention on SMEs. As a result, the momentum in the SME segment has grown, and penetration rates in this segment are expected to rise over the next 12-18 months.
More than 70 carriers offer stand-alone Cyber Insurance products, and competition for market share remained strong, especially for businesses in the SME segment. Supply continued to far exceed demand. As a result, pricing remained relatively stable, even in high-risk classes of business like health care, retail and finance. Flat ratings and rate decreases (for some large risks that demonstrated good cybersecurity controls due to active market competition) occurred. This is expected to continue throughout 2019.
Capacity remained robust, and supply kept pace with demand. As demand increased, new carriers entered with additional capacity. As much as $600 million in new capacity came from U.S.-based carriers as well as London, Bermuda and Asian markets. There were, however; a limited number of carriers willing to take a primary position on a complex risk that required such capacity. Further, the underwriting process was far more detailed for larger, complex risks than it was for those in the small to medium size segment.
PRIVACY VS. BREACH TRIGGERS
In the early years of Cyber Insurance, the coverage focus was predominately on network security and/or privacy breach related exposures. This focus was largely in response to the requirements set forth in federal and state breach notification laws enacted in the late 1990s and 2000s. Accordingly, many stand-alone cyber policies today only trigger in the event of a network security or privacy breach. Unfortunately, going forward, breach-based coverage may not be sufficient for many organizations.
The domestic and international regulatory landscape changed drastically in the past 12 months. There was a significant shift in regulatory focus from breach-based protections to privacy-based protections. Privacy regulations (as opposed to “breach regulations”) went viral, a trend expected to continue. While some markets embraced this shift and structured their policies to respond to both breach and privacy-based exposures, many markets remained focused on breached-based exposures.
OPERATIONAL, PHYSICAL AND REPUTATIONAL COVERAGES
As technological innovation continued to infiltrate all aspects of business operations, the fear of business interruption due to malicious attack or system failure rose sharply. In 2018, cyber carriers focused on, refined and in some cases, enhanced operational, physical and reputational coverages. Carriers introduced Voluntary Shutdown coverage, Invoice-Fraud coverage, Bricking coverage and Reputational Risk coverage. However, not all coverage offerings were enhancements.
SILENT OVERLAPPING COVERAGE
Cyber-related incidents have the potential to trigger coverage under various traditional insurance products such as General Liability, Property, Kidnap/Ransom, and Professional Liability. This is often referred to as “silent” cyber coverage. Policies that do not affirmatively address cyber risk may be interpreted to full apply, even though there is no intent for the policy to cover such an exposure. Overlapping or silent coverage is particularly concerning to carriers, especially those trying to manage their risk aggregation.
Increased awareness and action was taken by the insurance market, as a whole, to address silent cyber coverage. Markets continued to tighten policy wording on traditional products to affirmatively address cyber risk, thereby containing exposures and clarifying intent. At the same time, cyber Insurers continued to add coverage to stand-alone cyber policies that already existed (to varying degrees) within traditional policies. The overlap was perhaps most apparent with Commercial Crime and Property policies. This dynamic resulted in potentially inconsistent coverages in multiple places, which could have been incredibly challenging when applying the coverage to a live claim.
The global Cyber market will continue to grow in 2019. Domestically, significant growth in the small to medium size business segment is expected. Internationally, the May 2018 implementation of the GDPR and the cascade of follow-on international privacy regulations is expected to spark an interest in Cyber Insurance and accelerate growth in the European market and beyond.
Capacity is expected to continue to keep pace with demand. As the market grows and matures, new capacity will likely become available. Premiums will likely remain relatively stable in 2019. The continuing fallout from 2017 Equifax breach however, coupled with the more recent 2018 Marriot/Starwood breach, could have an impact on pricing and the availability of capacity for large organizations in high-risk industries.
Carriers will continue to refine their approach to underwriting cyber risk in an effort to gain better control over their aggregation risk as well as to provide more accurate pricing. A more technical and analytical approach to underwriting cyber risk will allow carriers to reward companies that have strong network security controls in place with more favorable pricing.
Coverage offerings on stand-alone cyber products will continue to expand and contract in line with the ever-changing threat and regulatory environment. The speed of current technological innovation has no historical precedent. The “5G Revolution” – the next generation of internet connectivity – began at the tail end of 2018 and is expected to be complete by 2020. A widespread 5G network will bring more speed, connectivity and power. This power will enable and accelerate Artificial Intelligence (AI) and Internet-of-Things (IoT) devices. The proliferation of AI and IoT technology will likely result in coverage adjustments by many carriers. There have already been “Robotics” Endorsements added to Technology E&O policies. More affirmative acknowledgment of such exposures on many product lines is expected going forward. This could come in the form of endorsements or changes in the underwriting process.
In mid-July 2018, the European General Data Protection Regulation (the “GDPR”) was considered a potential blueprint for future data privacy regulation. Today, it is clear that the GDPR has created a tsunami of international and domestic privacy regulation. The rapidly accelerating global privacy regulatory landscape is one of the key risks (if not the key risk) facing organizations today, regardless of size or industry vertical. The increasingly fragmented and dynamic regulatory landscape makes full compliance incredibly challenging, if not impossible. Coverage for regulatory exposures varies greatly from carrier to carrier. Many carriers are still only offering breach-based coverage. The extent to which regulatory fines and penalties are insurable is still very much a grey area.
While the public policy debate around healthcare generally has attracted the most media attention, there have been a number of benefit-related areas that attracted both federal and state legislative attention.
Democratic control of the U.S. House of Representatives could provide greater agency review and oversight, which might lead to a slowdown on regulatory and enforcement activity. It is also now less likely that any serious Affordable Care Act (ACA) reform will occur.
A Texas court ruling (Texas v Azar) on a constitutional challenge to the ACA already upheld at the District Court level is likely to come soon. Further, the Justice Department recently reversed its prior position and agreed with the lower court ruling that the ACA should be found unconstitutional. Any ruling against ACA constitutionality is likely to result in immediate appeal and could be heard by the Supreme Court next year. In response, the Democratic-controlled House introduced the “Protecting Pre-Existing Conditions & Making Health Care More Affordable Act of 2019.” This will likely be a lengthy process unlikely to be resolved anytime soon.
TOP EMPLOYEE BENEFIT ISSUES FOR 2019
Employer Shared Responsibility Assessments and Appeals – The Internal Revenue Service (IRS) continued to issue penalty letters for both A & B employer shared responsibility provisions under the ACA. There is no indication that the program will slow down. The current round is targeting 2016 plan years.
Key takeaways include:
- Do not ignore Letter 226J.
- Seek an extension to answer.
- Gather and review 2016 Forms 1094-C and 1095-C (filed in 2017). Coordinate with your vendor.
- Consider engaging legal counsel.
Wellness & Wellbeing Programs Face Uncertainty – A highly publicized case resulted in the court striking down incentive provisions from EEOC wellness regulations that were originally effective January 2017. As of January 1, 2019, employers offering incentives or imposing penalties need to monitor EEOC enforcement activity and sub-regulatory guidance. The EEOC is not expected to show any marked enforcement increase given the agency drafted the original regulations in the first place. Employers will need to monitor developments for new regulations, but given the stated timeline during the judicial proceedings, it is unlikely that new regulations will be issued in 2019.
Key takeaways include:
- Offer incentives or impose penalties below the previously acceptable 30 percent level.
- Potentially redesign plans to eliminate incentives.
- Possibly revert to program designs pre-dating EEOC regulations.
ACA Health Insurance Premium Tax (HIT) to Return in 2020 – The moratorium on this tax for 2019 will expire unless further Congressional action extends it. Absent an extension, this will result in premium increases for 2020 renewals that are likely to be from 4% – 7%, given similar activity in prior years, as carriers pass through the tax.
