The Commercial Insurance Market 2 0 2 0
RE P O RT
2020 State of the Market Report
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Table of Contents
EXECUTIVE SUMMARY
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PROPERTY 5 GENERAL LIABILITY
6
COMMERCIAL AUTO
7
WORKERS’ COMPENSATION
8
UMBRELLA AND EXCESS
9
DIRECTORS AND OFFICERS
10
EMPLOYMENT PRACTICES LIABILITY
11
CYBER 11 CONCLUSION 12
2020 State of the Market Report
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Executive Summary The closing years of the past decade saw a series of catastrophic natural disasters and other adverse events that had the cumulative effect of ending what is known in the insurance industry as a “soft” marketplace. Insurance rates began firming in 2018, continued “hardening” into 2019 and have shown no sign of easing in 2020. According to the Council of Insurance Agents and Brokers (CIAB), average premium pricing across all-sized accounts increased 6.2% in Q3 2019, marking the eighth consecutive quarter of rate increases. Large middle-market and national risks were impacted the most by the hardening market, recording an average premium of increase 7.6%.
and excess liability average premium increase was 9.8% in Q3 compared to 4.6% in Q2, according to the CIAB. Continued
RATE INCREASES, QUARTER BY QUARTER
What’s a “hard” market, exactly? Simply stated, it’s what happens when insurance companies reevaluate their books of business, their risk appetites, and how much capacity they want to present in the marketplace. Underwriters in a hard market operate under stricter standards in an attempt to correct rising loss ratios. The result? Buyers find themselves in a “seller’s market,” and it’s more difficult for agents and brokers to place risk.
7.0%
Policyholders have only begun to feel the pressure of rising rates, although the catastrophic events that played havoc with policyholder surplus began near the start of the 2010s. Hurricane Sandy in 2012 saw insured losses of $70 billion. In the aftermath, we saw single-digit property rate increases. The same moderate increases came in the following two years. It took three more CAT storms – including the monster storm Hurricane Harvey – before rates began to climb sharply.
4.0%
Hardening has been going on for far longer in liability lines, specifically general and auto. In Auto, for example, losses have been climbing significantly since 2014 and insurers are still facing unprecedented underwriting losses. The liability
2020 State of the Market Report
6.0%
5.0%
3.0%
2.0%
1.0%
0.0%
3Q 2018
4Q 2018
1Q 2019
2Q 2019
3Q 2019
Average Commercial Pricing Increases; Source: CIAB
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E X E CU T I V E
S U M M A RY
CO N T I N U E D
“Social inflation” is in part to blame here, the phrase used by insurers to describe the rising cost of claims resulting from increased litigation, larger jury awards and more plaintiff-friendly legal decisions. Mega-verdicts once were far and few between. That’s no longer the case. As Alan Schitzer, CEO and Chairman of Travelers Cos. Inc., told S&P Global, the industry is seeing “a tort environment that has deteriorated beyond (even) our elevated expectation.” All of the carriers are feeling it, although perhaps none more so than giant AIG, which increased its reserves by $667 million through Q3, the steepest reported increase yet. As long as these loss dynamics continue to be driven by rising social inflation and a highly aggressive plaintiffs’ bar, buyers should expect to continue to see increases in rates and a retraction in market capacity. We are seeing this take place most markedly in the public Directors and Officers space, which we will address later in this report. Not incidentally, reinsurers seeking to improve their profitability aren’t helping matters. Insurers turn to reinsurers to help spread the risk. The reinsurers,
S P E C I A L
like their smaller brethren, have felt the brunt of CAT claims and larger jury awards and are under pressure to stabilize their books. As we enter a new decade of firmer pricing and shrinking liability capacity, how long will this last? The consensus seems to run along the lines of, “Fasten your seatbelts, it’s going to be a bumpy ride.” Indeed, 73 percent of the respondents in a recent CIAB survey named “future premium increase(s)” as a top-three concern. We expect premiums to continue climbing in the year ahead. It’s unlikely we’ll see a softening of market conditions anytime soon. That said, insurers have a healthy supply of capital on hand. If we can squeak by with nominal CAT losses and somehow move away from a trigger-happy jury environment, we may see underwriting guidelines loosened and premiums lowered. But not all at once, and certainly not all in 2020. What follows is a discussion of eight major coverage lines, the trends influencing rates and what we anticipate in terms of price changes in 2020.
N OT E :
Knowing exactly where insurance premiums might go is never an exact science. It’s more of an educated guess. Rates are influenced by your type of business, location and claims history, among other variables. A commercial auto renewal in Las Vegas, for example, could be dramatically different than one in Denver. That said, this report is intended to give CCIG clients a better idea of what to expect and a clearer understanding of why rates have been rising so sharply.
