Mid-year 2018 Market Report


Executive Summary

At mid-year 2018, the general Property/Casualty market insurance industry remained in a solid financial position with abundant capacity and generally competitive terms. The traditional cycle of insurance price increases and decreases seems obsolete since for a significant number of years, a downward trend has dominated most lines. Additionally, policyholder surplus levels maintained a strong influence on overall pricing trends, with only a few lines of business typically bucking the trend.

An increase in competition and pricing transparency will hold down premium levels. Insurers will need to reconsider pricing models as the ‘pay-as-you-go’ approach gathers appeal and analytics provide deeper customer insights.

A vibrant economy and competitive insurance market enabled the industry to continue to post profits, even in the wake of record catastrophic losses. In the Property insurance sector, wild fires and hurricanes generated global economic losses of an estimated $337 billion. Interestingly, half way through 2018, surplus has not been adversely affected. While underwriters looked to increase rates, the industry’s capacity (measured by surplus) continued to offset pressures on pricing. Underwriting companies hoping to see a meaningful hardening of the overall property market have been disappointed.

Factors identified in Integro’s year-end 2017 report, such as healthcare reform and regulatory governance, continue to merit monitoring but have not created measurable change within the Property and Casualty market. Additional areas of potential impact that warrant watching in the months ahead are outlined below:

Automobile Liability

Automobile liability continued to be a problematic line for many carriers, with distracted driving contributing to an increase in the frequency and severity of auto losses. As an outlier, Commercial Auto rates increased 7.7%, marking the 27th consecutive quarter of increased rates.

Continued M&A

The market for public companies may firm in the second half of 2018 due to frequent claims and bankruptcies related to mergers and acquisitions. However, in the current strong stock market, litigation against public companies for mismanagement has slowed down (despite some jitters as stock valuations rise). An uptick in mergers and acquisitions has led to increased sales of Representations & Warranties insurance, which protects buyers against losses arising out of breaches of the sellers’ representation and warranties in M&A deal documents. 

Cyber Risks

In the Cyber arena, despite constant data breach activity, significant loss settlements have yet to manifest. According to insurance data provider Advisen, the percent of companies purchasing Cyber coverage has increased from 35% in 2011 to 65% in 2016. The adoption rate was highest among large buyers, but a heightened awareness of potential vulnerability and board-level concern began to generate interest in the small-company segment.

Professional Lines

The regulatory and legal issues around cannabis and cryptocurrency risks created challenging conditions in professional lines. Additionally, claims arising from the #MeToo harassment and discrimination movement are still developing and could have an impact on the D&O as well as EPL markets. 

We hope that you will find this review to be informative and useful. We present it in the following sections:

  • Market Overview: provides a high level summary by market segments.
  • Industry Overview: offers a macro look at the Property & Casualty marketplace through analysis provided by ALIRT Insurance Research, which specializes in the analysis of insurance company financial performance trends.
  • Detailed Market Overview: includes deeper commentary and observations by specific market segments.
     

Market Overview

Aviation

Driven by natural disasters and the resulting impact of those losses across the reinsurance market, Aviation insurance carriers attempted to increase prices across their books of business. Regulatory influences, particularly in foreign markets, also pushed rates higher. While capacity remained abundant, higher premiums are likely to continue for the foreseeable future.

Casualty

Overall, the Casualty market remained stable, with small increases in Auto Liability and Umbrella Liability areas, and slight decreases in Workers Compensation and General Liability coverages. Many factors contributed to increased Auto Liability rates, including more cars on the road and distracted driving. Capacity remained abundant, with some Insureds seeking support from markets outside the U.S.—a trend expected to continue.

Cyber

The Cyber insurance market remained strong, with robust capacity and active competition. By the end of 2018, global cyber premium is expected to top $5 billion with projected annual growth rates up to 60%. Competition for market share remained strong, especially for businesses with less than $250 million in annual revenue. Pricing remained relatively stable and the supply of capacity kept pace with demand. The global Cyber market will continue to grow throughout the rest of 2018.

