The
Hard Mark
How did we get here
The industry considers the last truly hard market occurred as a partial consequence of September 11, 2001. This firming mostly affected property and workers compensation – and to a lesser degree, general liability. Those of us who produced during that period may recall rates on renewals sometimes exceeding 100%, yet still held on to the account. Our 2020 hard market may prove that the 2001 placement challenges were a momentary blip, as the current partially pandemic driven economic and loss conditions is projected to outlast the 2001 hardening. This generation of hard market is hitting coverage lines across the board, evidencing rate pressure and capacity restrictions. It started well before the Pandemic came on the scene, though COVID-19 certainly accelerated the ramp up. In professional services lines the hardening probably started two years ago, focused on the Nursing Home/Assisted Living/Long Term marketplace. In 2018 carriers started pulling out of these lines and by the second quarter of 2019 brokers had lost more than half of the available markets. Currently there is just a handful or two of markets available for these classes and its shortages have expanded to include any risk with “residential treatment exposure”. We also saw the beginnings of the hardening of Management Liability, including Directors & Officers and Employment Practices coverages, during 2019. Property and Casualty started seeing hints of hardening in 2019 as well, with reinsurers pushing up treaty renewal costs.
What started driving this hard market if not COVID-19?
In part – Social Inflation. Social inflation is defined as “the phenomenon of unexpected rising insurance claim costs because of societal trends and views toward litigation.”1 More simply explained, it’s a societal view that insurance companies are faceless organizations who have deep pockets, coupled with claimants (fueled by trial lawyers) feeling like they are entitled to lottery-sized payouts. This “lottery mindset” of trial lawyers is not new – what is relatively fresh are venture capitalists creating a financing
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insight
mechanism to allow trial lawyers to fight longer and harder for supersized payout awards. Traditionally trial lawyers got paid primarily on a contingency basis, where they would receive 25-35% of a settlement- but the law firm would bear the expense burden until settlement or dismissal was reached. With most law firms unable to bare the financial drain inherent in long and protracted legal fights, they would generally look for opportunities to settle for reasonable amounts. Enter Venture Capital (“VC”) funds into the litigation game the last couple of years, and now law firms had potential access to financial resources to extend a plaintiff’s fight, and afford to push for much larger settlements. These essentially stall tactics, drive up legal costs which defendants continue to accrue, extend psychological stress for enterprise management, and create core business distractions. These tactics have been especially prevalent in employment practices cases in the wake of the #MeToo movement, particularly where public opinion would likely not fall on the side of defendants. This strategic trend started to appear in the latter half of 2018 and rising settlements started to alarm underwriters and risk managers. The Social Inflation conundrum also started driving up loss costs in the nursing home / long term care marketplace. Fast forward to pre-pandemic 2020, and these litigation trends had spilled over into many other traditional classes of liability coverage. Hardening property rate increase stem from something different for the most part. Property rates began to harden in late 2019 due to diminished capacity in both the US and UK markets due to multiple cat claims (wildfires, hurricanes, etc.) in recent years. The hardening started attacking traditional Excess and Surplus Lines classes (trucking, lessors risk, buildings with large amounts of exposed roofs habitational, older buildings,) that the standard markets had gained market share in during the soft market years. Rate pressure accelerated in 2020 when COVID-19 saw buyers bringing business income claims
january 2021