The year 2019 marked a changing tide for the casualty insurance market as loss trends continued to deteriorate from prior years. Insurance companies responded with reduced capacity, conservative underwriting practices, and increased rates, causing a broad firming in the primary liability and umbrella/excess liability marketplace. This firming trend continued well into 2020, with expectations that things would remain unchanged likely into 2021. The umbrella/ excess market during each quarter of 2020 experienced double-digit—and higher—rate increases and reductions in limits. Insurance companies began reducing limits in the umbrella/excess market in 2019. At that time, it was quite easy to obtain limits up to $25 million. Throughout 2020, capacity to get limits in excess of $10 million were extremely hard to obtain, and in some cases, $5 million was the maximum. Actuaries are taking a close look at the origin of losses, which has resulted in only a handful of carriers ready to take the lead layer and asking for significant premiums to do so.
The reduced limits in the excess market, however, do not come with a corresponding decrease in rates, causing more insureds to cut back on the limits they purchase. Each umbrella renewal needs to be restructured in lieu of working with the incumbent insurance company on the renewal pricing based on the same layered structure. This often involves introducing new insurance companies, reaching out to additional markets to get the most competitive terms, and pricing to structure the placement. In addition, COVID-19 has put additional pressure on the need for rate adequacy. Insurers and reinsurers are experiencing a near-zero interest rate environment and are unable to offset underwriting losses with investment income. Poor results are forcing carriers to remain committed to higher rates. Carriers are also adding pandemic exclusions to primary and excess policies moving forward.
WHAT’S DRIVING THE MARKET?
The firming casualty market is a result of deteriorating loss trends due to an unprecedented number of massive claims. Catastrophic liability losses stemmed from automobile accidents, active shooter events, personal injury lawsuits, construction defect claims, opioid casualties, sexual assault and molestation claims, and wildfire litigation, resulting in unsustainable loss ratios and insurance companies looking to obtain adequate rates. “Nuclear” verdicts driven by social inflation, for example, have hit $250 million-plus in high-profile cases, driven by an aggressive plaintiffs’ bar, litigation funding, and sympathetic juries with anticorporate sentiments.
The commercial auto liability market has predominately been responsible for cutting into insurance company profitability and driving up excess rates. According to data collected by Advisen, between 2016 and 2019, the number of catastrophic auto liability claims (characterized as having a reported cost of $15 million or greater) increased 87 percent. In response, insurance companies have exited some markets, overhauled their books of business to meet stricter underwriting guidelines, or made adjustments to pricing and coverage terms to reflect their exposures and prepare for future losses. Insureds with an auto exposure are facing higher primary auto liability rates and subsequently higher excess rates, with the excess more difficult to place due to fewer insurance companies offering policies.
COVID-19 IMPACT ON INSURANCE
Legal professionals overwhelmingly cite employment liability as the biggest legal risk insurance companies are facing related to the global health crisis, with many readying themselves for employment litigation they believe is in the pipeline. There are a lot of rules that come at employers from a lot of different angles, and it takes a lot of effort to get it right. Even when employers do get it right, unfortunately there are employees who are going to sue anyway. Employment issues are always a disproportionately large portion of the risk in any organization, but that is especially true in a situation where so many people have been furloughed or laid off. New types of grievances may emerge. Employers are concerned that employees who are desperate might be looking for ways to file claims. Plaintiffs’ lawyers have become very creative in looking for ways to come up with new claims with so many people out of work.
The availability of a vaccine will present new challenges for businesses and new benefits and risks to balance. Some employees might be unhappy if there is a mandate that employees must get a vaccine. Some employees, quite the opposite, may be unhappy if there isn’t a mandate because they want to make sure everyone around them is vaccinated. Employers most likely will be able to require their staff to get vaccinated barring any prohibition in state or local laws. Company leaders will need to make sure they’re also evaluating special circumstances, such as laws and regulations covering disability and religious bias. +