Employee Benefits

After failed attempts in 2017 to repeal and replace the Affordable Care Act (ACA), Employee Benefits legislation moved to the forefront. Updates to the ACA were made by Executive Order. Equal Employment Opportunity Commission (EEOC) wellness program incentives are on hold, with no clear guidance on how employers should administer wellness initiatives as of January 1, 2019 to avoid violating EEOC requirements for voluntariness.

Entertainment

The Entertainment Contingency market hardened on a number of fronts. The Lloyd’s Board and regulators are requiring managing agents to improve the bottom 10% of their books. With fewer insurers writing coverage, available capacity became further restricted and rates continued to rise. Losses and continued tightening of underwriting requirements are expected to continue.

Environmental

Acquisition activity continued, but no longer defines the market. Rate increases tended to be driven by specific risk criteria or as a direct result of loss experience, and most incumbent carriers sought to keep rates very near flat. An increasingly strong economy provides optimism, and the current market capacity suggests that a meaningful hardening of the market is unlikely.

Executive & Professional Risk

The Directors & Officers and Employment Practices Liability marketplaces remained competitive as plentiful capacity kept primary premiums generally flat to slightly up. Self-Insured retentions remained stable. Excess capacity also helped to stabilize pricing in the Crime and Fiduciary Liability markets. As long as abundant capacity remains available, no significant changes are expected throughout the remainder of 2018.

Healthcare

The Medical Professional Liability (MPL) marketplace retained significant capacity, yet continued to experience premium tightening. The increase in the severity of MPL claims continued and similar increases are expected throughout 2018. Managed Care Organization E&O continued to grow as an area of exposure, as health systems continued to form Accountable Care Organizations. The Medical Stop Loss and Reinsurance market continued to see upward pressures on rates, a trend noted in the Healthcare market overall as continued tightening is expected.

Marine

Overall, the Marine Cargo marketplace remained soft with broad coverage terms. Coverage terms tightened in the London marketplace as capacity continued to contract. Fleet business remained attractive despite low rates. Overall, underwriters were much more selective about the business they wrote. Hull capacity remained plentiful worldwide. U.S. carriers’ capacity to capitalize on changes occurring in the London market will determine the state of the worldwide market through the remainder of this year and into the next.

Property

While catastrophic events pushed 2017 to be the costliest Property loss year ever, the majority of renewals in 2018 saw generally flat to single-digit rate increases. Capacity remained abundant. While heavy CAT losses could test the ability of capacity to remain resilient, there’s no reason at this point to believe the market will experience hardening.

Surety

The Surety market continued its profitable trend toward a pure loss ratio of close to 15%. ENR 400 contractors had a combined volume that exceeded the previous high water mark for the industry set in 2008. Reinsurance continued to be plentiful and relatively cheap. Both the Contract and Commercial Surety industries are predicted to grow somewhat in 2018.

Transportation and Logistics

The Transportation Insurance marketplace remained competitive, keeping rates and premiums stable for Logistics Liability and All Risk Cargo insurance policies. Rates are expected to remain consistent in 2018. Lower insurance premiums for Logistics Liability policies, the availability of broad coverage options and increased capacity are expected to continue throughout 2018. Strong competition will keep rates and premiums stable.

Taking the Industry’s Temperature

The “Big Picture”: 2018 P&C Insurance Industry Through March

 

Underwriting and Operating Results and Premiums

The AY combined ratio (C/R) improved in 1Q18, helped by lower catastrophe losses during the period, while the reported C/R improved even more, cushioned by notable reserve releases.

Surplus growth and premium leverage

Surplus grew 0.9% in 1Q18 (vs. 3.7% in 2017), as underwriting gains, and  investment income were substantially offset by shareholder dividends and modest net capital losses (due to fairly volatile equity market performance). 

% Change in premiums written

Annualized net premium growth jumped sharply in 1Q18 as pooling among several composite insurers was revised.   Premium growth was also helped by improving commercial lines pricing.