- Employers with fully insured group health plans will need to include this as a consideration in their budgeting and planning processes.
KEY TRENDS IN EMPLOYEE BENEFITS
There are a series of broad trends in the marketplace that have the potential to impact employer sponsored health plans in 2019 and beyond. These include:
- Vertical integration among the largest health insurance carrier and service providers began to create the potential for market upheaval. Each major health insurance carrier owns or was owned by a pharmacy benefit management company. Vertical integration occurred in other areas as well.
- Increase in the number and severity of large claims. This will have an impact on self-funded clients that lack the scale to effectively spread risk. Alternatives in Stop Loss funding gained traction.
- The individual marketplace (overall health or weakness of the market) will have a spill over effect in the employer-sponsored space. A weaker individual marketplace creates risk of cost shifting to employer plans.
- Reference-based pricing plans took hold in certain parts of the country. An uptake lagged in regions where tight labor markets resulted in higher benefit levels or where employers sought to minimize impact to employees.
When Human Resources professionals were asked about their major concerns, competitive benefit plan design, attraction and retention of employees, and containing the cost of healthcare were cited by over 50% of respondents. Additional concerns that made the list included: effectively communicating benefit plan design and cost; succession planning; wellness initiatives; compliance with health care reform; benefits administration; maintaining competitive retirement benefits; alternative work schedules; health plan network access; and implementing non-traditional benefits.
Key findings from EPIC’s 2018 Health Care Trends survey included the following:
- Medical trend was estimated to be 4.2% for 2018, which was in line with prior years, and was consistent with other major trend surveys, which projected 4% to 6% in general.
- Cost shifting via plan design changes was the most common cost reduction method.
- Healthcare made up 18.2% of the GDP, up from 10% in 2008.
- Nearly $1 of every $5 was spent on healthcare in the U.S.
- Per a Milliman survey*, the cost of healthcare for a family of four increased nearly 80% over the past 10 years.
In addition, the survey noted that in a recent 12-month period, nearly 36% of surveyed companies changed their health plan design, while 15% implemented new wellness initiatives and 12% introduced a qualified high deductible health plan. The prevalence of the latter has stabilized over the past five years, growing from 37% in 2013 for employers with 1,000+ lives, to 65% in 2018.
Telehealth participation was also a growing trend, as employers sought alternative approaches to contain healthcare cost. Over 78% of surveyed employers offered telehealth services, although utilization was low, with 36% of companies seeing usage rates of 2% to 4%.
Pharmacy trends included the vertical integration of the market impacting the Pharmacy Benefit Manager (PBM) space. CVS Health acquired Aetna for approximately $69 billion. Cigna acquired ESI for approximately $67 billion. CVS Health, ESI and OptumRx controlled greater than 70% of the PBM market share in 2017 and each of them were or will soon be aligned with a medical carrier.
Some believe that vertical integration will allow these organizations to better coordinate healthcare for plans and their members, resulting in tailored solutions that will improve therapeutic outcomes. Others think limited provider choices could lead to higher cost and inferior coverage for consumers.
Key takeaways include:
- If self-funded, complete a pharmacy RFP to ensure the most favorable contractual terms and pricing.
- Conduct a market check to improve discounts and rebates at retail, mail, and specialty places.
- Optimize plan design, formulary and pharmacy network to drive consumerism.
Employers followed three major trends in communicating with employees:
- Digitization: digital communications provide companies with more flexibility. Employers can better reach remoted-based workers. Many workers can be reached through mobile devices, and employers can push out timely updates without delay without the expense of print.
- Measurability: analytics provide greater insight into employee behavior. Employers can monitor engagement with communications and understand what is valued while gathering real-time feedback.
- Personalization: allows messages to be crafted to each audience, improving effectiveness of communications by focusing on the employee’s perspective.
Worksite wellness efforts continued to experience lower participation rates and a debate over ROI. However, employers found success where wellness was part of an overall employee engagement strategy. Higher levels of engagement and results were achieved when incentives were incorporated as part of the program, and some employers began tying incentives to actual health outcomes.
Technology continued to play a big role in wellness strategies, as it provides: opportunities to individualize and personalize wellness; gamification of condition management; instant, direct and personalized communications; and flexibility in incentive management and administration.
VOLUNTARY BENEFIT TRENDS
There was a greater focus on financial wellness, which benefited both employees and employers by reducing employee stress related to current and long-term needs. Employers focused attention on voluntary benefits programs including: Critical Illness Insurance, Hospital Indemnity, Student Loan Programs, Identity Theft Protection and Pet Insurance. Plan designs became simpler and there were fewer choices in the products themselves.
Technology allowed carrier flexibility in integration with multiple benefit administration systems, hosting capabilities and simplified EDI feeds. Multi-media integration allowed for the integration of videos, decision support tools, mobile apps, text and stories into benefits administration platforms.
INTERNATIONAL ASSIGNMENT TRENDS
International assignees (including expatriate employees) presented unique challenges to benefit plan sponsors. Smaller group sizes and older populations meant the average cost of expatriate plans could run 20% higher or more than their domestic counterparts. Communicating with geographically dispersed employees required the modification of traditional communication methodologies. Coverage gaps could occur when employees traveled abroad.
Due to compliance and escalating cost concerns, there was a growing trend for greater corporate oversight of benefit programs in other countries.
HR TECHNOLOGY TRENDS
Human Capital Management (HCM) systems continued to push for improved engagement with employees, and Benefits Administration systems were a key driver in this effort. The market was shaped by several factors. While technology came at a lower cost, service continued to be an issue for service providers. Higher cost did not guarantee better service.
Service providers focused on improving user experience. Ease of use and an intuitive user interface were designed to promote engagement throughout the year. Improved decision support tools, including integration with carriers for employee-specific claims data and utilization became available. Broader HCM technology continued to evolve and was driven by rapid innovation and the need to support organizations with in-depth data insights and improved efficiencies in a strong economy and tightening labor market.
The Environmental market was more stable overall than it has been in several years. The impact created by AIG’s exit from site-pollution business in early 2016 has mostly subsided. By the end of the first quarter in 2019, most of AIG’s multi-year policies had been replaced.
Multi-year operational pollution policy terms continued to be common, though most Insurers preferred three-year terms over five-year terms. In the last year, there was a perceptible increase in transaction-based and project-based opportunities in the marketplace, and a slight easing of budget constraints among prospective buyers. While Insurers generally preferred operational to transactional business, the impact to the marketplace as a whole was positive.
While acquisition activity continued, it did not have nearly as much impact on the Environmental marketplace over the last year, as compared to prior years. Other recent market changes included continued underwriting growth of relatively newer market entrants (i.e., Sompo, Allianz, and Sirius), and the more recent entrance of Ascot. Allianz has been broadly competitive across most industries during its first five years in the U.S. market.
The number of Insurers offering Pollution Liability and Contractors Liability coverage remained abundant. Rate increases tended to be driven by specific risk criteria or as a direct result of loss experience. Fears that 2017 and 2018 property losses would harden all commercial lines did not materialize on Environmental business, though it was a latent concern.
When renewals were marketed (or there was a legitimate threat thereof), there was sufficient competition to control rates, or achieve decreased premiums on risks with good loss experience. Available decreases, in the range of 10%, were not as substantive as in prior years. Most incumbent carriers sought to keep rates very near flat; however, there were instances where Insurers pushed for slight rate increases (typically up to 5%).
