Interesting. Fluctuating. Moderating. Fun.
Those are the words that Patrick M. Gallagher, chief executive officer of Gallagher Global Brokerage for the Americas, used to respond to a question about the state of the insurance marketplace during a virtual conference hosted by Safety National last week.
Not everyone participating on a panel of broker and carrier executives agreed with Gallagher’s assessment that the market is fluctuating rather than hard. Another panelist, Mark Wilhelm, CEO of Safety National, seemed to suggest that the softer market in workers’ compensation could soon come to an end as insurer claim costs escalate.
Also participating on the panel were Cynthia Beveridge, president of Aon Broking, and John Glomb, CEO of Philadelphia Insurance Co. The panel was moderated by Mark Walls, vice president of Communications and Strategic Analysis at Safety National.
First up, Gallagher explained his view that the current environment is not a “standard hard market.”
“Let’s be clear, heading into COVID, we were heading into a standard hard market [where] everything’s up,” he said. “The spike in premium increases was going to be just as high if we didn’t get COVID, where exposure bases, sales, payroll, that type of thing, moderated it.”
Observing that hard markets, historically, don’t last very long, Gallagher said that COVID moderated the amount of needed rate that carriers could get. “Normally, right now we’d be thinking we were heading toward a softer market” after carriers took corrective actions. After getting a few years of good growth under their belts, they’d start to aim for market share again, he said.
“But that’s not what the data is showing us at the moment. What the data is showing us is this won’t be standard hard and then soft,” the broker executive said, explaining that carriers, which have good data by line of business and geography, “are being much more selective about which accounts they know they want to write and which accounts they’ve known they haven’t wanted to write.”
He continued, “We’re in a fluctuating or moderating market that I’m not sure we’ve seen to this extent.” Explaining what he means by fluctuating, Gallagher said, “You’re going to have a client that’s getting a really nice decrease on certain lines of their cover and a really big increase on other lines. Or you’re going to have manufacturers in the Midwest that are seeing nice decreases while you see manufacturers in the Northeast getting increases.”
He predicted that this unusual environment will persist over the course of the next year or year-and-a-half.
‘Different Way Forward’
Also not standard is how clients are approaching the market, according to Aon’s Beveridge, who sees insurance prices decelerating or moderating for all lines other than cyber and E&O. “Clients are demanding a different way of going forward and really thinking through solutioning.” For cyber, as an example, “it’s not just a service and an insurance product that we’re trying to sell them. [Instead], we’re trying to provide them with an evaluation and exploration of ideas and other ways to deal with their risks,” she said. “What we’re really seeing and will continue to see are alternative risk mechanisms…Whether it’s using captives, or using different deductibles, different tower approaches, the clients are really looking for idea generation rather than just the standard.”
Gallagher said, “It’s going to be a really difficult but interesting time to navigate through” as brokers tell their clients that there’s good and bad news for them. “Your D&O is up. Your package is down. And here’s what we need to do to mitigate that.”
“I don’t think the old days of ‘I got four quotes, so let’s choose this one because it’s the best’ are going to work. Clients expect more. Clients expect that you are going to be able to say, ‘The right price for your deal is X. And I’m going to go out and find a carrier that’s going to help us get as close to X as possible.’”
Beveridge sees one facet of the hard market continuing for sure: The tightening of the wording for contract certainty is definitely in play, she said. “I think that we’re going to see that come through the reinsurance market [during] 1/1 renewals and then flow back into the insurance market as well.”
“That’s not gone. I don’t think that will moderate. We’ll still see issues around silent cyber and even silent terrorism,” she said, referring to areas “where wording needs to be shored up or understood for both sides of the fence—the clients and the insurance carriers.”
Also seeing the potential for contract changes in the near future, Philadelphia Insurance’s Glomb, whose company is a big writer of nonprofits and sports camps, focused on possible insurance contract changes to deal with the introduction of reviver laws in some states. Reviver statutes allow look-back windows for abuse claims where statutes of limitations had been previously exhausted, which bring uncertainty to carriers who wrote occurrence-based policies. “Claimants had lost their opportunity to bring claim, and the window is opened up for them to bring claim now, because [states] moved the goalposts…That puts a tremendous amount of pressure on what the right price is for abuse,” he said, also raising questions about whether the industry, as a whole, is carrying appropriate reserves to pay for those losses in prior years and whether or not there’s going to be reinsurance available in the future.