Gross and net Premium leverage

Gross and net premium leverage increased slightly in 1Q18 as annualized premium growth exceeded surplus growth.  Both measures continue to reflect ample financial capacity to write business.

 

* Represented by the ALIRT P&C Composite, which consists of the 50 largest U.S. property/casualty insurers (excludes professional reinsurers).

Reports

Aviation

Market Overview

Driven by natural disasters (most recently forest fires) and the resulting impact of those losses across the Reinsurance market, Aviation insurance carriers attempted to increase prices across their books of business. While some carriers continued the position that no reductions would be granted and increases would occur on most or all lines, others took a somewhat softer approach and looked at each client individually. Higher Aviation insurance premiums are likely to continue for the foreseeable future.

Premium Overview

Coverages Year-end 2017 Mid-year 2018
General Aviation Flat (dependent upon losses) Flat to 10% increase
Products Liability Flat (dependent upon losses) 5% to 10% increase
M/MRO Flat (dependent upon losses) Flat (dependent upon losses)
Airlines Flat (dependent upon losses) Flat (dependent upon losses)
Helicopter Flat (dependent upon losses) 5% to 10% increase

While rates and premiums remained stable for most of 2017, uncertainty about the potential impact of natural disasters on the Reinsurance market resulted in a more conservative approach to underwriting across most lines of Aviation coverage. Regulatory influences, particularly in the foreign markets, also pushed rates higher.

Capacity & Coverage Overview

Total available capacity in the Aviation insurance market throughout the first half of 2018 remained high, at more than $3 billion, with an effective capacity of at least $2.5 billion.

No material change in capacity is expected for the balance of 2018. One carrier, Berkley Aviation (a subsidiary of WR Berkley) left the market abruptly and there may be more consolidations of carriers in the market. However, past consolidations have had a very limited impact on total market capacity.

Forecast

Based on current market conditions, carriers will likely continue to look for price increases across most, if not all, lines of Aviation coverage throughout the balance of 2018 and beyond.

The ongoing EU investigation into Aviation market activities in London remains active. Depending on the outcome of this investigation, it could have an impact on both capacity and pricing in the London and the European Aviation insurance markets.

Developing and maintaining strong relationships with carriers and approaching renewals with complete and detailed information remain crucial steps for obtaining and securing most favorable renewal terms. 

Casualty

Market Overview

Overall, the Casualty market remained stable in the second quarter of 2018. Middle Market Casualty programs often hit at or near minimum premiums, aside from Auto Liability, and the same is true of the Excess Casualty marketplace.

Significant property CAT loss activity last year caused underwriters to reevaluate pricing, terms and conditions and to push for rate increases in the Property sector, which trickled into the Casualty sector as well.

Auto Liability continued to be an area of concern in the Casualty marketplace, with underwriters more cautiously underwriting hired and non-owned exposures. In addition, insurers were less willing to write Auto Liability coverage without other supporting lines of business. Factors that contributed to the frequency and severity of Auto Liability losses included: a growing economy contributing to more cars on the road; safer vehicles but more expensive repairs due to the advanced technology; distracted driving due to texting and Internet surfing; legalized marijuana, which led to greater instances of driving while under the influence; speeding and weather.

Premium Overview

Coverages Year-end 2017 Mid-year 2018
Auto Liability Flat to 10% rate increases 5-10% rate increases
General Liability Slight decreases to high single digit increases Flat to slight rate decreases
Workers Compensation High single digit rate decreases to single digit rate increases Flat to slight rate decreases
Umbrella/Excess Liability Slight to flat rate increases Umbrella: Flat to slight rate increases
Excess: Flat

Workers Compensation and General Liability lines remained competitive with flat to slight rate decreases for desirable risks. Auto Liability continued to see rate increases, as the frequency and severity of claims remained on the rise. Umbrella rates experienced flat to slight rate increases, whereas the Excess marketplace remained generally flat. Excess rate pricing hit minimum premium levels on many programs, so it is unlikely that rates will decrease much further.

