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Survey Report

Insurance Marketplace Realities 2020

November 13, 2019

Introduction / Executive Summary

How long will it last?

Call it what you will: a firming market, a challenging market, a seller's market, a disciplined market, an unconventional hard market — North American businesses are paying more for insurance. The extent will vary, as always, depending on the business, its risk profile and its strategy for risk management, but the story that emerges in the pages that follow is clear. We are predicting increases, many sizeable, for more lines of insurance than we've experienced in recent memory. The most challenged lines of insurance (i.e., those experiencing the most widespread price increases and capacity withdrawals) are property, umbrella and public company D&O. In these classes and others, the global insurance market is demonstrating unprecedented discipline. For years, during soft market conditions, many said price reductions couldn't last forever. So, we've seen it coming, and here we are. The big question now is how long will it last?

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Commercial lines insurance pricing survey (CLIPS)

When we assemble our prognostications for the coming year in Insurance Marketplace Realities, we're also looking back at recent price movement reported by insurers, grounding us in firm data. CLIPS, Willis Towers Watson's retrospective look at commercial P&C prices, is based on both new and renewal business figures across all segments, obtained directly from carriers underwriting P&C business. CLIPS participants represent a cross section of U.S. P&C insurers that includes many of the top 10 commercial lines companies and the top 25 insurance groups in the U.S.

U.S. commercial insurance prices surged in the second quarter of 2019. This represents a significant pickup from increases of close to 2% for each of the previous five quarters.

For more, review the recent CLIPS report.

We predict that rate hikes and capacity constrictions will continue throughout 2020 and likely into 2021. However, we expect a more orderly market to emerge by mid-2020, especially for property. By that point, the bulk of the re-underwriting by some major property insurers should be largely complete. Pricing will most likely continue to rise as insurers seek profitability, but those increases and market capacity for most risks should be more predictable than they have been during the past two quarters. The other most challenged lines, umbrella and D&O for public companies, are likely to be difficult and unpredictable for the next four to six quarters. Why? Because we are experiencing what appears to be a fundamental and systemic change in liability losses — and not for the better. Loss severity in auto and general liability, and therefore umbrella, is spiking due in large part to so-called "social inflation." In D&O, the annual number of shareholder class action lawsuits has doubled in less than three years. The median settlement value for shareholder class action suits has remained constant at about $13M. If loss frequency has doubled but the median settlement value has remained constant — you do the math.

Nevertheless, as the market seeks a new equilibrium, there are reasons for optimism: the alternative capital market is showing some renewed enthusiasm for the reinsurance market after a year or so of tepid interest, the overall industry has more capital than ever, insolvencies are a rarity, InsurTech companies seem to have largely abandoned their bad-boy disruptor image and are now working with insurance market participants to improve the client experience by helping us all be smarter, cheaper and faster, and the inexorable laws of supply and demand still apply to our industry. This challenging market will not last forever.

Property conditions

We'll start with property. From Hurricane Dorian, with its record strength that caused horrific devastation in the Bahamas and narrowly missed making epic landfall in the U.S., to the drenching rains of Imelda in — again — Texas, the 2019 hurricane season has so far served as a reminder that while the threat of extreme weather is growing, the insurance industry remains well capitalized and sufficiently resilient to play its role in helping organizations bounce back. If we get through this hurricane season without a major U.S. landfall — and as of this writing it looks like we will — one might expect that the good news for insurers would, as in the past, push the supply and demand curve eventually in the buyer's favor.

In 2019, we saw big property hikes for those renewing in Q2, Q3 and so far in Q4. Q1 2020 buyers, it's your turn. And with carriers showing a steady willingness to withhold capacity in their disciplined approach to underwriting these days, the rate hikes in many cases are going to leave a mark. (We also note that there are property buyers who are in the midst of long-term deals. When such deals expire, those buyers should be prepared for a major re-underwriting.)

But what about the next renewal? After what those on the carrier side might call an overdue marketplace correction — and insurance buyers who enjoyed quite a few years of declining property rates might quietly agree — carriers will certainly be interested in sustaining these higher rates. But the moderating forces that contributed to the long soft marketplace of recent years could well return.