There were ample available markets for most risks, such that incumbent Insurers continued to be at a disadvantage, especially where flat terms/rates (or rate increases) were exposed during competitive marketing. Conversely, risks with frequency or severity indicators in their loss experience saw reduced market interest, and/or modest rate-increases.
|Pollution Legal Liability/Site Liability||-10% to +5%|
|Contractors Pollution Liability||-5% to +5%|
CAPACITY & COVERAGE OVERVIEW
Several major Insurers communicated profitability challenges in recent years, which was a natural outcome following several years of decreasing rates and increasing claims activity. Hard data was generally not made available by Insurers to back-up this messaging.
One of the most profound underwriting challenges continued to be uncertainty over how federal and state regulations will impact claims development arising from a specific group of chemicals (i.e., per- and polyfluoroalkyl substances (PFAS)). Presumably to aid in risk selection, some Insurers showed a preference to smaller, middle-market placements and were less competitive on larger portfolios or complex risks. In contrast, some Insurers continued to provide limits greater than $25 million and marketed capabilities for 10-year transaction-based policy terms.
Some specific classes of business remained more difficult to insure due to fewer interested Insurers, including: healthcare; hospitality; redevelopments (especially with respect to mold and/or historical fill risks); and any facility risk directly linked to PFOA/PFOS chemical usage (i.e., PFAS). These classes, while receiving a lesser degree of underwriting scrutiny, joined risks that have historically been viewed as adverse, such as: pipelines, mining, rail, and fracking/injection risks.
Continued confidence in the economy provides optimism, and current market capacity suggests that a meaningful hardening of the market is unlikely over the next 12 months. There appears to be opportunity for one or more Insurers to separate themselves through effective marketing campaigns. This could be paired with an improved buyer experience that emphasizes creativity, consistency and high-quality service.
Claims activity is expected to increase slightly and Insureds will likely experience some distinct differences in claims adjustment amongst Insurers. Claims handling quality and the reputations that are developed could become increasingly impactful (along with coverage terms and rates) in selecting Insurers in the coming years.
Insureds are advised to read their policy wordings carefully when changing forms, ask questions, and look beyond premiums when selecting an Insurer. Policy language and coverage nuances can often be inconspicuous prior to loss, but continued claims activity can increase the chances of a nuance becoming relevant post-loss.
EXECUTIVE & PROFESSIONAL RISK
DIRECTORS & OFFICERS LIABILITY (D&O LIABILITY)
The Executive and Professional Risk marketplace evidenced some hardening during the first quarter of 2019. Securities claim activity, mergers and acquisitions, more costly employment related claims and rising defense costs pushed carriers to increase rates.
- During 2018, 441 new securities class actions were filed in U.S. federal courts, the highest number of filings since the 2000 post-dot-com crash.
- In 2018, the average settlement rebounded to $69 million from a near-record low in 2017. This was largely due to a significant $3 billion settlement, the fifth-highest settlement ever, and one of five mega settlements for the period.
- The median settlement in 2018, which was $13 million, was more than twice that of 2017, primarily due to higher settlements of many moderately-sized cases and fewer small settlements.*
*NERA, Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review. Accessed on 4-19-19 at: https://www.nera.com/publications/archive/2019/recent-trends-in-securities-class-action-litigation–2018-full-y.html
While capacity remained robust, primary carriers cited these adverse trends as a justification for premium increases across the board. Excess carriers also sought their fair share. The Side A/DIC market remained flat. Fewer carriers looked to increase market share by undercutting premiums, and excess carriers were less aggressive and did not offer the decreases seen in recent years.
In the Private/Non-Profit arena, things remained a bit more stable with exposure-based increases being sought. Financially distressed organizations and challenging industry groups may have experienced increases in both premium and retentions.
EMPLOYMENT PRACTICES LIABILITY (EPL)
According to the Equal Employment Opportunity Commission (EEOC), workers filed fewer discrimination charges in fiscal year 2018 than they have in almost a decade. Retaliation remained the most frequent allegation, and these matters tended to be more complicated and costly to defend. The #MeToo Movement resulted in an increased number of sexual harassment cases as a percentage of total harassment lawsuits. There remained a continued focus by underwriters on exposure in CA and FL, which resulted in premium increases and separate retentions for these challenging geographies. Carriers continued to seek exposure-based premium increases and capacity remained stable.
The Fiduciary Liability market remained stable with plentiful capacity and relatively quiet renewals. There was a continued underwriting focus on service provider fees and investment committee decisions, as well as caution regarding Employee Stock Ownership Plans (ESOPs) and plans that invest in company stock.
The Fidelity marketplace remained stable with little change during the first quarter. Social Engineering coverage became more available with higher sub-limits offered by both primary and excess carriers.
|D&O Liability||Flat to +10%
In some cases, markets pushed for up to 20% increases, particularly for those risks that benefited from historically low pricing or had justifiable exposure.
|Employment Practices Liability||Flat to +5%|
|Fidelity||Flat to +5%|
Total capacity across all Executive Protection lines remained stable.
Despite the hardening premium trends experienced in the D&O arena, coverage remained broad and competitive with no new restrictions presented by carriers. There is no indication that this will change.
On the EPL front, coverage was relatively static. Increased creativity around ADA and biometric claims highlighted the need to review the adequacy of the definition of Wrongful Act. Current exposures relative to the #MeToo Movement and social media claims were mostly contemplated under current policies.
Social Engineering coverage continued to be a hot topic within the Fidelity arena. Focus needed to be given to policy wording since carriers provided different versions as it pertains to Insureds’ in-house protocols. Attention also needed to be directed to “other insurance” provisions since Cyber and Kidnap & Ransom policies offered Social Engineering coverage grants.
It is important to start the renewal process early so that there is an understanding of what markets are considering. Some carriers may come out of the gate potentially suggesting large increases. These initial indications will often decrease after negotiations, depending upon risk profile. It may be beneficial to market renewal programs to ensure optimal pricing and terms are secured in this evolving market.
MEDICAL PROFESSIONAL LIABILITY
The Medical Professional Liability Insurance (MPL) marketplace remained challenging. There was significant capacity in the industry, but most, if not all, of the MPL Insurance and reinsurance carriers sought rate increases due to high severity claims impacting the industry.
Traditionally strong healthcare carriers changed their strategic approaches to pricing renewals, requiring rate increases or taking more dramatic steps to protect their healthcare books by limiting the amount of capacity. For instance, effective October 2018, Zurich Healthcare exited specific, more challenging venues, such as: Cook County, IL; Baltimore, MD; Philadelphia, PA; Rhode Island; and Miami/Dade County, FL due to the number of high severity MPL claims and verdicts in those venues.
Pressure for rate increases was expected to continue throughout 2019.
Uncertainty surrounding the Healthcare landscape continued into 2019, with the following issues on the forefront.
- Uncertainty with the Affordable Care Act (ACA). The Trump Administration argued in lower court that Title I of the ACA is unconstitutional, but that it is severable from the rest of the law, and the rest of the law can and should stand if Title I is invalidated. In a notable pivot, the DOJ filed papers making a different argument: if the individual mandate is rendered unconstitutional, the whole law should be struck down. This significant shift caused a flurry of activity in the White House, Department of Health and Human Service (DHHS) and the halls of Congress. Republicans did not have a plan to replace the ACA. As was the case prior to the ruling, the Administration did not plan to dismantle all of the elements of the law, such as the Centers for Medicare and Medicaid Innovation; Medicaid expansion; health insurance exchanges; Accountable Care Organizations; and Food and Drug Administration biologics approval pathways. Democrats focused on buttressing the ACA, but continued to wrestle with when and if incorporated universal health (i.e., some form of “Medicare for All”) makes sense.*
- Health system mergers continued, creating “Mega-Healthcare Systems.”