Capacity Overview

The Casualty marketplace continued to offer substantial capacity. However, if Insureds were unable to fill capacity in the domestic/admitted marketplace, they sought additional capacity from the London, Bermuda or Wholesale (non-admitted) markets. Domestic Lead Umbrella markets continued to reduce capacity and sought higher attachment points on high hazard risks (particularly risks with large auto/trucking fleets) with negligible reductions in premium. As a result of this trend, a number of North American clients have recently moved to London quota share Lead Umbrella programs to create long-term stability by reducing dependence on one or two key markets.

Some Umbrella markets considered deploying additional capacity in an excess layer. Furthermore, Lead Umbrella markets that have traditionally focused on the Risk Management space increasingly looked to write Middle Market accounts to balance loss ratios and premium scale within their portfolios.

Coverage Overview

Workers Compensation insurance trends don’t necessarily follow overall global insurance trends, and average rates appeared to be stable through the first half of 2018. Indemnity claims continued to settle faster, which has been steadily improving over the past five years. Claim frequency continued to show modest increases, similar to other recent years, with cumulative injury rates continuing to be at high levels. Medical costs have increased in recent years, but started to flatten out through 2017 and into 2018.  

The General Liability market remained stable and continued to provide adequate capacity. Auto Liability claims continued to become more expensive, and as such, rates for this coverage increased. The physical damage costs have increased as well as the costs to settle fatality claims, both significantly contributing to the rate increase.

Umbrella underwriters continued to carefully underwrite exposures, particularly any new or emerging risks or new business sectors. Lead Umbrella programs for mid- to large-size companies generally experienced flat to slight rate increases, while excess layers above those lead programs saw flat rates for the most part. Merger & Acquisition activity, however, has affected the Excess marketplace where Insureds may have insurers on their program who have since merged and have cut back capacity as a result. 

Artificial intelligence, autonomous vehicles and drones continued to be tracked by underwriters as emerging risks in the insurance marketplace. Policy forms continue to evolve as underwriting and claims develop in these areas. Specifically, Lead Umbrella underwriters are asking detailed questions about these exposures and amending their policy language as such.

Forecast

With the losses to the insurance industry from the 2017 catastrophic losses expected to exceed $100 billion, insurers will be less likely to grant routine rate reductions in Casualty lines. However, given the surplus of Casualty capacity, the market will likely avoid any spikes in rates and will remain favorable to insurance buyers.

Cyber

Market Overview

Cyber risk continued to frustrate and challenge organizations of all sizes, within all industry verticals. Rapid advances in, and increasing reliance upon, technology combined with a surge in cyber-crime have created a perfect storm. Massive cyber breaches continued to dominate the headlines and reminded us that no one is safe. Regardless, the Cyber insurance market remained strong, with robust capacity and active competition. The market continued to mature and evolve to keep pace with dynamic risk; coverage offered was as dynamic as the risk itself.

Premium & Capacity Overview

SIZE OF THE MARKET
At the end of 2017, the global Cyber market was approximately $3 billion, with 90% of that attributable to U.S. companies. By the end of 2018, global premium is expected to rise to $5 billion, and by 2020 it will likely exceed $10 billion, which is the approximate size of the D&O market. This translates into annual growth rates of 20% to 60%.

PENETRATION RATES
Overall, penetration rates within the Cyber market remained relatively low. However, that began to change slightly as the product began to mature and buyers became better educated.

Historically, medium to large size organizations in high-risk classes of business such as Healthcare, Retail, and Finance, have been the primary buyers of stand-alone Cyber insurance. The penetration rates within the small to medium size organization segment (those with less than $250 million in annual revenue) that sit outside those industry classes remained relatively low – less than 25%.

The market recently shifted its focus and expanded coverage in the areas of physical loss, business interruption and regulatory coverage. This shift appeared to cause an increase in penetration rates to some degree in all industry verticals and size segments. 