One of those forces is competition. While we have witnessed unprecedented global market discipline with no renegade players, we do not expect that to last beyond 2020. There are a few new players coming into the market (even if their entry was planned before current conditions took hold) and insurers will, we expect, begin posting solid earnings. With a higher rating floor, insurers will have incentive to sell more insurance. Increasing market share becomes a more appealing goal, which tilts the marketplace back toward the buyer.

The alternative capital story line

Another force is alternative capital. In the wake of two big cat years in 2017 and 2018, some observers assumed that investors in instruments like ILS (insurance-linked securities) would get cold feet and flee. There was (and is) a lot of talk about loss creep (i.e., increases in loss estimates after initial reports), which may have come as a surprise to some investors unfamiliar with the slow-moving wheels of insurance claims. To be fair, loss creep from some of the mega losses of recent years has seemed high even to those who expected it. That's largely been driven by business interruption, which is subject to economic forces, many of them local, at work in the aftermath of a disaster. At the end of 2018, when an air of caution emerged and brought downward pressure on the overall capital flowing into the risk business, we could have guessed — and many of us did — that upward pressure on rates would follow.

However, alternative capital is not going away. It's not even retreating to any great extent. Many institutional ILS investors are in it for the long term. There are pockets of interest in the investor community to increase stakes in the property reinsurance industry, given the rising rates. When supply goes up in the reinsurance market, eventually the news is good for insurance buyers as we've seen in the past. Moreover, as modeling capabilities get ever more sophisticated, the ability of the market to profitably underwrite this short-tail line increases — even in the face of systemic climate risk.

Different pressures for liability lines

We see something of a different story on the long-tail side. In liability lines, the losses of yesterday are paid for tomorrow. The marketplace timeline is elongated. In auto, for example, losses having been climbing significantly for at least eight years and premium rates, which have been rising for years now as well, are still catching up. General liability is starting to show signs of distress due to loss severity. Both of these lines impact umbrella programs, which are now in a very distressed state. Similar dynamics are hitting public company D&O.

There are several factors at work — some situational and some systemic. As for the situational, we remain in a period of strong economic growth. That brings with it some risk factors. For example, a strong labor economy means companies rely more on inexperienced workers. Inexperienced workers have a higher rate of accidents, especially in the trucking industry. A strong economy means more vehicle traffic, leading to more accidents, especially when the plague of distracted driving continues to be a factor. A strong economy also leads to higher stock valuations and even higher expectations by shareholders, which contribute to shareholder actions when things go wrong. Another situational factor that is beginning to feel more permanent is the persistence of low interest rates. As we (re)enter a period of "lower for longer" interest rates, insurers cannot rely on investment yields to overcome underwriting losses.

As for systemic issues, many fingers point to social inflation. While there are many aspects of this phenomenon, the key characteristics include a trend to hold corporations and other organizations responsible to a much greater degree for their actions — sometimes for actions in the distant past. There is also a noticeable trend toward holding corporations accountable for societal ills where the corporation may have been an actor or just a bystander. Consider the opioid litigation that is ensnaring many organizations. Consider the reviver statutes that are aimed at clerical abuse, but create a specter of unending litigation, legitimate and spurious, for schools, health care institutions and non-profits when statutes of limitations are abandoned. Combine these considerations with juries that are numb to monetary values in the days of nine-figure incomes for CEOs, sports stars and celebrities. Fear of the jury verdict wheel of fortune is also driving higher settlements. Adding further fuel to social inflation are advances in health care. As medical technology expands, treatments become more expensive, but also more effective. People are living longer, which is a wonderful thing — with a big impact on compensatory damages and benefits that are paid out for a lifetime.

Some are beginning to point toward the need for legislative action to curb runaway juries. While worthy of consideration, there is no indication that will happen anytime soon. In the meantime, liability insurers are demonstrating discipline by raising rates and hedging their bets by deploying much lower limits on any one risk. But as rates climb, capital investors may again prove interested — better potential returns can make even the most complex and risky line seem more appealing. Property will attract more capital. But don't count out liability lines entirely. In the big picture, insurance is still a hyper competitive industry, with ever lower barriers for capital to enter.