- Hospitals continued to employ physicians, although this trend was decelerating for most specialties, with the exception of primary care physicians.
- An influx of private-equity backed acquisitions of physician and surgeon practices continued.
- Anticipation of disruptive technology remained, including Amazon, artificial intelligence and consumers’ changing expectations in how they accessed healthcare services.
Insurance and reinsurance carriers noted that combined ratios increased to over 100% the past three years and were expected to continue through 2019. Impacting these results were multiple large medical malpractice verdicts and settlements, which exceeded $10 million. Examples include:
- A $220 million settlement of a batch claim with USC stemming from multiple sexual abuse victims of an OB/GYN college and team physician.
- A $140 million settlement of a batch claim in New York, including multiple cases involving one physician who committed fraud and caused multiple injuries to more than 220 patients.
- A $44.5 million settlement in Ohio stemming from a failure to diagnose that led to brain infection and paralysis in a nine year-old boy.
The increase in the severity of MPL claims continued and similar increases were expected throughout 2019, as inflation for medical expenses outpaced CPI; the cost of medical experts continued to rise; and plaintiff attorneys continued to utilize higher-cost experts. According to a report by CRICO Strategies titled Medical Malpractice in America: A 10-year Assessment with Insights, which examines national trends in claims frequency, the frequency of medical malpractice claims dropped substantially, but average case management expenses and indemnity payments continued to rise.
The rate of MPL claims declined 27% from 5.1 cases per 100 physicians to 3.7 cases over 2007 – 2016, according to the report, which analyzed events affecting 124,000 patients. However, the report highlighted notable trends related to higher costs for managing MPL claims; average case management expenses increased by 3.5% annually and reached $46,000 per case in 2016, outpacing both consumer and legal inflation indices.
“Cases with multiple defendants reflect both the complexity of team-based care (patients encounter more clinicians) and policy limit “stacking” (plaintiffs adding policyholders to an MPL case to increase potential indemnity),” the report stated. “Typically, cases with more defendants require individual legal representation, adding complexity and cost to case management. Beyond legal fees, the use of MPL defense tools (e.g., mock trials, computerized renderings, jury studies, witness preparation) is increasing, as are their costs.” *
*CRICO Strategies. “Medical Malpractice in America: A 10-Year Assessment with Insights.”
Additional factors that continued to challenge underwriters included:
- Claims inflation
- Batch claims
- Tort reform
- Coordination by plaintiff attorneys
- Shrinking client market
- Oversupply of insurance capacity
- Reduction in the availability of reserve releases
CYBER, PRIVACY AND NETWORK SECURITY
The Identity Theft Resource Center tracked a total of 363 breaches in healthcare, exposing just fewer than 10,000,000 records. The healthcare industry remained a prime target for cyber attacks. There was an increased focus on business interruption as a key component of a Cyber Insurance purchase, with more availability for systems failure and contingent business interruption. The impact of the inability to either access electronic health records or of a third party vendor’s inability to process billing on a timely basis impacted healthcare organizations’ appetite for Cyber Insurance in the U.S.
Along with ransomware, the quantity of wire fund transfer fraud via social engineering approached epidemic proportions in the healthcare sector. While coverage for this exposure could be provided via a crime or cyber policy, in most circumstances, it was substantially sub-limited in both policies, although excess capacity began to appear.
The Office of Civil Rights (OCR) handed down its largest ever fine of $16 million. According to the OCR:
The Office of Civil Rights (OCR) handed down its largest ever fine of $16 million. According to the OCR:
OCR has concluded an all-time record year in HIPAA enforcement activity. In 2018, OCR settled 10 cases and secured one judgment, together totaling $28.7 million. This total surpassed the previous record of $23.5 million from 2016 by 22%. In addition, OCR also achieved the single largest individual HIPAA settlement in history of $16 million with Anthem, Inc., representing a nearly three-fold increase over the previous record settlement of $5.5 million in 2016.
Despite this activity, there remained competition for risks with good security maturity, loss histories and improving coverage. Even more competition was evident, with major Insurers providing extremely competitive terms when competing for primary layers. Major Insurers continued to enhance their cyber risk management tools, providing additional benefits to clients who chose to use them.
MANAGED CARE E&O
The risks facing Managed Care Organization were complex and continued to change quickly. Therefore, Managed Care E&O continued to grow as an area of emerging risk exposure because no two Managed Care Organizations are the same.
Considerable activity persisted with network design as health systems developed Accountable Care Organizations (ACOs), which allowed them to create their own insurance companies to write health benefits, and participate in contracts with insurance companies. In such contracts, providers assumed expanded responsibility for disease management, enrollee tracking and management, and advisory services to outside practices.
- Standalone ACO managed care E&O programs were most likely placed when there was a separate board for the ACO as compared to the current health system board.
- ACO retentions on a stand-alone managed care program were generally significantly less than healthcare system management lines retention.
Carriers continued to be concerned with the uncertainty of the repeal and/or replacement of the ACA and continued consolidation of managed care entities. Changes in the funding and structure of the ACA may have a material impact on the managed care market. Underwriters were increasingly concerned about current or future claims alleging:
- Design and/or administration of cost control systems (e.g., incentives, quotas, etc.)
- Down coding (insufficient revenue to providers) and allegations of deliberate slow reimbursement
- Civil rights actions from patients who were denied care
- Allegations of miscalculation of medical expense ratios
- Releases of protected health information, personally identifiable information, and payment card information
The marketplace for Managed Care E&O coverages remained competitive. Many healthcare accounts placed this coverage in their captives, but on smaller accounts that insure these coverages, the following trends emerged:
- Stand-alone commercial insurance carriers writing Managed Care E&O were still limited and include Ironshore, One Beacon, AWAC and AIG, which appeared among the leading insurance carriers, consistently providing competitive quotes.
- The aforementioned carriers typically sought rate increases of 0% to 10% on renewals, and there was frequently movement toward requiring higher retentions on renewals than expiring.
- Some markets offered a credit (0% to 3%) if the small grant of Cyber coverage was pulled out of the policy to be covered under the Insured’s healthcare system cyber policy.
- Rates remained from 0% to 10% increase unless: (1) the Insured had adverse claims development; and (2) there was a material change in exposure (e.g., number of enrollees, type of services provided, etc.).
- For this coverage, underwriters seemed to seek 0% to 10% rate increases, unless more was warranted due to changes in exposure or claims experience.
- Retentions (SIRs) depended on the type and size of the organization. We noted carriers offering higher retentions than expiring when exposures or claims increased.
- When claims or material increases in exposures (enrollment) occurred, underwriters generally tried to increase retentions and premium rate.
MEDICAL STOP LOSS: HEALTH REINSURANCE, EMPLOYER RISK & PROVIDER RISK
The Medical Stop Loss and Reinsurance market continued to see upward pressures on rates driven by the rising costs of specialty drugs and increased frequency of high cost ($1+ million) claims. This trend of frequency and severity in high cost claims continued from recent years and showed few signs of slowing. The pharmaceutical industry continued to develop and release extremely costly drugs for a variety of diagnoses. Many of these drugs were marketed directly to consumers, resulting in increased costs to health plans, hospitals and employer health plans.
Upward pressures were successfully countered by focusing on high-quality data and a willingness to adapt. High standards and detailed data often returned a competitive, but disciplined market, while poor data resulted in a harder market. Additionally, the established and growing use of captives in this business led to a wider access of reinsurance markets willing and able to accurately price the risk. Overall, rates increased in 2019 on average by 9% from 2018.
