JONATHON DRUMMOND: Welcome to our 2025 spring edition of Marketplace Realities, the podcast. The last time we connected was back in October and we spent a little time talking about the marketplace. Scott spent a little time talking about while we're softening the market, we are still on a tail end of hurricane season. And fortunately, that closed out, I guess, successfully for the industry.
But here we are, spring of 2025, looking into summer renewals, looking into the fall, trying to get an understanding of what's playing out in the marketplace. We have the same crew that joined us in the fall. We have Mike Machin, who is our Head of Broking for Phoenix and North America. Michael, hello.
MIKE MACHIN: Hi, everyone.
JONATHON DRUMMOND: We have James Sallada, who is the Head of Casualty in North America.
JAMES SALLADA: Hello, everyone.
JONATHON DRUMMOND: And we have Scott Pizzi, and Scott runs our national property practice in North America sitting in New York.
SCOTT PIZZI: Hello, everyone.
MIKE MACHIN: So, for those Smartless fans out there, Scott plays the role of Will Arnett on this podcast.
SCOTT PIZZI: Oh, all right. Well, at least I know where I stand. Perfect.
JONATHON DRUMMOND: You know, by making that reference, I might be able to tease my wife and convince her to actually listen to this one. So, hey, listen. Let's just get an overview question out there.
You know, we all recognize that the industry certainly is constantly influenced by different you know, capacity constraints. And we have capacity come in and coming out and just, you know, something that's really influenced by supply and demand economics. Spend a couple minutes.
Tell us about what's going on in your market, and are there new entrants? Is there anybody exiting? What's playing out as it relates to capacity in your market? And then perhaps how, is that ultimately influencing rate? And Scott, maybe I'll have you go first.
SCOTT PIZZI: Yeah, Jon. Thanks for the question. You know, when we did this podcast back in the fall, we were clearly getting into the tail end of hurricane season.
Right, if Milton takes a different path than what it does, I'm sure the conversation as it kicked off in the beginning of one one up until now would have been greatly different. But what we essentially are stuck with is a market that's literally in freefall, right? There's certainly some pockets of the market where things will continue to be challenged, whether that's some habitational real estate or maybe that's some food and beverage stuff.
But for the general speaking, the supply and demand curve is literally now into a buyer's position. So the narrative has shifted tremendously. There haven't been any real new entrants to the market per se, but what there has been is capital that sat on the sidelines because you didn't need to put up a tremendous amount of capital to reach a return during the hard market period.
So now, with everything being equal and everybody coming to the table to grab market share, people are having to double down given their growth goals they see for 2025. So you're seeing retailers try to expand and stretch their limits to go more across programs vertically than horizontally. You're seeing the wholesale space try to get involved where they can to challenge the status quo. You're seeing London and Bermuda much more active in terms of participation and trying to drive terms and conditions.
So holistically, the market is literally in a position where we're able to now get programs grossly over capacitized and be able to work on terms, conditions and pricing all at the same time. And candidly, I don't see that trend changing anytime soon. What I will think you'll see is the second quarter, which is where this kind of cycle started in 2024. Those accounts may moderate to a degree, but I still think you're going to see reductions across the board unless you have a real challenged account with claims or engineering issues or valuation problems.
JONATHON DRUMMOND: It's interesting you mentioned that, Scott, that you have not necessarily a lot of new capital, new entrants in the market, but you have people looking to deploy more capacity.
SCOTT PIZZI: Right.
JONATHON DRUMMOND: And James, that's like the exact opposite maybe sans a couple new players like Banyan and others. But it almost sounds like the exact opposite in what you see in excess casualty.
JAMES SALLADA: Yeah. When you think about casualty in general, right, you need to look at sort of a couple tranches. You've got primary casualty, then you've got excess casualty. And then you also have two tiered risks within that, right?
So, low to moderate risks and then medium to high hazard risks which we could talk about separately. But on the primary side, work comp continues to perform. 2023 marked the 10th consecutive year of underwriting profits, the seventh consecutive year of results below 90%.