Looking ahead to a major risk of tomorrow: climate risk

Like any prediction about insurance, so much depends on what happens: natural and human-made disasters, world events, a U.S. election that could yield big changes in perspective and in the economy. So, what to do now?

We offer two pieces of advice. In the short run, there's work to be done to avoid the worst of the rate hikes. Organizations should allot plenty of time to work with their advisors, provide robust risk information to potential risk takers, consider options across the global marketplace, and take advantage of increasingly sophisticated and user-friendly analytic tools that can help both decision-making and differentiating your risk in the market. Organizations should also continue to invest in risk control measures. The cheapest loss is the one avoided.

In the long run, we offer an additional suggestion. We urge risk professionals to keep an ear to the ground on the topic of climate risk. What's having a major impact in places where increasingly extreme weather has a direct catastrophic impact — places prone to flooding and wildfires, for example — may soon have an impact on every business, and on the way we look at organizational risk. Climate risk is increasingly a regulatory issue, with governments around the world demanding transparency and accountability. Investors are also taking notice of climate risk in their valuations. At some point soon, organizations may need to account for climate risk on their balance sheet. Accounting rules could change to reflect this.

It's daunting stuff. But it's also an opportunity for professionals in the risk business who are schooled in risk measurement, risk mitigation and risk transfer. This is a call to action for risk professionals to become involved and to lead. That's our intention, for ourselves and our clients — our partners in risk.

Looking forward, looking back

Comparing our rate predictions for 2020 to those from our spring 2019 issue, we're looking almost entirely in one direction: up. In fact, this year we're seeing the biggest upward shift in years. The gap between the number of lines reporting increases and those reporting decreases, no change, or a mix of increase and decreases is the largest in memory: 20 versus 7. Perhaps most striking, more than 13 lines we report on are now expected to deliver steeper increases than predicted in the spring.

Here are highlights from our 2020 predictions:

  • Property rate increases are expected to be twice as high as our predictions from the spring.
  • GL predictions moved from the mixed category into the single-digit-increase category for virtually all buyers.
  • Forecast auto rate increases are holding at +6% to +12%.
  • D&O buyers should again brace for significant price hikes.
  • Two lines showed some softening pressure since our spring report: political risks and kidnap and ransom, despite rising global tensions.
  • Several lines are looking at increases topping out at well over 25%.
  • Capacity is available in all but the most challenged cases, but underwriters are demonstrating unprecedented discipline in capacity deployment, especially for risks they are leery of.

The message is not hard to decipher. Buyers are in a seller's market across most lines and we expect that to be the case throughout 2020.

Overall, 19 lines are expected to see price increases, two (international casualty and surety) will see decreases and six will see a mix of both (or flat renewals). These six are fiduciary, environmental, marine, kidnap & ransom, and terrorism insurance. The rest, including property and casualty lines, will see increases.

Market trends: lines facing increases, decreases or a mix*
MR issue Decreases Increases Mix/flat
2020 2 20 5
2019 spring update 2 14 9
2019 2 14 9
2018 spring update 2 10 10
2018 7 7 9
2017 spring update 10 6 7
2017 10 6 7
2016 spring update 9 8 5

* The 2020 figures reflect the addition of personal lines and financial institutions — FINEX as separate entries. The 2019 figures reflect the addition of marine, cargo and senior living/long-term care as separate lines of business. The 2018 spring update figures reflect the absence of marine in that issue; the 2017 figures reflect the addition of international coverage as a separate line; and the 2018 figures reflect the addition of product recall and the subtraction of employee benefits, which are no longer covered in this report. Casualty lines are discussed in one combined report but are included in this table as separate items (GL, auto and workers compensation).

For more insight on how you can prepare for a marketplace in flux, contact your local Willis Towers Watson representative.

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Insurance Marketplace Realities 2020 PDF 14.3 MB
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