0:03
Welcome to WTW's Global Marketplace Insights series, where our experts bring you the latest risk and insurance perspectives.
0:21
JON DRUMMOND: We just want to thank everybody for joining us today on this round of virtual marketplace insights videos. Just a couple of weeks ago, we released our formal publication in North America on marketplace realities. I invite everybody to go online and check that out. It's where we speak to rate expectations and trends that we're seeing in the marketplace. Further, we hosted an interview at this particular release with Moe Tucker, commercial lines lead for the Hartford, where Moe shared his experiences on the market, on trends that he's seeing in the industry, and what we think can be held for the P&C world and the upcoming future.
1:01
When we look at the market on a macro basis, our industry is facing some unique challenges. But these aren't challenges that the industry hasn't seen before when we look at we're in an election year, we're dealing with inflation still. There's a lot of interest rate fluctuation and volatility, legal system abuse, climate change. These are all macro factors that contribute and weigh on the industry in a big way. But again, these aren't unique, and these are challenges that we've been looking at and attempting to address for a long time in the industry.
1:37
As we try to characterize the marketplace in 2024, I sit back and say, hey, it's less volatile. You look across almost nearly every single major trading line, and it's either in a stable, soft, or perhaps moderately difficult position to be trading in. That is categorically different than what we've seen over the last couple of years. At any one particular year, we've seen a one line of business or more is being heavily distressed and very difficult to trade in.
2:09
A lot of that is being driven by reinsurance. If we go back to 2022, 2023, the industry lost a lot of capital. We were looking at around $482 billion worth of reinsurance capital in that time frame.
2:23
As we fast forward to 2024, a lot of that capital is restored, and actually new capital was brought in. The industry as a whole is currently operating with about $625 billion worth of reinsurance capital and over $100 billion of capital. This supply is certainly bleeding down and influencing and impacting in a positive way the retail insurance marketplace, which certainly helps all of our clients with their trades on their individual programs themselves. Today I've brought along with me a team of our leaders here in North America to assist with understanding what's going on in the marketplace. We have Mike Machin, who's our FINEX broking leader in North America, James Sallada, who oversees casualty in North America, and Scott Pizzi, who is our head of property here in North America.
3:18
What I wanted to do was just start lobbing out a few questions to this team to help give us some context of the training environment we have today, macro factors that are impacting their space and their industry, and really just ultimately tease out what we're seeing in the marketplace. So with that, gentlemen, with our industry just being heavily influenced by supply and demand economics, how is capacity playing out in your market? And I'll leave this would be a panel question. I'd love to hear from everybody, specifically on how the industry is certainly treating capacity in your particular space.
4:00
JAMES SALLADA: From a casualty perspective. I would quantify primary casualty and to a lesser extent, lead umbrella capacity is consistent but embedded with fragility, for lack of a better term. We are seeing significant pressure on the liability lines driven by continued increase in severity for both auto liability and general liability. With legal system abuse and nuclear verdicts, the class is distressed, but we're not seeing a true exiting of sorts. Instead, carriers are managing overall limit and exposure to loss conservatively.
4:41
Many insurers would argue that multiple consecutive quarters of rate increases in recent years are not adequate enough. I would also say that an excess liability, specifically in the lower layers above the lead umbrella, is where we're seeing emerging concerns that we're watching closely. The reason the capacity is consistent is because the workers' compensation. As a three-line play, this continues to be the most profitable line of the casualty lines. And it's driving not only new business desires, but diligence on retention.
5:16
According to Sedgwick "State of the Line Report" 2023 yield, an 86% combined ratio for work comp, which is a 14% underwriting profit. But that led to a 23-point operating gain, 9% of which was investment gain. So large and complex clients continue to leverage this care in the marketplace in return for paring the liability lines.
5:41
Now, we say fragility is embedded within because if this line doesn't perform, then we're going to have a different problem. So while we're not overly concerned that there's going to be any material changes in the work comp environment, the industry is going to closely be watching rising indemnity and medical costs and how they compete with inflation and future interest rate reductions, which we're seeing on a macro scale.
6:07
So that's the state of the market and casualty, consistent but some things to be concerned with if worker's compensation continues to costs increase and it doesn't perform the way it has.