You know, the industry workers compensation combined ratio for 2023 was 86% So as such, capacity remains consistent in the primary space for traditional three line players, albeit with rate increases and structure pressures on the liability lines, softened somewhat by flat to rate decreases on work comp, which is being leveraged. Lead umbrella, excess, different story, right?
The industry has seen a reduction in true umbrella players, you know, on a mono line basis while more primary markets, interestingly enough, are looking to offer supported umbrella solutions as a strategy to take that market share of the workers' compensation, the media attractive piece, especially when that's at play, right? So the industry is closely watching the excess liability space for capacity, however.
Carriers are continuing to remain and in some cases, you know, enter the space. However, the overall availability in total limit continues to shrink. Renewing towers at expiring limits now requires significantly more players on average to achieve those limits.
This dynamic is causing less than optimal tower architecture and therefore increases in price. So the lack of availability of meaningful limits from single participants creates obvious pricing inefficiencies. Quota share strategies can mitigate the disruption at various points in the tower. So can looking at the client's balance sheet deployment.
But it is creating an inefficient process whereby more and more markets are looking to deploy less and less limit and not really give any sort of premium savings to do so. I will say that on the low to mid excess capacity, there is a crunch. There are not enough markets willing to play in that layer which many view as the working layer for complex casualty. And so that area is becoming distressed and really, for those high hazard risks, driving up price significantly.
JONATHON DRUMMOND: You know, what's more difficult, would you say, is to secure competition on the lead umbrella or to find the right capacity in that first and mid excess?
JAMES SALLADA: I would say because of that dynamic around a lot of the umbrella markets willing the right risks now are those that also have a primary casualty solution. It's probably an easier find for the lead umbrella than it is for those true excess only players that can't round out the risk with workers compensation or another primary casualty line. And so that is the true area of distress for which we, as brokers, are coming up with creative solutions to find meaningful capacity to solve for that.
JONATHON DRUMMOND: No, absolutely. You know, it's interesting too, and we can touch upon it a little bit. But it's the dynamic when you start to shorten these layers.
And so maybe you had a $25 million layer excess of 40. And now you're looking at a 5 times of 40 and then a 10 times of 45. You know, what opportunity does that create for the plaintiff's bar to be able to come in and perhaps more effectively target those layers of insurance in the courtroom? And so I'm not sure if you see anything on that.
JAMES SALLADA: Well, what I can say is, you know, we can never opine on, on actual claims themselves and predict how claims will be paid out. But there is a concern in the risk management community that insurers have a motivation to tender their limits quicker than in years past, because the limit deployed is not meaningful, and therefore, they'd rather avoid the expense costs and all the headache around it and tender their limit. That certainly is a strong concern for a lot of risk managers. Insurance companies would tell you that's not the strategy, but time will tell, right? And this is something that we factor into when looking to put these towers in place and working with our clients on their overarching strategy.
JONATHON DRUMMOND: Absolutely. Mr Machin kind of sitting over and touching upon management liability and cyber, tell us a little bit about what's going on in that market and what are the trends that you're seeing and new players perhaps in the game. But most importantly, what are our clients seeing at renewals?
MIKE MACHIN: Yeah. Thanks, Jon. So I think when I look at D&O and cyber, we're starting to see some change in the D&O market. I'll kind of touch on cyber in a minute.
But from a D&O standpoint, over the course of the first three months of the year, we've seen three or four markets exit either all or portions of their books of business. You know, so some cracks in the foundation, so to speak, just in terms of overall profitability. There are different reasons for each of the insurers that decided to exit, but I think, you know, there's underlying data to suggest that, you know, from a firming standpoint, from a market standpoint, we're at the tail end of the soft market and starting to potentially transition to, I'll say, a firming or hardening market at some point in the future.
Now, it's anybody's guess kind of when the switch flips, so to speak. But when you look at some of the underlying trends, at least from a D&O standpoint, security class action lawsuits are up modestly year over year. But what's notable is the size of the settlements. So 2024 SCA settlements totalled $4 billion, which is an all-time record and $700 million more than in 2023.