2020 State of the Market Report
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Property First the good news. Catastrophic weather-related losses in 2019 came in below expectations. It was, relatively speaking, a milder weather year, helping boost carriers’ profits. But the devastation of years past hasn’t washed out of their financials yet. Far from it. That’s why, if your operations are in the Mountain West, Midwest or South, you can blame at least some portion of rate hikes on several past years of record hailstorms. And if you’re based in the West, the wildfires have certainly played a role. It’s not really so surprising. We’ve all seen those big weather events in areas that historically haven’t been subject to such devastating hurricanes and tornadoes. As a consequence, insurers paid claims totaling nearly $200 billion between 2014-19 – an amount 80% higher than in the previous five-
year span. That helps to explain why the average premium increase in the third quarter last year for commercial property coverage was 8.8%, according to the CIAB’s figures. It also helps explain why carriers are increasing deductibles. Meanwhile, higher crop insurance losses last year – flooding in the Midwest left agricultural interests reeling – and the rising cost of building materials also conspired to boost rates. Trade tariffs impacted things, too, boosting valuations and further raising premiums. For the year ahead, our expectation is that property rates will rise somewhere between 5% and 10%.
COMMERCIAL PROPERTY PREMIUM CHANGE 10% 8.0%
8.8% 6.8%
5.9%
6.0%
3.4%
4.0% 2.0% 0.0% -2.0% -4.0%
-5.2%
-6.0% 1Q 2013
2Q 2015
-6.0% 2Q 2016
-4.4% 2Q 2017
1Q 2018
4Q 2018
3Q 2019
Source: CIAB
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General Liability Huge verdicts driven by sympathetic juries, more class-action lawsuits, a better-funded plaintiff bar and stalled tort reform. They’re all fueling what insurers call the “social inflation” that is driving the price shocks we’ve seen in the liability marketplace. Cases resulting from the “#MeToo” movement and the opioid crisis are among the issues that have opened the floodgates for litigation. How big of a deal is this? According to VerdictSearch, 2019 saw a 300% rise in the frequency of verdicts $20 million or over compared to the annual average from 2001 to 2010. Social inflation is challenging because not only does it mean more and bigger claims today, but carriers also must deal with issues that have been lingering or developing for a long time. Claims resulting from the opioid crisis are a good example of this. Claimants looking for those with the deepest pockets have brought suits against major drug companies for the role they played in the opioid crisis over the past 10-15 years – and won. Another good example? Legislation in several states giving childhood victims of sexual abuse more time to file their claims. New York and New Jersey changed their statutes of limitation to give victims until they’re 55 to file their lawsuits. Other states have followed their example. The end result? Not only are general liability rates climbing, but underwriters are re-evaluating the risks posed by individual accounts at renewal. In doing so, they may amend policy terms and conditions and, from time to time, even decline to renew. Our forecast is that liability rates will rise between 3% to 4% in 2020, although companies with poor loss histories can expect to see increases in the double digits.
2020 State of the Market Report
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Commercial Auto The vast majority of U.S. drivers admit to using their cellphones while driving, so it’s hardly any surprise that highway deaths have been climbing. Moreover, when there’s a loss today, the carrier isn’t just fixing a bumper. It’s also paying to replace pricey broken cameras and sensors.
to rising legal expenses, unprecedented plaintiff verdicts and other factors that have delivered underwriting losses year after year.
At the same time, we’re seeing more drivers, more congestion and more inexperienced drivers on the road – many of whom are carrying the state minimum in coverage levels or no insurance at all.
The bottom line here? Few insureds have been able to escape what can only be described as notoriously steep premium increases, regardless of where they do business, driving radius or what they’re driving.
In short, distracted drivers and high-tech cars have both driven claims costs up. And when claims rise, so do premiums.
Increases in 2019 ranged from 7% to 9%. The year ahead is likely to see even higher increases of 12% to 15%.
Large commercial fleets, in fact, have seen rate increases for a number of years as carriers respond COMMERCIAL AUTO PREMIUM CHANGE 10% 8.0% 6.0% 4.0% 2.0% 0% -0.2% 1Q 2011
1Q 2012
1Q 2013
1Q 2014
3Q 2014
1Q 2015
3Q 2015
1Q 2016
3Q 2016
3Q 2017
1Q 2018
3Q 2018
1Q 2019
3Q 2019
Source: CIAB 2020 State of the Market Report
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Workers’ Compensation A bright spot over the past few years, workers’ compensation premiums in the year ahead should continue to drop. Employers have certainly earned a break on this front, focusing on creating safer work environments and preventing injuries, which have led to declines in the frequency of claims, duration of claims, severity of injuries and medical costs.
Insurance regulators in Colorado approved an 8.5% cut in workers’ compensation rates for 2020, welcome news to any buyer having to deal with rate increases in other lines.