The impact of the GOP tax bill, which included an effective repeal of the individual insurance mandate in 2019, has yet to be seen. As more data becomes available, the industry will be able to evaluate how much influence it actually had on Americans. The ability to adapt in this ever-changing healthcare landscape and find underwriters who have adapted with it remained crucial.
Mergers and acquisitions continued to pose challenges. New organizations and leadership modifying the risk management landscape required more innovation and strategy. The uncertainty of renewal in many cases created a need for focused client management, deliberate advisory services, and a push to win new accounts.
This dynamic marketplace allowed for continuous, but challenging, growth opportunities in the insurance and reinsurance industry. Notable ongoing trends and updates regarding the market included:
- In June 2018, a significant number of PartnerRe executives and underwriters in its Managed Care and Corporate team left the company to form a new reinsurance market entry named Sequoia Reinsurance, financially backed by ELMC Risk Solutions and led by CEO Dan Bolgar. They have been successful in writing 2019 effective business and were expected to continue growing.
- PartnerRe’s remaining leadership stated that the company remains fully committed to the market sector, underscored by its hiring of Kelly Munger (formerly of SCOR) as Head of U.S. Health in late 2018.
- HM Life announced that its 12-year relationship with MGU Risk Based Solutions (RBS) was ending and they were bringing underwriting and claims in-house. The RBS team was exploring options and HM intended to expand in the Provider and ACO market sectors.
- Munich Re announced in late 2017 an exit from the HMO Re, ESL and PXS markets. These markets were then underwritten by their former underwriters, who facilitated buyouts of Munich’s current accounts. The Munich MBO team formed a new MGU (TMS Re), using Nationwide Mutual Insurance Company and Everest Reinsurance paper to write Stop Loss Insurance and Reinsurance coverage, respectively.
- The final ACA exchange enrollment for 2019 was 11.4 million lives, which was a 3.4% decrease from 11.8 million lives in 2018. This indicated strong interest from consumers in coverage, despite actions by the current administration to undermine the ACA. Signs pointed to the further erosion of insurance coverage in 2020, as the status of the ACA’s future remained in doubt.
- Major markets (i.e., Aetna, Anthem, Blue Cross Blue Shield and Humana) reduced their presence in the exchange market in 2018, citing large losses and the growing uncertainty surrounding the future of the ACA.
- Despite these concerns, insurance company margins improved during 2018. This drove several Insurers to enter the market or expand their service area in 2019. In 2018, the average number of insurance companies per state was 3.5 and 58% of enrollees had a choice of three or more Insurers. In 2019, those numbers grew to four and 58%, respectively.
Medicare Shared Savings Program (MSSP) and Next Generation ACOs
- In December 2018, the Centers for Medicare and Medicaid Services issued their final rule that dramatically overhauled the MSSP program. The new program, “Pathways to Success,” reduced the amount of time an ACO could participate in the program without holding risk from six years to two. Additional changes were made regarding benchmark calculation, shared savings rates, and beneficiary engagement.
- The total number of MSSP ACOs declined from 561 at the beginning of 2018 to 487 as of January 2019. Physician-led ACOs dropped out at a higher rate than Hospital-led ACOs.
- The market for ACO stop-loss grew. New entries to the market in 2019 included Sequoia Reinsurance and Scor Re. As market competition increases, improved rates were being realized for ACO insurance buyers.
- Next Gen ACO performance improved slightly. In 2017, 63% of NGACOs performed below benchmark compared to 61% in 2016.
- Multiple new markets are writing aggregate stop loss for ACOs, a trend that began in 2018 and was expected to continue as more data becomes available and carriers become more comfortable pricing this risk.
- Starting in 2018, Next Generation ACOs have been permitted to opt out of the government provided individual stop loss. Multiple ACOs have done so, with some seeking commercial insurance as a replacement, and others electing to have no excess loss protection.
Medicaid Accountable Care Organizations
- Twelve states implemented Medicaid ACOs to align provider and payer incentives with the goal of managing costs and delivering quality care to beneficiaries; at least nine more were actively pursuing them.
- These ACOs, similar to their Medicare counterparts, focused on value-based payment structures, measuring quality improvement and analyzing data.
- Medicaid ACOs will also be required to provide financial guarantees, such as a letter of credit or surety bond. Consistent savings have been available through surety bonds over letter of credit pricing for Medicare ACOs, and similar results were expected for Medicaid ACOs as they continued to emerge across the U.S.
Medicare Access and CHIP Reauthorization Act of 2015 (MACRA)
- MACRA created a new Quality Payment Program to reward physicians for providing higher quality care to Medicare beneficiaries by implementing two payment tracks: Merit-Based Incentive Payment Systems (MIPS) where providers were evaluated on their performance in four categories; and Advance Alternative Payment Models (AMPs), which were designed for providers with experience coordinating care. Risks and rewards were accepted by the provider with the promise of meeting quality measures. These two tracks began in 2019.
- The first year of performance measuring began in 2017. Results determined the payments to providers in 2019.
- Costs related to pharmaceuticals continued to increase year over year, causing financial challenges for health systems. Reinsurers continued to be impacted by multi-million dollar pharmaceutical claims.
- Both high-cost orphan drugs and drugs developed to treat conditions like Hepatitis C continued to drive costs up due to their heavy use and high demand. Additionally, high-cost drug claims often required more time for the reinsurer to review, leading to delayed claim payments.
Association Health Plans (AHPs)
- AHPs allowed members of a group or profession to band together to negotiate better premiums for their members; similar to the way an employer-sponsored health plan would work. Except the members of an association or group did not work for the same employer; rather, they shared an industry, interest or other common thread that allowed them to define themselves as an association.
- In June 2018, the U.S. Department of Labor expanded access to affordable health coverage options for America’s small businesses and their employees through AHPs. The rule allowed more employer groups and associations to form AHPs, based on common geography or industry.
Self-Funding & Employer Stop Loss
- Since the ACA) passed, there was significant growth in self-funding. Many fully-insured plans successfully transitioned to self-funded plans.
- Benefits of self-funding include more control over the plan document, less regulatory oversight, and flexibility to choose providers and networks that best fit the plan. Additionally, the ACA implemented the removal of limits, making Medical Stop Loss Insurance a tailored solution for protecting those plans that elect to self-fund.
|Total Employees||Number of Businesses||% Self-Insured|
|1-4 employees||11,226,989||17.4% Immature/Developing Market|
|100-249 employees||79,352||29.2% Rapidly developing/Growth Market|
|500-999 employees||14,115||78.5% Mature Market|
Source: North American Industry Classification System (NAICS)
The number of claims exceeding $1 million more than doubled in the past five years. Although less than 2% of Stop Loss claimants produced costs over $1 million, those claimants accounted for 18.5% of the total Stop Loss payments. These higher associated claims costs were expected to somewhat slow revenue growth in the Stop Loss market; however, the risk-mitigation, customization, and regulatory savings aspects of the market continued to make it an attractive segment of Health Insurance. Additionally, there was a growing trend toward reference-based pricing, which helped control the cost of catastrophic claims for some self-funded employers.
Significant risk drivers contributing to the risk dialogue happening in boardrooms and executive suites included: technological advancements; disruptive innovations threatening core business models; recurring natural disasters with catastrophic impact; soaring equity markets; turnover of leadership in key political positions; and cyber breaches on a massive scale. Key stakeholders in healthcare organizations required greater transparency about the nature and magnitude of the risks they assumed in executing an organization’s corporate strategy.
Convergence and collaboration between health systems and plans was more important. In 2019, the most successful health plans connected consumers to their health care. Health plans were the only players in the health care ecosystem with a complete data set for each insured patient—information important to health systems and physicians as they take more responsibility for patients’ long-term health. Care providers relied on health plans for their technology and expertise in managing care, and health plans turned to providers who understood care delivery and clinical effectiveness. Both sides leveraged each other’s strengths to create a better and stronger U.S. health system.