PREMIUM
Today, more than 70 carriers offer stand-alone Cyber insurance products. Competition for market share remained strong, especially for businesses with less than $250 million in annual revenue. The supply continued to far exceed the demand in this area. As a result, pricing remained relatively stable, even in high-risk classes of business. Flat to single-digit increases (up to 5%) in mid-sized, non-high-risk classes of business and coverage remained negotiable.

CAPACITY
Supply kept pace with demand in terms of capacity, which reached as much as $600 million. As the demand increased, new carriers entered with additional capacity. New capacity came from U.S.-based carriers as well as the London, Bermuda and Asian markets. The number of carriers willing to take a primary position on a complex risk that required such capacity was limited. Further, the underwriting process was far more detailed for larger, complex risks than it was for those in the small to medium size segment.

Coverage Overview

SHIFT IN FOCUS
In the early years of Cyber insurance, the coverage focus was largely on privacy protection-based coverages and breach response. While such coverages remained hugely important, in 2017 there was a sharp shift in focus on to things like: (1) operational-related coverages, such as Business Interruption, Dependent Business Interruption, and System Failure; (2) physical risk coverages, such as coverage for property damage and bodily injury arising from cyber perils; and, (3) cyber-crime coverages, including social engineering fraud and wire transfer fraud. In the first half of 2018, Cyber insurers focused their attention on regulatory coverage, given the increase in international and domestic privacy regulations such as the EU General Data Protection Regulation (GDPR) and the California Consumer Privacy Act.

EXPANDING AND CONTRACTING COVERAGE
Coverage offerings on stand-alone Cyber products continued to expand to keep pace with the ever-changing threat environment. The continuing escalation of cyber-crime will likely cause an increased focus on the adequacy of crime-related coverages as well as risk management tools. Further, increased reliance on Internet-connected devices will force the market to solidify an approach to coverage for property damage and bodily injury arising from cyber perils.

While coverage under stand-alone Cyber policies will likely expand in scope, coverage under traditional insurance products will likely contract, to some degree, as carriers look to address silent cyber coverage. Traditional products that were not intended to respond to cyber perils will be amended or revised to contain or restrict Cyber-related coverage.

THE CONTINUING IMPACT OF THE EQUIFAX BREACH AND THE GDPR
Equifax Breach

The Equifax breach, disclosed in September 2017, impacted 143+ million people – approximately 50% of the adult population in the U.S. The ramifications from this massive breach will likely continue for many years to come. The immediate response came largely from legislators seeking to reevaluate the self-policing nature of credit agencies as well as to protect consumers from the likely impact of follow-on identity theft. Definitive legislative action has occurred in these two general areas already. In June 2018, the New York Department of Financial Services (DFS) issued new regulations requiring consumer credit reporting agencies operating in the state to register with the Superintendent of the Department of Financial Services and comply with New York’s cyber security regulations.

The Equifax breach also prompted many states to reevaluate and strengthen their own breach notification and privacy laws. This trend is expected to continue throughout the rest of 2018 and into 2019.

Increased and changing privacy and breach legislation could result in Cyber insurers engaging in more detailed underwriting, tightening of policy wording/terms, reducing or restricting capacity and/or increasing premiums.

New Significant Privacy Regulations: GDPR and the California Consumer Privacy Act of 2018

The European General Data Protection Regulation (the “GDPR”) went into effect on May 25, 2018. As predicted, although the GDPR is a European Union regulation, it has already had a significant impact within the U.S. as well as outside the EU.

In late June 2018, the California legislature passed a landmark privacy bill – the California Consumer Privacy Act of 2018 (“CCPA”). The CCPA was introduced and enacted into law within a week. Not surprisingly, the CCPA shares similarities with the GDPR and greatly expands privacy rights of the residents of California. The CCPA has an effective date of January 1, 2020. However, it is likely the new law will be revised and amended over the next 18 months or so. Given California’s reputation as a leader in the privacy space, other states could use this legislation as a blueprint.

