Toward a new equilibrium
Most agree that 2020 will be remembered as an annus horribilis, to borrow a phrase from Queen Elizabeth. The coronavirus continues to hurt our populations and our economies. It’s also exacerbated the hard insurance market, now 21 months old, which has proven to be one of historic proportions. In our last two issues we began with the same question: How long will it last? The first time, we were referring to the hard market. The second time, the pandemic. To answer both questions, we still cannot offer a precise end date, but we can say that both will end, and both will leave indelible changes.
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Commercial lines insurance pricing survey (CLIPS)
Over the past several decades, hard market cycles have occurred but have been somewhat limited. They were market responses to insured catastrophes, years of declining prices, and low interest rates that depressed insurer investment income. Those hard markets were typically confined to an insurance line or two and had limited geographic impact. We have to look back to the defining hard market crisis of the mid-1980s to see market conditions of the proportions we are currently experiencing — one of double- and triple-digit rate increases in most lines of business and dramatically reduced capacity in key lines.
This is no trivial comparison. The hard market of the mid 1980s, and the systemic changes in corporate risks — primarily asbestos and pollution liability — that caused it, gave rise to many structural changes in our industry: the rise of Bermuda as an insurance center, the dramatic growth of captives, fundamental changes to Lloyd’s of London, and, one could argue, the launching of alternative risk financing that has produced such products as catastrophe bonds, insurance linked securities and parametric trigger programs.
The current hard market may have been triggered by loss events — namely the natural catastrophes of 2017 and 2018, by years of declining prices, and by historically low interest rates. But what has made this hard market feel like the hard market of the mid-1980s has been the significant withdrawal of capacity in response to changes in risk exposures. The demonstrable increase in the frequency and severity of natural catastrophes across the world appears to be systemic — perhaps driven by climate change. The persistent increase in man-made property damage losses — fire, boiler and machinery, etc.— is also problematic and probably caused by short-sighted business practices, but those can be addressed. The increase in severity for liability losses of all types — auto, general liability, product liability, D&O, employment practices, etc. — is crudely attributed to “social inflation.” Whether one likes the term or not, the increase in losses are real, and they are systemic.
Some have pointed to the robust capitalization of the P&C industry and asked, “Why do insurers need increased rates if their capital is sound?” The answer is that the absolute, inflation-adjusted size of insured losses — property, business interruption, umbrella and D&O particularly — have increased faster than the capital base of the industry. In other words, insurers need more capital to absorb this increase in volatility. Remember, this volatility exists independent of the insurance industry. If insurers cannot absorb the volatility, it will fall back on businesses and other organizations.
Mark Twain reportedly said that history might not repeat itself, but it sure does rhyme. The hard market of the 1980s ended due to the imposition of asbestos and pollution exclusions and a subsequent influx of new capital. Within three years of the start of that hard market, rates dropped off precipitously. It seems unlikely that the P&C industry will impose climate change or social inflation exclusions to address the current systemic changes. However, insurers will adapt, new capital will flow into our business (as it already has), capacity will return and prices will moderate. We just shouldn’t expect capacity and pricing to return 2017 levels — at least not quickly.
So how will we adapt this time? In a word, analytics. Analytics and data-driven tools are increasingly changing the way both buyers and sellers approach the negotiating table when it comes to risk transfer. Insurers are using analytics to identify macro trends in losses and the drivers of those losses, and to predict the potential impact of emerging risks. The unprecedented underwriting discipline characterizing the current hard market is bolstered by such quantitative analysis.
Over the past decade we’ve seen a competition between underwriting and data science. Guess what? They both won. Underwriting judgment has been and will remain fundamental to our industry, it is the essence of risk taking, but judgment alone hasn’t always proven dependable. Judgment built on a foundation of analytics is much more sustainable. This sustainability will enable the P&C industry to find a new equilibrium between premium and losses, to attract new capital and to remain relevant. Our advice to insurers during this difficult transition to a new equilibrium is to demonstrate to clients that relationships still matter. If we don’t want insurance to be considered a commodity, we shouldn’t treat our clients like commodities.