Health systems focused more on patients than illness. Adoption of the Medicare Access and CHIP Reauthorization Act, which is more than three years old, accelerated in 2018 as health plans forged closer relationships with health systems to share risk. The law will likely affect health systems more profoundly throughout 2019 as more choose to take on shared and full-capitation risk contracts.
Additionally, many health systems explored how to grasp the entire continuum of care. Historically, this has been more the responsibility of health plans but, in a value-based payment model, health systems and doctors were well served to consider the full spectrum of care within a fixed-premium payment. This could be another opportunity for health plans and providers to collaborate.
Technology could help doctors focus on treatment. According to a study, physicians spent 21% of their time on nonclinical paperwork, which took away from their time with patients and contributed to burnout. AI, robotics, and cognitive technologies could automate many daily duties and give physicians and clinicians more time to practice medicine.
Over the next three to five years, 100% of health care providers expect to make significant progress toward adopting these technologies, according to Deloitte’s Human Capital Trends research; however, respondents acknowledge little progress to-date. Enabling technologies such as electronic health records (EHRs); and emerging technologies, such as blockchain and AI, will play a large role in helping to improve connectivity and engagement among health systems, health plans, and patients and families. For example, doctors could use EHR data to help manage chronic illnesses, saving frequent patient appointments.
More patients could consider virtual health. Few people enjoyed going to the doctor, and some waited until a condition worsened before seeking care. This drove up costs, including expenses related to ER visits. Virtual health technology could allow patients to communicate directly with caregivers, while helping physicians see and support more patients. Only 14% of physicians have implemented technology, however, that allows them to conduct virtual visits with patients; and only 175 physicians use it for physician-to-physician consultations, according to the results of Deloitte’s 2018 Physician Survey on virtual care.
Implementation is often costly for providers, and many organizations are still weighing ROI and existing fee-for-service reimbursement rules. Health system leaders can strive to determine when physicians and other caregivers should be at the site of care delivery and when their work can be performed virtually. Last summer, the U.S. Centers for Medicare and Medicaid Services proposed that Medicare pay physicians for virtual check-ins and other tech-enabled services. Telehealth is also becoming a common feature in commercial health plans. As of 2016, 74% of large employer-sponsored health plans had incorporated telehealth into their benefits, up from 48% in 2015.
Increased focus on population health. Health systems were looking at managing outcomes for patients on a broad basis; and at using resources more effectively and efficiently to improve lifetime health and well being for specific groups. In recent years, there was an increased focus on the social determinants of health, with recognition that many influences have less to do with care and more to do with environment, stressors, income and education, as well as the level of social interactions and sense of community. While health care organizations might struggle to measure ROI for these efforts, they may be critical as the focus shifts to wellness.
Health systems can give people incentives to engage as early as possible to help reduce injury and illness and manage chronic disease more effectively. This can also reduce health system usage and resource consumption, while improving patient experiences can strengthen customer loyalty and build reputation and brand. In order to stay on the right trajectory, health plans, health systems, and patients will benefit from working more collaboratively in 2019 and beyond.
|Medical Professional Liability||Expected rate increases|
|Managed Care E&O Liability||Flat to slight increase|
|Medical Stop Loss Liability||Flat to slight increase|
Continued tightening in the marketplace is expected. While capacity is still available, the recent consolidation activity of Medical Professional Liability carriers is likely to continue in order to sustain market share and create underwriting efficiencies.
Underwriters, such as Zurich, Berkley, CNA, and the Aon/ASHRM report, expect the upward trend in claim severity to continue, as detailed in their benchmarking analysis. While fewer malpractice cases are being filed, they are more expensive to defend, driving up legal and related expenses for carriers and self-insured entities.
Emerging risks are evolving and present real considerations for healthcare organizations that require a proactive risk management approach. Consumers demand a healthcare experience that mirrors the convenience and transparency of their banking, retail, transportation and other purchasing experiences. Healthcare organizations need to evolve with these changing demands from their customers, while insurance carriers and brokers must provide cutting edge solutions to address developing risks.
The Marine market for cargo/stock throughput, liability and hull was in an aggressively firming mode in London, where it continued to be extremely turbulent and somewhat inflexible due to the actions taken at Lloyds. U.S. Marine markets, while firming, seemed more balanced, but responded aggressively on accounts with poor loss records. A combination of vessel fires, numerous storage losses (including misappropriation), California wild fires, various transit-related automobile losses, and uncertainty about BREXIT lead Lloyds to take steps to “close the performance gap.”
Lloyds had significant expense burdens that hovered at or above 40% on a gross basis (7 to 8 percentage points higher than U.S. Insurers) and because of that, required many of its syndicates to submit business plans to achieve profitable results. Several syndicates withdrew from writing cargo and throughput business, including: Acapella; AmTrust; Barbican; Channel; Sirius; and WR Berkley. Other syndicates, such as Ascot, Beazley, Brit and Canopius, operate U.S. offices, which present a different distribution channel at a lower expense ratio.
With numerous syndicates exiting the market and Lloyds actively seeking to reduce top line, capacity shrunk. In addition, there has been a recent consolidation among major cargo players, including XL Specialty’s acquisition by AXA after the former acquired Catlin. Also, ACE acquired Chubb a few years ago (a significant cargo player in U.S.) and Hartford acquired Navigators.
The U.S. Marine market, while not as large as the London Marine market, was comparatively more consistent. The American Institute of Marine Underwriters was profitable when compared to London and thus U.S. Insurers looked to capitalize on turmoil in London by writing new business.
With poor loss history as the key driver, coupled with pressure from Lloyds to improve overall results and return to profitability, the Marine market experienced price firming. Simple supply and demand impacted pricing as Lloyds syndicates cut capacity or shut down, resulting in higher prices.
In general, market conditions aligned within the following broad pricing categories:
|Cargo/Stock Throughput: Loss-free, non-CAT exposed||+5% to +10% rate increases|
|Cargo/Stock Throughput: Poor loss history and/or CAT exposed||+10% to +30% rate increases|
|Hull/Liability/USL&H: Loss free||Flat to +15% rate increases|
|Hull/Liability/USL&H: Poor loss history||+5% to +25% rate increases|
Underwriters experienced extreme pressure to achieve profitability. As noted above, numerous syndicates either exited the Marine market or significantly cut back on their lines. This led to a capacity crunch in London. Markets in the U.S. took a disciplined approach to underwriting new business, so accounts with poor loss experience found it challenging to garner interest and attract competitive capacity.
Some of the coverages that were expanded or added to programs in the recent soft market years received scrutiny during the renewal process. Static goods in storage were closely underwritten following significant losses from CAT events during the last two years. Coverages for spoilage, control of damaged goods, and fear of loss were re-written; in many cases with restrictive wording. Commodity packaging and security controls were also a focus.
Lloyds reported improvement in its profitability, perhaps due, in part, to increased diligence in the underwriting process. Cargo and Stock Throughput underwriters wait anxiously to see how the wind season will play out, as static risks have led the way in losses over the past few years.
The migration of many long-time London-centric programs to U.S. Insurers has broken some old relationships and fostered new ones. An upward trend in pricing and more restrictive terms and conditions in the Marine market continues to build momentum and is expected to continue through at least one renewal cycle. If losses improve for the industry, competitiveness may return in 2020.
Recommendations for 2019 renewals include the following:
- Start the renewal process early.
- Be prepared and provide detailed risk data.
- Seek market alternative if program is London-based.
- Focus on packaging, route and storage data (Surveys, COPE) to differentiate risk from others.