Referencing Beveridge’s comments, Glomb asked, “Is a real intentional and deliberate shift to claims made from occurrence important? Is that something that the market will accept? Is that something that we just have to pull the market in that direction?”
Also on Glomb’s mind was the condo collapse in Surfside, Fla., in late June. “The law and the zoning requirements were that every 40 years a condo has to be updated and made sure that they’re up to code. This collapse happened, and they were on the verge of getting ready to prepare for the renovations to ensure that everything was stable…And then overnight the goalposts were moved to 30 years instead of 40 years.”
“Common sense would tell me that a cottage industry of litigation plaintiffs’ attorneys would follow suit. And the litigation environment is already robust,” he said, predicting that Florida will be a new hotbed of opportunity for lawyers.
More generally, Glomb and Wilhelm said that claims ranging from slips and falls to nuclear verdicts and property catastrophes are keeping insurance prices high.
“While there’s still much uncertainty as to exactly what’s lying ahead, I have tremendous confidence that rates will continue through 2022,” Glomb said. “The industry will again adjust and continue to raise rates on all the lines.”
“Simple increased frequency, as well as severity of catastrophic claims due to winter weather, wildfire, hurricanes, floods, defines the year of 2021,” he said. “What that does is it causes an increase in construction costs, a run on contractors and therefore the need—and the ability—to get rate on the property line of business,” he said, noting that cost inflation is also affecting non-catastrophe attritional property losses.
“The market continues to be hard. Yes, rates are decelerating, but broadly, the market is still able to allow for significant rate on really all lines of business. More routine slip and fall cases, that years ago were settling for a fraction of what they are now, [are] helping and allowing us to get rate in GL and PL while allowing us to continue to cut capacity in general.”
“I will say that this year that has been less prevalent, has been less available, than it was last year. But it is still available,” he said, going on to highlight the nuclear verdicts that insurers were dealing with before COVID prompted court house lockdowns.
“It’s intuitive that after all the social and political unrest that we’ve seen over the last 18 months, and as courts are now beginning to open, that we can expect that the verdicts and the inflation in [liability] losses will continue,” he added. “I think a good argument can be made that [verdicts] will actually be even more nuclear than they were” prior to COVID.
Wilhelm said every line was being affected either by social inflation or climate change before the pandemic. He predicted that litigation funding that fueled some lawsuits prior to COVID will continue as will inflation in medical costs.
“Medical is 60 percent or so of workers ‘compensation, perhaps even more, and workers’ compensation costs are probably going to stop dropping and go the other direction for that reason. [There’s] just lots of uncertainty for underwriters and actuaries in trying to set rates and predict profitability,” the excess workers’ compensation insurer executive said.
In workers ‘compensation, claims “severity has only gone up because of costs associated with medical technology,” which helps to keep people alive, he said.
Later in the session, he reported that Safety National alone has incurred about 600 COVID-related death claims reported by employees in essential industries. Those fatalities also involved huge sums of medical payments for intensive care treatments lasting for weeks and months.
Safety National and other excess workers’ compensation carriers are also particularly impacted by something beyond loss costs: low interest rates on investments. “From a carrier’s perspective, so much of our profit scenarios are based on investment income, and that’s just been decimated. We’re half of what we were just a few years ago in terms of returns we can earn. And that’s a major impact to retention carriers that expect to take money in now and pay it out, perhaps years later.”
Looking ahead, Wilhelm also noted that new legislation continues to be introduced that would make an adverse reaction to a COVID vaccine covered by workers compensation if the employer required it.
Wilhelm concluded, “I think everything still points to higher rates continuing, unfortunately, for the insurance buyers in the audience. As my colleagues have said, they’re probably going to be moderating in some cases, but maybe not in other cases.”
Again addressing the buyers of insurance, Safety National’s CEO said, “I know you probably didn’t want to hear so much about our problems. We know you have your [own] problems, and hopefully hearing about our problems, you’ll understand positions we’re forced to take and some of the reasons behind that a little bit better.”
“Believe me, we don’t forget that we’re here to serve you ultimately,” he said.