And so what insurers are facing is, you know, decreasing premium levels. We're back to basically 2020 premium levels but with severity that's increased materially over the course of the last three or four years. So, a lot of margin pressure from a D&O point of view.
And so again, we'll see at what point insurers say when in terms of really trying to force the issue from a rate standpoint. I think, Jon, kind of to the point-- somewhat to the question that you had asked James, you know, the most pressure really is in the middle excess, where rate deterioration had accelerated most significantly over the course of the last few years. Primary we saw reductions.
Side A and high excess, we saw reductions. But those middle layers are really being impacted by the, you know, kind of the increased severity and very low rates. So I think that's where we're starting to see things turn most materially right now, or at least stabilize most materially. So we'll keep we're keeping an eye on D&O.
Cyber, a little bit of a different story. We continue to see carriers invest in the cyber product line. A couple of new entrants over the last few months.
There have certainly been loss trends that have been unfavorable, but we haven't seen that market start to turn quite yet. And in fact, many insurers are trying to come downstream into the middle market cyber arena in an attempt to capture additional revenue because there is so much other capacity in the large and complex space. So, interesting dynamics in financial lines overall.
JONATHON DRUMMOND: Thanks, Mike. Touching back on property a little bit, you know, you just had to rewind a couple of years and I felt like there were so many issues going on or at least pressure points from valuations to effectively looking at reinsurance trends and capacity falling out of that marketplace. You know, Scott, do you think that, you know, while the marketplace is certainly pursuing what they perceive as strong rate adequacy in this line of business, how do the reinsurers feel, and what is the perspective on valuations today? Any thoughts there?
SCOTT PIZZI: OK, a couple of pieces there. So when we talk about supply and demand, let's be mindful. The reinsurance community is not immune to that at all.
In fact, if you look through late '22 into '24, the contraction we saw in the availability of property CAT was so substantial in the reinsurance market, which ultimately led, right, to significant upward pressure on both premiums and insurers retentions and, in turn, favorable financial results for those with capital to deploy. So now, flip that on its head. Capital clearly chases returns.
So what we're seeing now in the reinsurance space is more capital coming into the market that had been sitting on the sidelines. And then when you're stabilizing and now we've got softening CAT reinsurance premiums, it's going to be interesting to see how far those insurers who haven't been able to achieve meaningful reductions in the retentions imposed in '22 and '23 and whether that capital can achieve those returns they seek and thus extend the longevity in the market. We all know, at least over the past couple of cycles, the 1-1 reinsurance treaties that go on basically dictate where we're headed.
And with another benign season, hopefully, knock on wood, of hurricanes, we should be able to see continued favorable conversations and favorable results across leading all through '20 into 2026. With that, I think, you know, the market still is just in a bit of flux as to where they want to go and what they want to do, right? So we've got so many people trying to chase a lot of growth and a lot of market share that I don't know where the bottom is yet.
And we, certainly, as brokers need to be mindful when we're putting together programs of having a sense of a flight to quality and not just chasing the bottom with people who are buying the account for one year and may not be there for the next. So I caution people in this market. You know, somebody said to me yesterday, would you rather have been still operating in the hard market of '17 through '23, let's call it, or the soft market of today?
And for me, the soft market, while everybody perceives it to be in property, is a much easier game to play, and you've got all this capital, and it's so much, you know, easy to-- like, it's hard to manage through some of these programs when you have such excess capital to deploy, and you can't use it all. So you have to be really mindful on terms and manage expectations, even greater than chasing the last $5 or $10 million on a program you did during the hard market.
So, you know, the property space is very fluid. It continues to be very open. And I think you're just going to continue to see that continue as we get through the balance of 2025, pending any complete natural disasters and the outlook around tariffs and some of that other stuff that we haven't talked about, will play its hand in some shape. But I don't think we'll see it play out as great as people think it will.