WORKERS’ COMPENSATION PREMIUM CHANGE 5.0% 4.0%
4.1%
3.0%
2.3%
2.0% 1.0% 0.0% -1.0% -2.0%
-2.5%
-3.0%
-2.9%
-2.9%
1Q 2017
2Q 2018
-3.3%
-2.7%
-4.0%
-4.3%
-5.0% 1Q 2014
4Q 2014
3Q 2015
2Q 2016
1Q 2019
3Q 2019
Source: CIAB 2020 State of the Market Report
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Umbrella and Excess Shrinking capacity – another way of saying carriers are limiting their exposure – is the big problem here. And yet again, much of what we’re seeing in umbrella and excess rates relates back to those record-setting, multimillion-dollar jury verdicts. Consider, too, that umbrella limits are being pierced more frequently than in many years. Carriers, as a consequence, are far less willing to expose themselves, offering lower limits and charging more. That trend is on full display in almost all areas of excess coverage, although especially in auto risks.
The segment feeling the pain most? Trucking. Many carriers have either completely withdrawn from the business of writing trucking companies or reduced their capacity significantly. The CIAB notes that umbrella coverage was the hardest-hit line of business in the third quarter of last year, with an average premium increase of 9.8%. With all of that in mind, it’s no wonder increases in the year ahead are expected to come in from 8%-15%.
UMBRELLA PREMIUM CHANGE
9.8%
10%
8.0%
6.0%
5.7%
4.0%
2.0%
1.7%
1.4%
0.6%
2.3%
3.3%
0.0%
-2.0%
-4.0% 1Q 2014
3Q 2014
-3.0%
-2.8%
3Q 2015
2Q 2016
3Q 2018
4Q 2018
1Q 2019
2Q 2019
3Q 2019
Source: CIAB
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Directors & Officers After years of intense competition and depressed premiums, D&O carriers have shifted gears, pushing for profits since the second half of 2018 to correct poor underwriting results. Last year only saw more of the same, with steeper premium increases, higher retentions and the addition of restrictive terms. The hardening of the D&O market has been most pronounced in regard to initial public offerings and particularly for publicly traded technology, life-sciences companies and financial institutions. In part, all of this is related to a 2018 U.S. Supreme Court decision that allows some securities lawsuits to move forward in state courts in addition to federal court. Companies prefer to fight such lawsuits in U.S. court because federal judges have more experience with the laws that govern IPOs. But with help from overly aggressive securities lawyers, investors are quicker than ever to pounce when a newly issued stock fails to live up to expectations. The 2018 Cyan Inc. vs. Beaver County Employee Retirement Fund decision made their job easier. As unwelcome as this news is – we, in fact, reported on it in 2019, “Directors & Officers Rates Jumps Higher in ‘Hardening’ Market” – it’s not particularly surprising in light of record levels of securities classaction lawsuit filings. The increased risk of such a lawsuit is a problem for all listed companies as well as those considering going public – and is a significant factor influencing the increases in pricing and retentions and reduction in limits for D&O insurance. Finally, government investigations and whistleblower activity also continue to present worrisome exposures for companies, as does rising legal fees, which consumed half of the $23 billion in securities litigation costs between 2014 and 2019. An unfortunate example of this can be found in the 2018 SEC fraud complaint against Theranos Inc., the healthcare tech startup once valued at $10 billion and now operationally defunct. The case provided a stark reminder that privately held companies are not exempt from federal securities law enforcement actions. The year ahead won’t bring any relief to publicly traded D&O; rates are expected to rise from 10% to 15% on the low end but easily 20% or more on the high end. Private companies may escape some of that, but also should expect to see increases in their D&O rates.
2020 State of the Market Report
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Employment Practices Liability While the rate hikes in Employment Practices Liability Insurance haven’t been as pronounced as those in the D&O space, #MeToo laws in California, New York, Illinois and other states are definitely being felt. Shifts in the way independent contractors are treated – giving them, for instance, the right to minimum wage, workers’ compensation and other benefits – also are beginning to affect pricing and retentions. The sharpest EPLI increases in 2019 registered above 20%. In the year ahead, we expect increases to come in between 5% and 10%, although, again, some could see much higher increases.
Cyber Ransomware attacks are in the headlines on a practically daily basis. That’s not new. What is new is that the losses from these attacks are much higher than ever, jumping on average to well over $1 million. None of this has escaped the attention of carriers, naturally. Their response has been not only to increase premiums, but also to narrow the scope of coverage, even as demand has been growing. Carriers now require a thorough underwriting review, generally by a third party, and will closely examine a company’s controls, practices and procedures before issuing a cyber policy. In the year ahead, cyber rates will likely rise by 7% to 10%.
2020 State of the Market Report
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Conclusion If you’re a CCIG customer, you already know this: As insurance brokers, procuring coverage is only part of what we do. We’re risk and claims managers dedicated to helping our clients find new ways to bring their total cost of risk under control, including alternative approaches to covering your exposures. Whether it’s a top-to-bottom risk analysis of your operations, the work of our risk control department or our claims advocacy team, we do all we can to ensure you’re paying only for what you need, when you need it, and that your policies and practices attract carriers offering the most competitive rates and best coverage terms. In short, while premiums might be going up, we are here to help you find strategies to offset the pain.
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