6:21
Yeah, no, I appreciate it. Mike, give us a little insight of what is playing out in our financial alliance, including cyber, as it relates to capacity.
6:31
MIKE MACHIN: In financial lines. we've got a little bit of everything going on, quite frankly. There continues to be plenty of capacity available for most, if not all, of our major product lines. New capital entered the space following the 2020 hard market. Those carriers continue to compete very aggressively on programs, which is helping to keep premiums down across the board.
6:52
Now, the challenge, I would say, is both in from a Directors and Officers (D&O) standpoint, as well as from a cyber standpoint, the underlying exposure trends aren't great. When you look at D&O, the securities class action filings are still elevated. Loss costs have increased. And, you're looking at more material settlements overall.
7:16
Similarly, on the cyber side, ransomware claims and things of that nature have increased frequency for those carriers. But there's still plenty of capacity in both cyber, as well as MGAs, in particular, on the cyber side, have leveraged technology to underwrite and select risk, I think across the board, regardless of which line of business you're talking about. These newer markets have put a lot of pressure on established carriers, which have legacy books of business to handle claims to manage, combined with higher overall infrastructure costs for those companies in general.
7:52
And so I'd say to sum it up, whether you're talking about D&O, cyber, more broadly, capital is available to build programs competitively. But we're keeping an eye on it because I think there could be some underlying trends here that impact that heading into 2025 and beyond.
8:09
JON DRUMMOND: Very good. How has the Managing General Agents (MGA) space impacted your financial lines in cyber?
8:17
MIKE MACHIN: Yeah, I mean, it's been very impactful so far, and I think it ties into the comment you made earlier, Jon, about some of the reinsurance capacity. On their own, clearly, these companies couldn't absorb many of the losses that are coming through the system. But when you spread out that risk amongst a bunch of different carriers, whether it's established carriers that are supporting some of the MGAs or whether it's some of the reinsurance capital, it's just taking a lot longer to have these things work their way through the system.
8:47
And so clearly, I think that's-- we have some of it in the D&O side as well, but I think it's been much more prevalent in cyber lines. They're bringing some interesting products to market. And I think some of the MGAs have been pretty innovative. But overall, I think they've certainly had an impact in keeping premiums down, despite the fact that we are seeing, again, increased frequency relative to cyber loss.
9:13
JON DRUMMOND: Yeah, absolutely. Scott, transitioning to property. And, I know your team largely focuses on large complex placements. Sometimes, they're shared and layered. Sometimes, it might be a single carrier placements, but these are your more challenging risk profiles, if you will.
9:33
So, as I think about capacity and look at it, it's probably just too demonstrably different years, especially if you look at the beginning of 2023 versus the beginning of 2024. Tell me a little bit about capacity in your space, in your world, and how it's played out in 2024 and maybe even a little insight into 2025.
9:57
SCOTT PIZZI: I appreciate that, Jon. I think before we go into just 2024, you've got to go back to really 2017 because in 2017, when the three major hurricanes of Harvey, Irma, and Maria hit. That set the standard of the changing market or the hard market, as we saw really seven years straight-- so 28 straight quarters of rate lift.
10:19
Compound that with inflation. Compound that with valuation concerns. All of these things started to really set the market on its heels, and capacity pulled back.
10:30
Reinsurance prices went up, as we all talked about a little bit earlier. And then that set in motion a tremendous amount of concern for a bunch of our clients where programs couldn't get filled to completion. Programs that were getting filled either had to take significant increased retentions, price points moved dramatically.
10:51
Terms and conditions started to change with occurrence of limited liability endorsements, margin clauses, a lot of restrictive nature that occurred if you look from 2017 up to 2024. So when we think about 2023, in the beginning, you're right. Again, the reinsurance treaties really set the standard and therefore put that-- push that those increases down to the insurers, which then ultimately pushed them on to our clients.
11:16
When we look at '24, I think the benign reinsurance season that happened in January 1 of 24 allowed everybody a bit of respite. So I think the 2024 market became very transitional. I wouldn't say we moved. We moved into a soft market, but the transitional market, because when you think about March renewals and all those that have happened post that, we found ourselves with people bringing capital back to the table. It's not trapped capital like we talked about LIS and some other reinsurance. It's just capital that they've reserved on their balance sheets because the way the market was going and the amount of capital-- the amount of price they could get for deploying less was so significant.