- Be willing to negotiate on less important things.
- Get options for higher deductibles, sub-limits and coverages.
|Accountants Professional Liability (APL)||Flat to slight increase|
|Lawyers Professional Liability (LPL)||+2% to +7% increase|
CAPACITY & COVERAGE OVERVIEW
Large Firm Segment (Top 100)
Broad policy wording and customizable coverage continued to be provided. Insurers managed their capacity conservatively, by generally not exposing more than $5 million on any one risk, especially if such capacity was contained within the primary layer.
The excess market continued to be highly competitive with Insurers generally either reducing prices or maintaining expiring premiums. Additional capacity continued to enter this segment.
Small to Mid-size Firm Segment (below Top 100)
Rates were generally flat to lower in this highly competitive segment. Insurers saw good results in the small firm segment and sought to expand their target market. Broad coverage continued to be available.
In the first quarter of 2019, Insurers declared strategic plans focused on profitability and demonstrated varying levels of resolve pursuing these plans in a market flush with capacity. Law firms renewing in 2019 experienced rate increases in the range of 2% to 7% and upward pressure on self-insured retentions or deductibles.
Year-end renewals saw generally flat premiums resulting in lower rates after considering growth in firm revenues. Through the remainder of 2019 renewals, firming rates were expected due to Insurers’ overall profitability concerns and continued loss deterioration in the APL market (except for the lower end of the large firm segment as noted herein).
Large Firm Segment (Top 100)
Market conditions remained stable. Firms continued to show strong revenue growth from both organic and acquisition activity, and Insurers were able to capture only a portion of that through premium increases. However, signs of firming continued to develop as certain legacy primary Insurers expressed concern over profitability/book performance. Spillover into the APL market was expected from some of the profitability issues in the LPL market.
Larger rate reductions were more difficult to support with incumbent Insurers, who either non-renewed or reduced their capacity. Firms with substantial growth or paid claims saw increased premiums and retentions. Counteracting these developments were Insurers traditionally focused on the small firm segment moving upstream by offering competitive terms to the lower end of the large firm segment. These actions kept premiums and rates depressed for this segment of the large firm market, and may continue to do so as these Insurers implement their plans to write larger firms.
While Insurers achieved modest rate gains in their LPL books, the most significant market development of 2018 was a shift to a more aggressive tone regarding loss development, rate adequacy and profitability. Several Insurers published reports analyzing their loss development back to the recession, with each reaching similar conclusions: LPL rates were not representative of the risk being assumed.
Large Law Firm Segment (150 lawyers or more)
Large firms should anticipate greater resolve from incumbent Insurers to achieve rate increases, as fewer Insurers were willing to deploy capital on large firm primary layers, resulting in less competition. Insurers in this segment will likely seek to increase self-insured retentions that have not already been adjusted over the past few years. Firms in this segment with adverse claims experience will struggle to avoid rate increases above the range noted above.
Insurers recently demonstrated greater discipline in properly accounting for law firm growth in renewal premium through tighter pricing strategies for new and departing attorneys, and by renouncing dilution of the number of attorneys proposed for coverage.
Broad policy wording and customizable coverage was available in this segment. However, Insurers continued to deploy capacity conservatively, by generally not exposing more than $5 million on any one risk and by maintaining healthy ratios of primary participation to excess placements.
Given severity levels of large law firm loss trends, modest rate increases applied to lower attaching excess layers was likely. Competition for higher excess continued to be highly competitive with Insurers generally either reducing prices or maintaining expiring premiums.
Small to Mid-size Law Firms: (Below 150 attorneys)
While law firms in this segment were subject to strategic rate increases as outlined above, more abundant capacity, particularly for primary layers, afforded firms greater leverage to minimize incumbents’ efforts to achieve desired increases. Despite abundant capacity, firms in this segment with adverse claims development faced difficulty avoiding significant rate increases, as Insurers sought minimize exposure to severe losses. While coverage in this segment remained broad, isolated instances of new policies, intended to enhance or clarify coverage resulted in tightening of terms and conditions. Excess capacity was abundant and pricing was expected to remain flat.
Soft market conditions and healthy capacity should continue into the second half of 2019. Firms with favorable loss experience will continue to see competition for their business, while those with claims will have increased rate or self-insured retention pressure. Although abundant capacity will keep rates in check, taking advantage of favorable market conditions will require planning and knowledge of the market and its many participants.
Although greater underwriting discipline, limits management and increasing rates will continue through the second half of 2019, abundant capacity and broad coverage terms defy declaration of hard market conditions in the LPL segment. Deteriorating loss trends, increasing severity of claims and more unified concern by Insurers over adequacy of rates will result in more significant upward pressure on pricing and self-insured retentions than usual for the rest of the year. Strategic and creative use of existing abundant capacity, and new entrants to the space, will offset Insurers’ efforts. Taking advantage of current market conditions will require planning and knowledge of the market and its many participants.
The Property market was characterized by rapid change that saw a dogmatic firming of rates and terms. Unlike the efforts of carriers in 2017 and 2018 to harden the market, the firming in 2019 has been rapid and has momentum.
Remembered as the worst catastrophic loss year in insurance industry history, 2017 was led by the HIM hurricane losses: Harvey, Irma and Maria and a total of $140 billion in Insured losses.
The losses in 2018 are still being calculated, but the current tally of Insured losses was approximately $80 billion.
|Date||Country/Region||Event||Insured Loss*||Economic Loss||Fatalities|
|November 8-25||USA||Wildfire (Camp Fire)||$12.5 Billion||$16.5 Billion||86|
|October 8-10||USA, Cuba||Hurricane Michael||$10 Billion||$16 Billion||45|
|September 1-6||Japan, Taiwan||Typhoon Jebi||$9 Billion||$12.5 Billion||17|
|September 10-27||USA||Hurricane Florence||$5 Billion||$14 Billion||53|
|November 8-22||USA||Wildfire (Woolsey Fire)||$4 Billion||$5.2 Billion||3|
Source: Munich RE NatCatSERVICE, as of January 2019. *Figures include the loss estimation based on Property Claims Services (PCS).
Last year’s thwarted effort to turn the market around was in reaction to the events of 2017. Underwriters had an oversupply of aggressive capacity working against them as there was always non-incumbent capacity ready to jump on a new piece of business at competitive pricing.
There’s a difference in 2019. Direct and primary carriers, reinsurers and surplus lines underwriters across geographies, access points and industry groups all pushed for increased pricing through rate hikes and tighter underwriting terms and conditions. Many were willing to walk away from accounts if they did not get the corrections they desired.
The firming that came about quickly since the beginning of the year caught many Insureds off guard. The renewal pricing was, in some cases, significantly higher than budgeted for at year-end 2018, when there was little sign of this rapid hardening.
With hesitancy in the formerly robust capital markets, increased reinsurance costs, poor underwriting results from the past three years and volatile investment results at the beginning of the year, underwriters sought to correct the pricing of their product and raise rates. There was increased talk of technical pricing needed to support a book of business capable of paying future losses.
In general, the majority of renewals experienced high single-digit to low double-digit rate increases. However, there were pockets of hardening that experienced higher rate increases, such as: Caribbean risks; U.S. mainland coastal properties; flood exposed properties; and wildfire-exposed properties. Some industries, such as habitational, hi-tech and manufacturers with Contingent Business Interruption exposures saw rate increases above the averages.
The particulars of any given portfolio dictated the terms and pricing of the renewal, but in general, market conditions aligned within the following broad pricing categories:
|Loss-free, non-CAT exposed portfolios||+5% to +10% rate increases|
|Loss-free but CAT exposed portfolios||+7% to +20% rate increases|
|CAT losses with ongoing exposed portfolio or challenging occupancies like habitational||+10% to +30% rate increases|
Factors that moderated pricing included general policy and CAT deductible changes, program structure, limits and sublimits.
