Insurance Marketplace Realities 2021 Spring Update

A two-tiered market, one changing world

In the not-too-distant past, we were in a sustained soft market that seemed impervious to historic property and casualty losses, making many of us question whether the hard/soft market cycle might be a thing of the past. Then eye-popping rate increases and the disappearance of capacity struck like some weather-borne natural catastrophe on steroids. The market had indeed turned. Now, with higher rates attracting new entrants and coaxing some capacity to come off the sidelines, increases are beginning to decelerate, or at least stop climbing. It’s still a hard market, but to a large degree, the cycle is — or will soon be — proven again. 

With one important caveat — we are seeing the emergence of not one marketplace, but two: one for “good” risks, another for, well, not so good risks. While there are wide variations product line by product line, good risks are finding some easing of conditions, including more modest rate increases. The others, not so much. Strict underwriting and the cautious deployment of capacity on certain risks seem to persist as the underwriting community grapples with systemic changes in the risk landscape. 

Systemic rise in risk

There are several underlying causes of the current hard market: Years of soft pricing and low interest rates for sure, but a major driver is an increase in the severity of losses. Social inflation continues to drive up jury verdicts and casualty losses. A rising number of shareholder class actions has had a similar effect on D&O. Ransomware losses are increasingly difficult for the cyber market to handle and property losses continue to climb with the steadily rising accumulation of insured property in catastrophe-prone areas. Many also believe that climate change will yield a rise in the frequency of catastrophic events, including those we can anticipate and model (e.g., hurricanes) and those we can’t (e.g., tornados and wildfires).  

Given these changes, why would any insurance buyers expect anything positive in the marketplace? We come back to the insurance cycle. After a few year-on-year increases, rates are approaching technical adequacy in some lines for some sectors. This has attracted new capital to enter the marketplace — $23 billion of new capital in the last six months. Start-ups are sprouting in Bermuda and London. Established carriers are expanding their available capacity and starting to deploy it a bit more for some risks. While broadly speaking the market remains hard, it is certainly more orderly and predictable. 

The role of analytics

In the past, when the industry cycle reached a plateau, a rapid decline in rates and carrier pursuit of market share often followed. The late 1980s and early 1990s come to mind. While we are not taking the bait and saying that the market cycle is dead, we do note that this hard market has been characterized by uncanny underwriting discipline. We attribute this to the growing sophistication of analytics. Insurers rely on portfolio analytics to guide financial decisions, which has a direct effect on underwriting decisions. We said in a previous edition of Insurance Marketplace Realities that the fight between analytics and underwriting judgement was over and both had won. The result may be a future market cycle with lower peaks and shallower troughs in the aggregate and more differentiated underwriting of risk classes. This latter characteristic is being manifested in the current two-tiered marketplace. The upshot: buyers need to do everything they can to differentiate themselves into that good tier.

Competing in the two-tiered marketplace

Risk differentiation begins, as always, with a strong commitment to risk management. Providing exposure data that is both current and developed with rigor will help pave the way for better renewal outcomes. High quality data is also a necessary input for updated analytics and modeling. Remember that underwriters have their portfolio analytics; buyers and brokers need to fight analytics with analytics to differentiate good risks from others in the portfolio. Finally, take full advantage of our virtual business world to hold world-class renewal meetings with many underwriters. While face-to-face meetings will always have an important place in our business of trust, videoconferencing enables risk managers to bring multiple internal resources (e.g., CFOs, safety managers, etc.) to the virtual table. This enables underwriters to dive deeper, and it underscores the teamwork necessary to realize a company’s commitment to risk management. In addition, videoconferencing with underwriters around the world has made our global business even more connected.  

Insurance in the post-pandemic world: Words matter

One more note about what we’ve learned during the pandemic — or perhaps something we’ve been reminded of in dramatic fashion. Words matter. In the ongoing stream of court battles over what insurance might or might not apply to pandemic-related losses, we’re seeing cases hinge on the exact wording pertaining to property loss, diseases, contamination, etc. As risk advisers, we try never to lose sight of such details. Understanding the big picture is important, but so are the details.

Back in October of 2017 when the triple whammy of Harvey, Irma and Maria loomed large, we described our worry in this publication that many in our industry had not gone through a market correction. Three and a half years later we have no such worries! We now have a large class of brokers, underwriters and risk managers who have graduated from the most challenging market in decades.  