Countries outside the EU have also begun reevaluating and updating their privacy laws. For example, the Canadian Personal Information Protection and Electronic Document Act (PIPEDA) has been amended to include mandatory breach reporting provisions that will go into force on November 1, 2018. In addition, in 2017, amendments were made to the Australian Privacy Act of 1988. Those amendments went into force in February 2018.

Forecast

The global Cyber market will continue to grow throughout the rest of 2018. Domestically, a majority of the growth will likely be driven by increased penetration rates in the small to medium size business segment. The California Consumer Privacy Act, coupled with other states that are updating or proposing new privacy laws, will also likely contribute to market growth. Internationally, the implementation of the EU General Data Protection Regulation has and will likely continue to accelerate growth in the European market. Further, multiple other countries following this global trend are in the process of updating their own privacy laws.

All of the regulatory activity will likely accelerate the growth of the Cyber market in the U.S., the E.U. and beyond. Thus far, the market has been open to capturing emerging exposures. But, this could change once data exists on how these new regulations are enforced.

Entertainment Contingency

Market Overview

The market has hardened on a number of fronts. Lloyd’s non-appearance results for 2017 ran out at over 150% on net. The Lloyd’s board is now drilling down into individual syndicate results by class and is requiring managing agents to provide robust business plans to either cull or significantly improve the bottom 10% of their books. Contingency in some cases has fallen into this percentile and remedial actions have already been taken.

Prosight, Travelers and Barbican closed their books and a number of other Insurers imposed minimum rates and enhanced underwriting requirements. Those actions led to a significant increased demand on producers and brokers to sell higher rates and provide additional information, such as medicals and risk reports that traditionally have not been requested.

Terrorism coverage, in particular the threat of terrorism with various enhancements, continued to be in demand across the marketplace. The market continued to adapt and develop policies to match clients’ needs.

Coverage & Capacity Overview

The number of insurers writing the class has reduced this year, most notably with Travelers, Barbican and Prosight completely withdrawing from the Lloyd’s market.

Rates continued to rise quarter-by-quarter as available capacity became further restricted. Additionally, the size of the inquiries and age of the artists around the larger tours continued to grow, which required breaking tours into legs with separate coverage.

Forecast

Losses and continued tightening of underwriting requirements are expected to continue. With the Lloyd’s franchise board actively drilling down into individual syndicates’ bottom 10% of performing books, further restriction in capacity and more focused underwriting terms and conditions are expected.

Regulation and compliance continue to be rolled out across the industry. Brokers should embrace this reality and try to use it to their clients’ advantage.

Environmental

Market Overview

The most notable Environmental market impact continued to be the wake created by AIG’s exit from site-pollution business in early 2016. While multi-year pollution policy terms were common, the effects of AIG’s exit should substantially drop off in late 2018 or early 2019, when AIG’s three-year policies will have been replaced.

Acquisition activity continued with AXA’s announcement that it will acquire XL-Catlin. While Liberty Mutual completed its acquisition of Ironshore, there are indications that operations are not fully integrated. Neither of these acquisitions impacted the overall marketplace as profoundly as, for example, the ACE-Chubb acquisition did in 2016; still, the integration of two underwriting operations could be impactful to some Insureds.

Other recent market changes included: 1) Zurich’s naming of a new environmental site-leader and a renewed focus on its retail business, which had suffered from personnel changes; 2) continued underwriting growth of relatively newer market entrants (i.e., Sompo, Allianz, and Sirius).

Premium Overview

Coverages Year-end 2017 Mid-year 2018
Pollution Legal Liability/Site Liability -20% to +5% -15% to +5%
Contractors Pollution Liability -15% to flat -15% to flat

Market conditions have continued to stabilize since AIG exited the North American Site-Pollution business. Insurer acquisition activity no longer defines the market.

The number of insurers offering Pollution Liability and Contractors Liability coverage remained abundant. Rate increases tended to be driven by specific risk criteria or as a direct result of loss experience. Fears that 2017 property losses would harden all commercial lines has not yet materialized on Environmental business.