11:59
Now, in 2024, with the market shifting, more and more programs are becoming overcapacitized and more and more programs are being challenged not only from a price and a retention standpoint, but there's so much more being driven out of London, out of our wholesalers, that people either expand market share, meaning grow their lines either vertically or horizontally, and have to become more commercial on price now. So in 2024, it's really become more of a buyer's market than it had been in the past.
12:28
And I think you're seeing a lot of clients, while they're being significantly concerned about incumbency, their c-suite is telling them at all costs, you need to seek some respite on the premium side in order to get these dollars down. So the property for once, after seven years is finally in a position where I think it's healthy. And now it's just going to be real competition and arbitrage that has to be generated in order to get these programs over the line economically.
12:56
JON DRUMMOND: It's interesting. You mentioned, our three hurricanes in 2017 that really prompted a hard market cycle that's continued for a long time.
13:06
Helene and Milton just came through. And I think the loss costs are largely unknown. There's some projections out there, but I would describe it maybe as unknown at this point. How do you think that's going to influence reinsurance capacity, and perhaps even the marketplace, as we move into 2025?
13:25
SCOTT PIZZI: Yeah, so when you think about what happened in 2017 and then you think about how these two hurricanes that just happened back-to-back impact the market, I don't view Helene and Milton as being a market-changing event, and I say that with a bit of trepidation only because they were significant. They're significant loss of life. They're significant personal lines. There's a lot of things that happen in those storms that's devastating.
13:49
But from a commercial standpoint, most of the reinsurers won't get hit. Their excess of loss treaties probably won't be impacted. Primary insurers have put together retentions that are going to insulate them. You may have some smaller regionals that may be impact that could be facing some real concerns and some bankruptcy. But all in all, enlarging complex property as we know it today, we don't believe that Helene and Milton will be a market-changing event, an impact, anything from the reinsurance community to be passed on as those renewals come up effectively January 1 of 2025.
14:21
What it will hint at, Jon, is just carriers looking more at capital deployment because these storms-- like Helene went all the way through North Carolina and into Georgia. You had some really dramatic effects all the way up the coast. And then Milton went completely across Florida.
14:38
You typically don't see that. They hit the coast. They die out, tropical depressions, and they disappear.
14:43
So think they'll just be a little bit more awareness on how big these storms can be and ultimately how far they can reach when people look at capital deployment and where they sit on programs.
14:53
All right, Scott, thank you for that insight on capacity and what perhaps our expectations are as we move into New York, now new year. And listen, we can totally appreciate that it's difficult to put the Nostradamus hat on, especially when we've got a little bit of time left in this hurricane season. So perhaps changing pace
15:14
We know capacity certainly influences price, but let's look at price. Let's look at rate. When I look across your three major line of businesses, I kind of am reminded in just way about Goldilocks and the Three Bears.
15:30
And so in that story, we have some soup that's hot. We've got soup that's cold. We got soup that's just right.
15:38
So I'm going to ask the three of you to comment on where do you fit within that story. And how do you see pricing, pricing trends playing out in the near future for your line of business? James, I'll start with you. Where do you see yourself?
15:55
JAMES SALLADA: Unfortunately, Jon, I think the casualty space falls into the hot category. As much as I would prefer being just right, but I'll leave that to some of my counterparts here on the line. But casualty liabilities distressed.
16:11
And those clients that haven't already seen some remediation in the form of restructuring of their programs in the primary or even in the umbrella space are still looking at high single digits in the primary liability lines on auto and GL. work comp, again, back to my earlier comment is still performing. We can expect roughly flat, maybe down a few points environment going forward. And then it bifurcates in the umbrella space.
16:43
So the challenge classes, those that do have the claims activity that everyone's talking about, they're seeing plus 15%-ish, maybe 20% on their renewals in umbrella access and then on the performing classes within a difficult product line, probably in that 10% 11, 12% range.
17:09
So that's what we're seeing in casualty. I wish I had a better story. But until we see some meaningful change in these jury verdicts, the market is continuing to be stressed and will be watched closely.
17:25
JON DRUMMOND: Yeah, appreciate it. Mike, what about financial lines?
