Insurance Marketplace Realities 2023 Spring Update – Domestic casualty

Rate predictions: Domestic casualty

	Trend	Range
General liability		-3 % to +5%
Auto liability		+5% to +10%
Workers compensation		-5% to +2%
Umbrella — High hazard		Flat to +15%
Umbrella — Low/moderate hazard		Flat to +7.5%
Excess liability — High hazard		Flat to +5%
Excess liability — Low/moderate hazard		-5% to +5%

• WTW’s marketplace predictions incorporate various relevant datapoints including trailing figures like average rate changes and insurer profitability as well as forward-looking data such as interest rate expectations and insurer sentiment.
• Over the last two years, actual rates achieved in the marketplace fell below the mid-point of our guidance 83% of the time (20 out of 24 quarters) with twelve quarters where actual rate performance was equal-to or better-than the low-end of the expected range.
• Our takeaways from these unexpectedly strong outcomes are twofold:
  • The two-tiered market remains: With the start of 2021, WTW began to describe the casualty marketplace as “two-tiered,” meaning easing conditions for vanilla exposure and loss-light risks and ongoing difficulty for our clients with inherently risky operations, heavy fleets/products and/or losses, or those who have not deployed risk mitigation, safety controls, governance, etc. By anchoring our renewal submissions in risk differentiation – describing in detail why our clients should be considered a superior risk, with supporting analytics and documentation – WTW clients have consistently benefitted from our value-added services. In sum, the current marketplace rewards brokers and insureds that can substantiate the reasons why their particular risk should not be treated like “just another account.”
  • Despite liability and profitability concerns, casualty remains attractive: As a line of coverage, auto liability has steadily contributed to underwriting losses over the last decade. General liability has similarly weighed on profitability, albeit to a lesser degree. Despite these trends, the buoyancy of the workers’ compensation market, the recent benefit of an improved interest rate environment and the relatively unattractive property and cyber marketplaces have combined to draw insurer interest towards primary casualty and improved outcomes for our clients. The confluence of these effects has allowed our brokers to deliver more favorable results than expected.

The current landscape rewards insureds who embrace “hard market fundamentals.”

• We described in our initial Insurance Marketplace Realities report for 2023 how “forced” program restructuring has curtailed since the peak of the hard liability market in 2020. Many umbrella attachment points have already adjusted to the new normal, however some insurers lagged in their approach to rising claim values and delayed “forced restructuring” by not increasing the average attachment point until 2021 or 2022.
• In evaluating auto liability performance over that timeframe, certain marketplace trends appear across WTW’s client base:
  • Most insureds experienced stable but rising costs, with roughly 4 out of 5 WTW clients making no change to either the limit or retention on their auto liability program from 2020 to 2022 and a three-year cumulative rate change of +24%.
  • When higher primary auto liability limit attachments (to umbrella) were required, insureds that embraced hard marketplace dynamics excelled – WTW’s clients that increased their own risk taking alongside the higher primary limits purchase beat the marketplace average by 4%, albeit assuming a higher loss volatility.
  • Meanwhile, insureds that made no retention adjustment were penalized with a fixed-cost surcharge of 21% on average.
  • Even when no primary limit adjustment was necessary, a subset of WTW clients proactively increased their risk-taking during the seemingly unending hard auto liability marketplace and reduced their exposure to the ongoing, unfavorable (re)insurance trends. In doing so, these insureds “beat” the marketplace by 12% and minimized their overhead premium spend.
• While we would not suggest blindly increasingly retention levels to avoid unfavorable insurance marketplace trends, this rearview analysis reveals a clear opportunity for insureds with confidence in their controls and predicable loss experience – now is the time to reconsider your approach to auto liability risk retention, particularly when faced with demands for higher primary limits.

Workers’ compensation costs in today’s inflationary environment

• In today’s inflationary environment, there is concern that medical inflation could rise at similar levels as CPI, impacting workers compensation rates and pricing. The National Council on Compensation Insurance (NCCI) has published a recent review of medical cost inflation and identified two factors driving changes in medical claims costs: the price of medical services and utilization (the mix and number of services provided to an injured worker). NCCI’s most recent medical data shows that drug costs are declining, physician costs are up slightly, and facility costs are rising in the WC system.
• Between 2012 and 2021, countrywide WC medical costs increased at 2% per year. For 2022, CMS actuary projects the PHC (Personal Health Care Index which is a mix of the CPI-M & PPI) to run higher at 3.7%, and beyond 2022, something in the 2.5% to 3% range.
• Breaking this further down:
  • Facility services:
    • Facilities were the largest contributor to WC medical cost changes.
    • WC medical costs increased 2.0% annually on average from 2012 to 2021 and more than 60% of that growth came from facilities.
  • Physician services:
    • Physician-paid costs per claim grew moderately from 2012 to 2021 at about 1.5% per year.
    • Payments for physician services generate approximately 40% of WC medical costs.
• While medical inflation will continue to be a concern for insureds and insurers alike, these figures mark a steady increase in costs over time, rather than a headline-grabbing 9%+ inflation figure seen elsewhere. To the extent that medical inflation continues to increase at rates higher than the last decade, it appears more favorable interest rates and ongoing profitability levels in the industry should sufficiently offset these types of rising costs – we expect ongoing favorable trends for workers’ compensation as a result.

Disclaimer

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 entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).