When renewals were marketed, there was still often sufficient competition to recognize decreased premiums or control rates. Most incumbent carriers sought to keep rates very near flat; however, there were instances where insurers pushed for slight rate increases (e.g., 5%).

Capacity & Coverage Overview

Several major insurers have communicated profitability challenges that appeared to be a natural outcome following several years of decreasing rates and increasing claims activity. One of the most profound underwriting challenges surrounded uncertainty of how Federal and State regulations will impact future claims for a specific group of chemicals, per- and polyfluoroalkyl substances (PFASs).

Presumably to aid in risk selection, some insurers showed a preference to smaller, middle-market placements and were less competitive on larger portfolios or complex risks. In contrast, some insurers continued to provide limits greater than $25 million and continued to market capabilities for 10-year transaction-based policy terms. 

Some specific classes of business were relatively more difficult to insure, due to fewer interested insurers; these classes included: Healthcare, Hospitality, Redevelopments (especially with respect to mold), and any risk linked to PFOA/PFOS chemical usage (i.e., PFAS). These classes joined Pipelines, Mining, and Fracking, which have historically been subject to much higher underwriting scrutiny.

Competition on renewals continued to yield decreased premiums/rates in certain circumstances by up to 15% (depending on the marketing strategy and risk-specific factors). With respect to rate, incumbent carriers continued to be at a disadvantage when renewals were competitively marketed and where flat rates (and any rate increases) were exposed as non-competitive. 

Forecast

An increasingly strong economy provides optimism, and current market capacity suggests that a meaningful hardening of the market is unlikely. 

There appears to be an opportunity for one or more insurers to separate themselves through quality marketing campaigns and an improved buyer experience that emphasizes creativity, consistency, and high-quality service. Insureds would be wise to read their policy wordings carefully when changing forms, ask questions, and look beyond premiums alone when selecting an insurer. Policy language and coverage nuances will be magnified as claims activity continues to increase.

Healthcare

Premium Overview

Coverages Year-end 2017 Mid-year 2018
Medical Professional Liability Flat to tightening Flat to slight increase
Managed Care E&O Liability Flat Flat
Medical Stop Loss Liability Flat to tightening Flat to slight decrease

Market Overview

MEDICAL PROFESSIONAL LIABILITY
The first half of 2018 was an interesting time for the Medical Professional Liability (MPL) marketplace. While there continued to be significant capacity in the industry, there were definite signs of premium tightening. Traditionally strong healthcare carriers began changing their strategic approaches to pricing renewals and started requiring rate increases or taking more dramatic steps to protect their healthcare books. For instance, Zurich Healthcare announced its decision to exit specific, more challenging venues effective October 1, 2018, due to the number of high severity MPL claims and verdicts in those venues (e.g., Cook County, IL; Baltimore, MD; Philadelphia, PA; counties in Florida and other venues that impacted their healthcare book).

The challenges associated with operating in a soft market where Medical Malpractice insurance rates have not changed significantly in more than a decade began to affect underwriters, who sought rate increases for renewals in the first half of 2018. Such pressure for rate increases will continue throughout the remainder of 2018. In other instances, some underwriters began reducing the limits they provided to clients, historically, to try to mitigate the impact to the high severity claims that rippled through the towers of coverage.

The uncertainty surrounding the Healthcare landscape continued in 2018, with the following issues on the forefront:

  • Health system mergers continued, creating “Mega-Healthcare Systems,” although a new set of religious directives from the U.S. Conference of Catholic Bishops could make it more complicated for Catholic and non-Catholic health systems to forge merger or partnership deals
  • Hospitals’ continued employment of physicians
  • Continued influx of private-equity backed acquisitions of physician and surgeon practices
  • The changing landscape of health plans, including CVS’ announcement to acquire Aetna, United Healthcare and Optum; and Humana’s acquisition of Kindred
  • Anticipation of disruptive technology, such as Amazon; Walgreens’ collaboration with New York Presbyterian; and Walmart’s ambitious goal “to be the number one healthcare provider in the country”

While these changes influence point-of-care service in the U.S., underwriters and brokers in the Healthcare sector are “re-thinking” the most cost effective and efficient models to protect the assets of Insureds and to mitigate claims risk.