As a final note, while we see a somewhat brighter horizon in the marketplace for insureds, we certainly see a brighter world for all of us as the end of the pandemic draws nearer. Let us not lose perspective. These times have tested us all, but none more so than those who have lost family or friends.    

Commercial lines insurance pricing survey (CLIPS)

Our rate predictions in the following pages of Insurance Marketplace Realities are relevant to the commercial insurance marketplace in which we trade (i.e., the mid-market, national and global segments). When we assemble our forecasts for the coming year, we also look back at recent price movements reported by insurers, grounding us in firm data. CLIPS, Willis Towers Watson’s retrospective look at commercial P&C prices, is based on both new and renewal business figures, across all segments (including small commercial and so-called “main street” business), obtained directly from carriers underwriting P&C business. (It is our experience that insurance rate fluctuations are considerably more pronounced for larger buyers than smaller buyers.) CLIPS participants represent a cross section of U.S. P&C insurers that includes many of the top 10 commercial lines companies and the top 25 insurance groups in the U.S.

In the most recent CLIPS survey, the aggregate commercial price change reported by carriers grew by almost 5% in the third quarter of 2019, over 6% for the fourth quarter of 2019 and first quarter of 2020, and then spiked upward to nearly 10% in the second and third quarters and now above 10% in the fourth quarter. U.S. commercial insurance prices saw the highest increase since 2003. For more, review the recent CLIPS report.

Looking forward, looking back

With the number of lines predicting rate decreases remaining at zero for the third straight issue, and the number of lines predicting flat or mixed results holding at one for the second straight issue, we are forced to look hard at our rate forecasts in search of good news for buyers of commercial insurance. There is some. For one, property increases are not as steep as predicted in the fall. In 10 lines, we expect increases to be lower, and in almost half the lines, the same — not great, but not worse. Only a handful of lines are expected to see higher increases, and some of those just slightly higher. And there’s the one holdout in the mixed/flat column: kidnap and ransom insurance — perhaps helped by the fact that in the pandemic, many potential kidnap and ransom targets were, like everybody else, stuck at home.

On the other hand, there is some specific bad news on top of the overall bad news: anticipated cyber rate increases jumped from +10% to +30% in the fall to +25% to +50% in this issue.

But beyond the numbers, many of our line-by-line experts do see this ever-so-slight turn for the better continuing and the marketplace becoming less difficult for buyers in the months ahead. Further, as we said in the executive summary, to properly understand the market, readers should look at the range of possible increase and consider how they can get on the better side of that range. A two-tiered market has emerged, one for better risks, one for poorer. Each tier can expect to pay more for insurance in 2021, but those in the better tier will suffer considerably less.

Here are highlights from our 2021 predictions:

• Property rate increases, while still high, offer what passes for a bright spot in the current marketplace: for challenged occupancies, predicted increases fell from +15% to +20% in the fall to +5% to +15% now; for challenged occupancies the range improved from +30% or more to +20% or more.
• General liability predictions remain at +7.5% to +15%.
• Casualty excess predictions are slightly less eye-popping than in spring: from +150% or more for high-hazard buyers and +75% or more for low/moderate hazard buyers, to +100% or more for high-hazard and +50% or more for low/moderate.
• Workers compensation continues to offer a respite from big increases, with some buyers even coming away with flat renewals.
• Auto rate increases remain plateaued at +8% to +15%.
• D&O increases are decelerating, from +20% to +50% for public companies and +10% to +50% for private/non-profit organizations in the fall to +10% to +40% for public and +5% to +45% for private/non-profit now.

The market remains hard, but better times for buyers, at least somewhat better times, should be ahead in the not-too-distant future, despite the extreme numbers in the chart below.

* The 2021 spring update figures include marine hull/liability and marine cargo as separate lines. The 2021 figures include life sciences and alternative risk transfer predictions for the first time. The 2020 spring update figures reflect the addition of managed care errors & omissions as a separate line of business. The 2020 figures reflect the addition of personal lines and financial institutions as separate entries. The 2019 figures reflect the addition of marine, cargo and senior living/long-term care as separate lines of business. The 2018 spring update figures reflect the absence of marine in that issue; the 2017 figures reflect the addition of international coverage as a separate line, and the 2018 figures reflect the addition of product recall and the subtraction of employee benefits, which are no longer covered in this report. Casualty lines are discussed in one combined report but are included in this table as separate items (GL, umbrella/excess, auto and workers compensation).

For more insight on how you can prepare for a challenging marketplace, contact your local Willis Towers Watson representative.

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