17:30
MIKE MACHIN: Yeah, I mean, at the moment, I would say overall financial lines, we're relatively cold. I mean, I think there's maybe some perhaps some warming trends that we're anticipating over the course of the next 12 to 18 months. But again, on the heels of 2020 and 2021, both from a D&O as well as from a cyber standpoint, we've seen material rate reductions across both of those classes of business for nearly all clients.
17:57
Now I think part of the challenge is while cyber remains competitive, for instance, we are seeing, as I mentioned earlier, increased ransomware, third-party vendor related losses. And the market's beginning to act a little bit more cautiously in terms of being, I think a little bit more selective, but especially for good risks, we're still seeing double-digit rate reductions in some areas, although I anticipate heading into 2025 that may change. Again, at some point, some of these claims will catch up to carriers. And I think they will likely be looking at some sort of premium or rate adjustment.
18:33
In public D&O, after three or four years of rate reductions, we're starting to flatten out a bit, particularly on the primary and low access layers. I think carriers are starting to take a much harder look at that third, fourth, fifth layer in a program where they've been hit with double-digit decreases multiple years in a row, but the exposure is still there compared to sitting at the top of a tower.
18:59
Again, spoke a little bit about this earlier. But settlement values continue to be astronomical. Social inflation, nuclear verdicts that James mentioned earlier, those are all impacting the cost to settle and resolve these claims. And so there's a little bit more rate adequacy in those lower layers. But I do think that the middle layers of these programs are starting to get hit pretty hard.
19:21
And so as things potentially turn over the course of the next year or two, I think we would certainly anticipate those layers starting to adjust a little bit more quickly than others. And so I think the reality is, there are underlying trends here that would suggest that things could change. I think a lot of carriers are either break even or making a little bit of money or losing a little bit of money right now based on loss costs.
19:49
But really, this has been a capacity-driven soft market, as opposed to a soft market based on true profitability. And so I think depending on what happens with some of this excess capacity that's come into the market the last few years, we could see things turn at some point in the next 12 to 18 months.
20:08
Excellent. Thank you. So, Scott, I guess I'm kind of leading the witness here. So if we have someone who's hot, someone who's cold, it leaves you with being just right.
20:17
SCOTT PIZZI: Well, look, Mama Bear and Papa Bear have already given their take. I would say, Jon, we are kind of just right. But say that in all fairness that we probably teeter. Property insurance has always been fairly, lingering around. One major claim can turn everything.
20:38
We've had two hurricanes, which I told you earlier, I don't think impact where we're moving. But if we get another one and we get something of some significant size, this market has the ability to turn right back on its head again. In the same vein, if we don't, do I expect rates to continue to fall at a precipitous level as they started to back in the beginning of 2023 per early 2024 earlier conversation.
21:01
We still have some challenge occupancies. James touched on this a little bit earlier. Those that have significant nutritional and loss activity, those that maybe haven't done much on their valuation, those will still be concerns, and you'll probably see some slight fluctuation of some rate change upwards. But for the most part, our big shared and layered book, especially around some of our industry classes like real estate and hospitality, where those took the most substantial brunt because of the cat footprints that you had to secure capital on. Those are the ones seeing the most significant reduction.
21:31
So while we are kind of in that just right moment, we're also one big storm away, I think, from something changing that landscape and impacting us one way or the other.
21:40
JON DRUMMOND: So after hearing that and really taking in our capacity challenges or lack thereof, we understand what the pricing dynamic is a little bit. It certainly seems like casualty perhaps is the most distressed out of our major line of business. James, this next question is for you. What are our clients doing today to help them manage their total cost of risk and their spend, and are there any innovative solutions that they're deploying to really manage renewal outcomes?
22:11
JAMES SALLADA: Yeah. Yeah. So thanks, Jon. I wish the news was better, but certainly the marketplace is difficult for our large clients in casualty, and it's important to really dig into the facts and lead with analytics to differentiate our clients. We do not want to be painted with a broad brush, especially those that are performing and have the right cultures in place. So the utilization of risk quantification tools and analytics is key there.
