As insurer balance sheets were impacted by severity in losses and subsequent premium needs, both clients and insurers needed to change limits and structures to absorb the impact.
Rate predictions: Domestic casualty
+1% to +4%
+4% to +7%
-3% to -1%
Excess workers compensation
-2% to +5%
+4% to +8% (+10% to +15% for heavy auto/large fleet risks)
+2% to +7% (10%+ for heavy auto/large fleet risks)
As the frequency and severity of nuclear verdicts continue to increase, so has the use of supportive lead program augmentation. In analyzing this trend from 2015 to 2023, WTW has found that 55% of WTW’s large and complex clients currently purchase umbrella liability and primary liability from the same carrier (from 37% in 2015), representing a 49% increase in this structure alternative. Congruently, WTW has also found that 44% of supportive lead structures have reduced umbrella limits over the same period, from an average limit of $20.1 million to $11.2 million today.
According to a recent study by the U.S. Chamber of Commerce Institute for Legal Reform published in September of 2022, the median nuclear verdict increased 27.5% over a ten-year study period. The Institute found that while the median verdict was $20 million, the average verdict was much higher at $76 million due to outsized nuclear verdicts.
These verdicts are often insurable and funded by umbrella/excess liability insurance, causing a constriction in excess liability capacity and a substantial increase in rates as seen in Q1 of 2021, with an average umbrella and excess rate increase of 58% and 72% respectively (WTW CIA data).
By 2021, global litigation funding saw an estimated $17 billion invested, more than half of that investment being in United States litigation. Plaintiffs’ lawyers are incentivized to pursue mass tort litigation with a substantial return on investment from hedge funds, private equity firms, and other companies. These law firms greatly contribute to the increasing number of nuclear verdicts from jury trials. The insurance industry can expect the frequency and severity of litigation to continue. Insurers are contemplating this in their attachment point and lead capacity strategies.
The popularity of supportive lead structures benefits clients and insurers in several ways, leading to a more sustainable insurance mechanism as follows:
Portfolio premium: By writing both the lead umbrella and primary liability, insurers benefit from additional premium to pay covered losses.
Coverage and claim concurrency: Clients benefit from having insurer alignment on primary and lead umbrella placements.
Excess pricing insulation/stabilization: Excess liability insurers typically price layers based on “rate relativity.” Portfolio financing can allow insurers to be more competitive on the lead umbrella pricing, allowing more competitive rates up-the-tower, often to the tune of seven-figure savings in the supportive lead structure change.
Reduced exposure to loss: By systematically reducing umbrella capacity from the once-popular $25 million lead block, to $10 million or $15 million today in conjunction with raising primary attachments, insurers are willing to add risk transfer in the primary limit, providing an overall reduction on limit exposure and insulation from nuclear verdict impact.
Lead umbrella carriers who write supported leads typically allow for lower attachment points and lower premiums than those who write unsupported lead umbrellas. From 2015 to 2017, supported leads didn’t correlate with low attachment points. Starting in 2017, the market has been demonstrating significant benefits of pairing the primary and lead to support much lower attachment points.
Automobile liability (AL) average attachment points have steadily increased from $1.6 million supported and $1.3 million unsupported in 2015 to $2.2 million supported and $4.9 million unsupported in 2022-23 (WTW CIA data).
Carriers are mitigating their respective AL combined ratios over 100% by simultaneously increasing primary retentions and employing both facultative and treaty reinsurance as they move up primary attachment points.
Similarly, general liability (GL) average attachment points increased from $1.5 million supported and $1.4 million unsupported in 2015 to $3 million supported and $4.2 million unsupported in 2022-23 (WTW CIA data).
Corresponding lead umbrella premiums increased from 2015 to 2018-19 for both supported and unsupported positions from a range of $230,000 thousand to $300,000 thousand. Pairing the primary and lead didn’t have an impact on premium until 2018. Then, the average supported lead umbrella premiums took a reasonable climb from $493,000 thousand in 2018 to $593,000 thousand in 2022-23. Meanwhile, average unsupported lead umbrella premiums jumped from $470,000 thousand in 2018 to $758,000 thousand in 2022-23 (WTW CIA data).
Industry spotlight — Healthcare life sciences umbrella insurers catch up to traditional casualty marketplace.
As part of WTW’s ongoing emphasis on industry-specific market insights, we analyzed our proprietary placement database to evaluate how insurers specializing in healthcare/life sciences (HC/LS) liability responded to worsening auto liability claim trends. While both “traditional” umbrella insurers and those with HC/LS expertise have steadily increased their underlying combined single limit (CSL) requirements since 2018, the HC/LS marketplace consistently lagged behind the attachment point needs of all other industry umbrella insurers. Over the four-year period spanning 2018 to 2021, WTW’s HC/LS clients benefitted from primary auto limit requirements that were 10% lower than the rest of the marketplace. This benefit, potentially attributable to HC/LS insurers’ focus on pandemic-related liabilities, has since been eliminated. Beginning in 2022 and continuing in 2023, the HC/LS marketplace has placed more direct emphasis on attachment point adequacy for auto liability and are now aligned with the rest of the marketplace with average primary limits cresting above $2 million.
Around the country, the plaintiff bar is seeking creative ways to obtain larger damage awards. Frequently, this will include claims for punitive damages, which are intended not to compensate a specific injury but to punish a wrongful actor and deter future conduct. In a July decision, the Pennsylvania Supreme Court affirmed an award of punitive damage against multiple defendants. This decision was important because it set the precedent that a combined punitive damage award can exceed a 10:1 ratio when compared to the compensatory damages awarded a plaintiff. The court also ruled that the potential harm that could have resulted from the wrongful conduct can support punitive damages.
While this case is only controlling law in Pennsylvania, attorneys in other states are likely to pursue similar strategies in seeking punitive damages from multiple defendants. It also underscores the need for clients to consider their exposure to punitive damages and the various ways such risk can be addressed, including through most favored jurisdiction endorsements, punitive wrap policies or offshore coverage.
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).