Risk managers, insurance buyers, and their brokers are responding in kind with analytics. In the pages that follow you will see some stark predictions about rates in 2021. However, our experience in this hard market is that there is a wide range of results; renewal results are not huddled around the mean. This means underwriters are underwriting and there is the opportunity to differentiate your risk. While underwriters look at mega trends, good risk managers and brokers use granular analytics to demonstrate where a prospective insured differs positively from those trends. Where an insured differs negatively, a good risk manager, with a consultative broker, can devise a risk management plan to remediate the deficiencies and articulate that plan to insurers.
Strategic risk managers who embrace analytics in 2021 should start with a fresh look at their organization’s tolerance for risk. Every organization has been changed by the pandemic. Some positively, many negatively. Exposures have changed, financial wherewithal has changed and, no doubt, risk tolerance has changed. The strategic risk manager, armed with a fresh understanding of the organization’s risk tolerance, can use analytics to sort through retentions, limits and alternative risk financing structures and determine the value trade-offs of each. The strategic risk managers in 2021 will be their organizations’ “first underwriter,” determining which risks to retain and which to transfer. He or she will also be a trader of risk, making smart, real-time buying decisions based on risk tolerance and point-in-time market conditions. Finally, just as strategic underwriting is a combination of analytics and judgment, the strategic risk managers will not only use analytics, they will also tend to their strategic insurer relationships, since these have proven, in most cases, to be assets in this hard market.
The impact of COVID-19 on the P&C industry is proving to be a slow-moving crisis. Last spring, we offered an estimated range of $32 billion to $80 billion for insured losses arising from the pandemic. At this point, it looks like the upper end of that range may be where we land. There is cautious optimism that the final tally will not be much higher, but there remains uncertainty about the coverage litigation that is still in early stages. That coverage litigation, which involves hundreds of lawsuits across the U.S., centers on business interruption policy language, as we expected. Judgments against insurers that survive appeal could change from a significant, but manageable catastrophe into a solvency threat. All eyes will be on the courts during 2021.
We think the current hard market conditions will continue throughout 2021. You’ll see in the pages that follow that the most challenged lines are property, umbrella, D&O and fiduciary with cyber not far behind. (NB: mid-market companies, particularly those that purchase in the “package” market are experiencing more moderate rate increases than large organizations.) A year ago, we forecasted that the property market would become more predictable by this time, but rates would continue to climb. This has proven true, although some industry sectors, such as manufacturing and food processing, continue to experience unpredictability.
Barring another major insured catastrophe, we expect that property rate increases by mid-2021 will begin to moderate since underwriters will have had two cycles of rate increases by that point. A year ago, we also predicted that umbrella and D&O would be challenged and unpredictable until mid-2021. While both lines became more challenging than we expected, we do maintain that by mid-2021, the markets for these risks should be more predictable, although rates are likely to continue climbing. We also expect that the capacity from new ventures now coming online will have some moderating impact on these lines by mid-2021, especially D&O. In the pages that follow, we offer line-by-line forecasts of what risk managers can expect in 2021.
One more thought about analytics. Analytics can also play a role in making our industry more relevant to world business than it has been for decades. The pandemic and the terrorist attacks of 9/11 are just two grim reminders that black swans show up. As mentioned above, external volatility is growing globally. As we are seeing with climate risk, our industry has the chance to play a meaningful, even a leading role in measuring, quantifying and addressing emerging risks. We can advise business leaders about the sources of volatility and our advice will be backed up by credible analytics. Similarly, underwriters can use analytics and judgement to make the case to capital providers, both traditional and alternative, that they can and should meet the demand for risk transfer and advance the industry’s traditional role of enabling global commerce.
As we look to the future, we are confident that analytics, judgment and relationships will bring this difficult market to a new equilibrium that provides customers with protection from emerging risks and growing volatility, and keeps the underwriting community relevant to world business. We may not see a precipitous return to soft pricing, but we will see moderation and perhaps some welcome sustainability — and increased relevance.
For the second issue running we reach an unfortunate landmark for buyers. For the first time, in every line except one, most buyers can expect rate increases. In most cases, the rate increases predicted for 2021 surpass those of last spring. In the few cases where rate reductions were considered possible last spring, this time the best outcome buyers can hope for is flat renewals — with the one negligible exception being kidnap and ransom, where our prediction is ‒5% to +5%. While our line-by-line reports offer strategies for getting the best possible results in the current marketplace, the assembled predictions tell a difficult, if unsurprising story for buyers in this hard market.