22:41
But as you point out, the marketplace is firming. So even when very successful in the traditional sense of approaching carriers on an expiring basis or new markets and transferring risk, sometimes clients are faced with untenable or less than desirable results. So there are a couple of tools we're using in this environment, and we're seeing more and more. It's no secret clients have been forced or have chosen to retain more risk than they have probably in a lot of our risk managers' careers on the casualty piece.
23:13
So to address this punitive pricing environment. So balance sheets are now the new frontier and being leveraged as alternative capacity. WTW, our alternative risk team, is working collaboratively with the brokers to come up with financing solutions. Captive utilization is another way to combat these adverse results and provide our clients with not only optionality, but the ability to chart their own course. So multi-year structured solutions are attractive as they create certainty of capacity while still allowing the insured to participate in the success of the layer but hedging against the impact of losses.
23:51
WTW recently launched our structured auto buffer solution, appropriately titled Stable for short. This facility enables clients to share in both risk and reward of their fleet operations, specifically the auto. If losses remain below a predetermined threshold, clients may receive some return premium with the option to commute the policy for additional returns. If losses exceed the threshold, additional premiums can be capped.
24:20
You're ensuring a balanced risk sharing approach. And it can be tailored to our clients' desirable terms and conditions, including adjustment premium structures that support cash flow. With a multi-year structure, Stable provides clients with greater budget certainty and clearly defines limits on potential losses.
24:42
And captive utilization is another tool being deployed to combat this pricing environment, whether it's via rented sell captive that WTW and other brokers have or an existing one that clients are deploying already. We're securing fronting paper and sometimes reinsurance on the back end to mitigate overall total cost of risk and deploy capital where it makes sense.
25:04
So those are just a couple emerging tools as we look to navigate the marketplace. But differentiating your risk is clearly important as we navigate the next few quarters of environment.
25:22
JON DRUMMOND: I think that's spot on. And you see that across probably all lines of business. Over the last few years when clients have been faced with a challenging market, they've been looking towards their balance sheet.
25:35
And I think the industry has responded well too with creating innovative structures and products to allow them to utilize their own balance sheet to be able to fund risk more effectively. This next piece will be a fun round, and it will kind of working towards closing this out. I'll call it the speed round.
25:55
And so what I want each of you to do is to answer this question and there will be a series of questions in one or two-word responses. So we'll ask it, and we'll go around the room. Scott, we'll start with you, then Mike, then James.
26:13
So I'm excited. All right. All right. Perfect so question number one, will capacity be greater, equal to, or less in six months from now than it is today?
26:25
SCOTT PIZZI: Equal to.
MIKE MACHIN: Equal to.
JAMES SALLADA: Less.
26:30
JON DRUMMOND: Question number 2 MGAs will make blank impact to the industry.
26:36
SCOTT PIZZI: Moderate.
26:38
MIKE MACHIN: Material.
26:40
JAMES SALLADA: Still unknown.
26:43
JON DRUMMOND: All right, next question. Clients will be blank at their renewal.
26:51
SCOTT PIZZI: Happy.
26:53
MIKE MACHIN: Very pleased.
26:56
JAMES SALLADA: Creative.
27:00
JON DRUMMOND: Q4 average renewal rate will be blank in your line of business.
27:08
SCOTT PIZZI: Down 5% to 7.5%
27:12
MIKE MACHIN: Down roughly 5%
27:15
JAMES SALLADA: Single-digit decrease on workers' compensation, 10% to 15% increase on liability.
27:23
JON DRUMMOND: And our last question. The blank will win the World Series.
SCOTT PIZZI: Yankees.
MIKE MACHIN: Go Yankees.
JAMES SALLADA: The Guardians going to shock the world.
27:38
JON DRUMMOND: Well, good stuff. All right. Well, hey, listen to our audience. I wanted to thank you for certainly joining us today, hearing from our panel of experts on what's going on in the marketplace.
27:50
Certainly not a loss of activity. I do think that we're operating in a rational market. I think we're seeing some moderate rate movements adjusting to maybe micro actions and trends that we're seeing in the marketplace, but it's sustainable.
28:07
So we're looking forward to seeing how the hurricane season closes out. I do think across property casualty financial lines, the reinsurance renewals that occur at 1/1/2025 are going to set the tone for 2025. So I think all eyes in the industry should be on those, but we look forward to visiting you in the future. Thanks a lot.