And the valuation piece of the puzzle, I think everybody I talked to seems to believe that the world has done a really good job in moderating, getting valuation to where it is. So price adequacy tends to be at a nice, stable environment. So even if they're giving back some rate to maintain, people feel still pretty good where their positions are on their portfolios. But we do have some, some places where valuations continue to be very much under water, and we need to continue to lean in with our FACC guys to help drive that and provide some more guidance around adequacy in terms of reporting.
MIKE MACHIN: Yeah, OK. Well, a couple of months ago, I was thinking about our podcast we had and as it relates to today. And the story a couple of months ago, we said in jest, was we correlated the market to Goldilocks and the Three Bears. We had a market that was hot, we had a market that was cold, and we had a market that was just right.
As we look at today's market, what's your story? What's your song? What epitomizes your marketplace today? And perhaps I'll start off with you, James.
JAMES SALLADA: Yeah, thanks. Appreciate that, and I recognize that this may not be for every listener here. But for those of you that, like myself, enjoyed the Game of Thrones series on HBO a few years back, you may be familiar with the various houses, and we used to joke that, you know, casualty was the House Stark, right? So they ruled the North.
As a career casualty professional, it's no secret that some of the product can be labor intensive for brokers, sometimes filled with, you know, we'll call it less than attractive tasks. Think UM, UIM forms, retro adjustments, manuscript policy language, heavy data entry, et cetera.
You know, the House Stark is known for the dirty work, the less sexy things. But they're also known for protecting the Seven Kingdoms from the dangers beyond the northern border. As casualty professionals, we strive to assist our clients in loss prevention and disaster mitigation, you know, and all the other physical dangers associated with operating their business.
You know, now, right-- and for those of you who watch the show, House Stark kept saying winter is coming. And unfortunately, we are the bearers of bad news in the marketplace. You know, the winter for us is nuclear verdicts.
It's social inflation. It's all these things that are leading to increased prices, problematic exclusions, scarcity and capacity. You know, it's not a zombie apocalypse like Game of Thrones, but winter is here for casualty, and it's our job to solve for those needs as is the ruler of the North.
But I would tell you that, you know, on a side note, House Lannister, right? These old moneyed Lannisters controlling the riches and the fortunes of those in the houses, strike a comedic resemblance to my friends in D&O and professional liability with their fancy pinstripe suits and C-suite engagement and false impressions as bankers, right? And then you think about House Baratheon, I'll leave it with this, Scott, right? They were the lords of Storm's End. So you could see where that goes.
SCOTT PIZZI: I had a feeling that was playing into this.
JONATHON DRUMMOND: Oh, I love it, James. That's good. I would definitely characterize winter is upon us.
And so, you know, we just got to make sure that the industry recognizes those that-- what are the white walkers? What were the leaders of the White walkers? That's the plaintiff's bar, I think, is the one causing these problems.
JAMES SALLADA: There you go. There you go.
JONATHON DRUMMOND: So, good. All right, Mike. What's your song, theme, or you're welcome to continue on this Game of Thrones concept.
MIKE MACHIN: Jeez. Yeah, that's a tough act to follow. I'm not going to lie. I mean, I think, you know, there are certainly some similarities in, in some of our financial lines with what's gone on in casualty, I mean, I think between nuclear verdicts and social inflation impacting kind of lost costs.
In a lot of respects, the insurers are feeling similar pain. I mean, I think my parallel, at least for D&O minimally, and I think soon to be cyber, is Back to the Future. Where we are now is, you know, frankly, quite familiar, you know, compared to years prior, whether you look at 2020, whether you look at, you know, 2008, 2009, 2010, whether you look at, you know, the IPO crash in the early 2000s.
You know, from a D&O standpoint, we have a habit of doing the same thing over and over and over again-- you know, driving rates, you know, below sustainability and then, you know, creating a whipsaw effect in the marketplace. And I think part of that, to Scott's point earlier, has to do with, one, excess capacity but then less quality capacity. And so I think to the extent that we can stave off some of this whipsaw, some of this volatility by, you know, trying to find ways to create more stable programs, you're not going to avoid a hard market entirely when things start to adjust.