In workers compensation, life sciences (new this issue), terrorism, product recall and alternative risk transfer (reporting rate predictions for the first time), flat renewals are possible, though increases will greet many buyers.
In a handful of lines (aerospace, environmental, marine, trade credit, personal lines) rate predictions were no worse than in the spring. In every other line (except kidnap and ransom, which has seen exposures abate due to the travel restrictions imposed by the pandemic), higher increases are expected in 2021.
Here are highlights from our 2021 predictions:
Like the times we find ourselves in, these predictions again are pushing the envelope of our previous experience. One thing is certain: the insurance marketplace will continue to be challenging in 2021.
As mentioned above, in five lines, predictions allow for the possibility of flat renewals, though many if not most buyers in those lines can expect some kind of increase. Hence the stark numbers below.
| IMR issue | Decreases | Increases | Mix/flat |
|---|---|---|---|
| 2021 | 0 | 29 | 1 |
| 2020 spring update | 0 | 23 | 5 |
| 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 spring update figures reflect the addition of managed care errors & omissions as a separate line of business. The 2020 figures reflect the addition of personal lines and financial institutions 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, umbrella/excess, auto and workers compensation).
For more insight on how you can prepare for a challenging marketplace, contact your local Willis Towers Watson representative.
Recommendations to weather both the hard market and economic turmoil.
Alternative risk transfer deals, whether simple, novel or innovative, supported by robust analytics and negotiated over realistic timeframes, fare better.
As economic activity stabilizes and the hard market continues, we expect the rush to form and re-engineer captives will continue.
Until underwriting profitability returns, expect little relief in rate, with continued pull-back in sublimits and tightening of policy wordings.
Due to various factors continuing to negatively impact loss trends and underwriting profitability, the commercial liability marketplace remains hard.
The market for international casualty has begun to see significant impact from recent social and economic trends.
Pressure on manufacturers to focus on safety has never been greater as retailers ban unsafe products and rely less on regulators.
Given the dramatic increase in ransomware incidents, organizations should be proactive in assessing their cyber resilience.
Rates, terms and capacity will continue to see upward pressure well into 2021, yet we see signs of activity that could lead to stabilization.
The Employment Practices Liability market has shifted to a hard market where underwriters are focused on many priorities.
Professional and technology service organizations should be prepared to discuss with brokers and underwriters how they have been impacted by COVID-19.
Although social engineering has been around for several years, lately it has garnered greater attention with more severe and frequent losses.
Fiduciary liability turns sharply harder as the transition to a new administration is likely to escalate fiduciary risks.
The financial lines market for financial institutions (FIs) has hardened and we expect rate increases for H1 2021.
Insurers continue to seek financial recovery and long-term profitability.
In the construction industry, effective use of analytical tools will be critical to driving sound risk management decisions.
Expect hardening to continue for downstream energy and extreme market hardening for smaller buyers in upstream energy.
Breakthrough innovations in environmental analytics are creating opportunities for buyers.
The impact of the hard market and pandemic is still reverberating in the HPL/GL marketplace. Every aspect of insurance is under review and subject to change.
The special risks insurance markets continue to reduce their exposure to cyber extortion events.
The pandemic is unlikely to have a significant impact on rates or terms in the immediate future, but many product liability claims may be coming.
The market is hard: Significant rate increases, insistence on increased retentions, capacity problems and coverage restrictions.
Conditions remain hard for cargo. For hull, 2020 was one of the hardest marine markets in more than 20 years.
Insurance carriers are taking aggressive actions in a drive toward profitability. Buyers need to be creative in finding solutions.
Traditional political flashpoints compounded by COVID-19-induced financial distress has led to elevated risks.
The emergence of COVID-19 has instigated a massive market disruption in all facets of this sector.
Despite the severity of the economic downturn, the global surety market is stable.
Increased civil unrest driven by political and ideological polarization puts property coverages under scrutiny.
Having a trade credit policy in place provides an oasis to insureds who procured the protection before the economic downturn.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.
| Title | File Type | File Size |
|---|---|---|
| Insurance Marketplace Realities 2021 | 8.7 MB |