Underwriters, most notably Lloyds syndicates, reassessed their distribution of capacity and in many cases, decreased their lines on shared and layered account structures. With reinsurance prices increasing, the cost of capital drove underwriters to deploy capacity where they were able to garner the best pricing under the most favorable terms.
With some of the larger capacity providers in the market (e.g., FM, AIG, Zurich) re-underwriting their books, capacity stress was introduced in larger programs that tapped a large number of participants to fill out. In some cases, it was not a question of price, but of an underwriter’s decision to move on from an unprofitable account or industry.
To date, a program has not gone uncompleted, but there was certainly more finessing involved, which increased the potential for non-concurrencies in pricing and terms amongst bound participants.
The more closely controlled coverages in a property program, such as: Contingent Time Element; Cyber; Non-Physical Business Insurance; Earthquake; Flood; Named Windstorm; and Hail and Convective Storm attracted heightened underwriting scrutiny. Underwriters focused on these lines from the perspectives of limits, breadth of coverage and deductible.
Non-CAT, single location losses such as fires, explosions, collapse and mechanical/electrical breakdown added significantly to the poor underwriting results of previous years. Though CAT is light to date, 2019 has already produced in excess of $1 billion in property losses to a number of property carriers.
Wind season begins on June 1, and there is debate within the modeling and academic predictive community as to the expected frequency and severity. Even without any major catastrophic events, a firming market seems to be taking hold and momentum from renewal to renewal each month is building.
Insureds with renewals in the second half of 2019 should prepare to give back rate to underwriters looking to correct the pricing of their books and get closer to the technical underwriting standards. Deductibles, terms and conditions for the most scrutinized lines of coverage will also receive intense underwriting attention and are likely to include more restrictive renewal offerings. Recommendations for 2019 renewals include the following:
- Start the renewal process early.
- Differentiate risk with detailed, accurate exposure data.
- Get incumbent indications and expectations upfront.
- Talk to new markets throughout the year, not just during the marketing process.
- Use the models that the underwriters use.
- Prioritize and be willing to negotiate on the less important things.
- Get options for deductibles, sublimits and coverages.
- Consider diversifying market portfolio with U.S. domestic, European, Asian, Bermudian and Lloyds markets.
The Contract and Commercial Surety industries were predicted to grow 5 – 10% in 2019 and are on track throughout the first part of the year. The strong economy allowed Surety to grow as business and construction recovered and solidified. Increased public infrastructure spending, specifically in the Transportation, Education and Military sectors, continue to project favorable outlooks for Contract Surety.
|Contract Surety||Flat to slight increase|
|Commercial Surety||Flat to slight decrease|
- Recent entrants to the market ramped up their sales efforts and many saw double-digit gains in written premium volume.
- Reinsurance continued to be plentiful and relatively cheap.
- Fierce competition in certain market sectors created continued pressure on rates.
ENR 400 contractors continued to experience significant growth in their backlog. Healthcare, Education, P-3 type infrastructure, and multi-family continued to be strong markets for construction companies. The Contract Surety space saw increased use of collateral arrangements and funds control to enhance the credit capacity of small and medium-sized contractors. Rates were relatively firm.
The Commercial Surety sector continued to show solid premium growth. The replacement of bank letters of credit with surety bonds for certain obligations continued to gain momentum. Rate competition continued to be fierce for investment grade credits. New entrants and plentiful reinsurance continued to put rate and underwriting pressure on all Commercial Surety players.
There was an increase in the use of surety bonds in place of bank letters of credit in South America and the EU, and the industry continued to entertain weaker credits.
The Surety industry will face some major challenges in 2019. Barring a major catastrophic economic event, rate and underwriting pressure will likely be the norm. The overall credit picture in the Commercial space continues to weaken as many underwriters are entertaining credits far below investment grade, albeit at a hefty price.
The Surety industry is positioned to meet underwriting losses due to strong balance sheets, judicious collateral positions, spread of risk via multi-company participation and the continued use of reinsurance. M&A activity should continue throughout 2019.
TRANSPORTATION & LOGISTICS
The overall market for Logistics Liability products (i.e., Cargo, Professional Liability, Third Party Liability) remained stable in the first quarter of 2019. While a great number of Marine and Inland Marine markets exited conventional marine cargo lines in 2018, Logistics Liability markets were largely unaffected by these changes.
Logistics Liability policies provided coverage to freight intermediaries for cargo damage, negligence, third party death, bodily injury and property damage claims. Some industry-leading programs offered coverage enhancements that assisted in meeting onerous shipper requirements.
There were modest premium increases during the first quarter of 2019, as underwriters became more selective in the submissions they quoted.
The market for comprehensive Logistics Liability products remains limited. Certain sections of a Logistics Liability portfolio, such as Freight Broker Liability, are mainly offered through Lloyds programs because they provide needed coverage flexibility. Few U.S. insurance companies compete in this space.
As demand for goods and services increased, freight intermediaries assumed a larger role in the global supply chain. Shippers and manufacturers continued to transfer risk down the chain, requiring insurance markets to meet the ever-changing needs of logistics companies. These companies continued to seek competitive and innovative insurance solutions to protect their businesses.
An increase in claims activity could push rates higher in 2019 and continue the hardening of the market. Many analysts are predicting an economic slowdown or recession on the horizon. This would create a headwind that will have a significant and unfavorable impact on consumer spending and demand for goods and services around the globe. Overall, it may result in lower revenues for freight intermediaries.
The first quarter of 2019 showed significant growth in premium, while rates remained mostly unchanged. Premiums increased partly because of larger import bond requirements by U.S. Customs and Border Protection (CBP), due to the tariff increases under Section 232 and 301.
Despite the Administration’s forecast on February 24, 2019 that it would delay the second tariff increase on Section 301, List 3, the higher tariff requirements did not appear to have an end date in sight. This might be a new era as relates to trade with China. Challenges that importers face financially in qualifying for larger bonds limits may require them to tie up significant cash flow, in the form of collateral, for the surety to grant approval.
In addition to new duty requirements, as well as the increased risk on potential importer bond defaults to U.S. CBP, there was an increase in Importer Security Filing (ISF) Enforcement. Liquidated damage penalties are being issued primarily for late ISF filings, which is a breach of the surety contract. Based on these recent trends, it is reasonable to believe that rates may increase on U.S. Customs & Transportation Bonds in the future.
The transportation/energy marketplace for Truck Insurance (i.e., Auto Liability, Physical Damage, Motor Truck Cargo) was very selective in the accounts written, with tightened guidelines and increased premiums. While Insurers were not leaving the market at the same rate as in prior years, there were very few Insurers entering this space.
A major energy transportation Insurer left the marketplace, creating some opportunities by putting several clients back into the market.
Truck Insurance premiums continued to increase for all lines. Physical Damage premiums climbed due to increased tractor insured values. New technology within tractors, including greenhouse-efficiency standards, video and computers, created an increase in values and premiums.
The trucking industry continues to face a driver shortage. As the current workforce ages out, fewer younger drivers are joining the industry, creating an ongoing challenge.
The Transportation market has been hardening for the last few years. This trend is set to continue as insurance companies tighten submission guidelines, reduce distribution channels, and exit the market. Insurers interested in providing quotes do so for motor carriers with a solid safety history.
Insurance brokers and Insureds need to stay on top of the increasing regulatory burden. Motor Carriers must comply with FMCSA regulations, while California and other states continue to increase their individual state requirements.
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