But I think for our clients, what we're trying to do is manage rate change to the most reasonable extent possible. Our value proposition is delivering strong programs, strong, sustainable programs to clients that may not always be at the absolute bottom dollar, but I think that creates a more stable trading environment. And so while I feel like it might be back to the Future a little bit, I'm hoping that we can change the future course, here just a bit heading into 2025 and 2026.
JONATHON DRUMMOND: Good stuff. Good stuff. Piz, this leads it down to you, my friend. You got-- the bar is pretty high right now.
SCOTT PIZZI: Well, it is because James did a lot of homework and clearly needs to get outside more and stop watching a lot of TV. But when I think of it, I've got two parallels here, right? So my first one is movie, my next one will be music, right, because you know my passions are in both.
So, from a client perspective, I feel like this market is like Shawshank Redemption. I think there's a lot of people in this market who feel that they were just whipsawed and convicted of crime they didn't commit and are playing victim to the market. And why am I being punished? I didn't do anything wrong. And now, finally, all of that has changed, and they're finally getting their pound of flesh and finding some freedom with a market that they're able to control and narrate into.
When it comes to the market in general, I feel like Led Zeppelin's "Dazed and Confused." To Mike's point, I don't understand why we continue to replicate what we do year in and year out. We all know that property is short tailed. I get it.
But the peaks and valleys that we've all lived through throughout my entire career over the past 33 years, you would think after seven years of rate stability, we'd find an equitable balance where we'd be able to go plus or minus 5%, and everybody would be happy. No.
Instead now, we're going to go down by 15%, 20%, which will then whipsaw back up in the event of a hurricane up another 15%. And I was with a panel of friends from all the other brokerage houses. We really feel like we're dazed and confused as to what this market is doing and why they're doing it. Some of it just borders on pure insanity, if you really want to ask me. So I'm a little bit in that mode where I'm like, I'm not sure what's coming next.
JONATHON DRUMMOND: You know, this is all real value perspective, and I'm hoping our audience is able to take away some good comments from each major line of business here on what we expect. You know, kind of in conclusion, we've got a challenge casualty marketplace, specifically in umbrella and access. And if you really want to focus in on it, it's the first few layers in mid access that are most challenged.
No necessarily end in sight on that. Workers comp continues to be a darling of the industry and is able to perhaps balance some challenges on that access tower from a premium standpoint. Property seems to be in a state of schizophrenia and knowing where they want to go and what they want to be, and perhaps where the floor is.
The reality is, is everyone's chasing it to that floor, and we'll have to see what plays out for the next couple of quarters and really what plays out this summer in our windstorm season to better understand, you know, where this marketplace is ultimately going to go and where it's going to land. But right now, it's trending downward. And then as Mike clearly articulated, you know, we have financial lines and cyber marketplace that is flush with capital.
Yes, there are some distressed areas-- mid excess and management liability, for example. But by and large, our clients are able to build their programs out, push coverages, enhancements where appropriate, be able to drive down rate, and in some cases, depending on where exposures go, and drive down that premium as well. It's probably only a few major cases from a claims standpoint, away from shaping up and perhaps stabilizing into a moderate to a flat rate environment.
But today, it's still pretty soft. So I appreciate everybody tuning in for the spring edition of Marketplace Realities. We will definitely connect later on this year, and feel free to reach out to one of your subject matter experts if you want to dig a little bit deeper and get some more insight on how the market is going to behave in your specific line of business.
A special thank you to Scott, to Mike, to James. Thank you guys. I appreciate you jumping on today.
JAMES SALLADA: Thank you.
SCOTT PIZZI: All right.
JAMES SALLADA: Thanks, Jon.
MIKE MACHIN: Absolutely. Thank you.
JONATHON DRUMMOND: All right, guys. Very good.
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