Insurance and reinsurance carriers noted that combined ratios increased to over 100% in 2016 and 2017, a trend which is expected to continue through 2018. Impacting these results were multiple large medical malpractice verdicts, with over 30 in 2017 that exceeded $10 million. For example, in 2017: 

  • A $61.6 million judgment in Rhode Island was awarded to a patient who sued two doctors and a hospital for taking him off blood-thinning drugs, a decision that led to severe blood clots in his legs and lungs and required the amputation of his right leg. The September verdict was the largest Medical Malpractice or Personal Injury award in the state’s history.
  • In March, an Arkansas jury awarded $46.5 million to the family of an infant who suffered brain damage, finding that doctors at a hospital were negligent by failing to undertake procedures to prevent a skin condition the child had from worsening.
  • Following a bench trial, a Pennsylvania federal judge ruled in April that the federal government must pay $41.6 million to a couple after finding that a doctor at a federally-funded health clinic negligently used forceps to deliver the couple’s baby, which caused permanent brain damage.

The high severity settlements continued in 2018, with the Muskegon Chronicle (MI) reporting July that:

  • A Wayne County jury awarded $135 million to the plaintiff in a Medical Malpractice lawsuit against the Detroit Medical Center Children’s Hospital of Michigan, according to Southfield-based Fieger Law. The lawsuit filed in 2013 focused on the care provided to Faith DeGrand of Wyandotte, who underwent a spinal surgery for scoliosis at DMC Children’s when she was 10.

The increase in the severity of MPL claims continued throughout 2017, and similar increases are expected throughout 2018, as inflation for medical expenses outpaces CPI; the cost of medical experts continues to rise; and plaintiff attorneys continue to utilize higher-cost experts.

For renewals during the first half of 2018, underwriters in the U.S., London, and Bermuda were unwilling to offer decreases to many clients and indicated their willingness to walk away from accounts if the client was unwilling to bind a flat or, in many instances, increased renewal proposal. 

Additional factors that continued to challenge underwriters include:

  • Claims inflation
  • Batch claims
  • Tort reform
  • Coordination by plaintiff attorneys
  • A shrinking client market
  • Oversupply of insurance capacity
  • Reduction in the availability of reserve releases

CYBER PRIVACY AND NETWORK SECURITY
While there have been no reported attacks on the scale of last year’s WannaCry and NotPetya attacks, the number of breaches so far this year is tracking with last year’s numbers and the Healthcare industry remains a prime target. Last summer’s ransomware attacks continued to drive increased focus on business interruption as a key component of a cyber purchase, with more availability for systems failure and contingent business interruption. The impact of the inability to either access electronic health records or of a third party vendor’s inability to process billing on a timely basis has impacted healthcare organizations’ appetite for Cyber insurance in the U.S.  

Along with ransomware, the quantity of wire fund transfer fraud via social engineering continued to rise and is approaching epidemic proportions in the Healthcare sector. While coverage for this exposure can be provided via a crime or cyber policy, in most circumstances, it is substantially sub-limited in both policies. However, excess capacity is beginning to appear. Through July, the Identity Theft Resource Center (ITRC) identified 181 data breaches in healthcare organizations involving a known loss of personal identifiable information (PII). At mid-December last year, ITRC reported 366 breaches, so last year’s trend appears to be continuing into 2018.

The Office of Civil Rights (OCR) breach portal lists a total of 2,384 healthcare-related breaches since its inception in December 2015, with the makeup of the breaches as seen below: 

As of April 14, OCR has now received 184,614 HIPAA complaints relating to such breaches. Civil penalties were imposed in 55 cases, for a total of $78.8 million in civil penalties. Penalties have been as large as $5.5 million in 2017 and two cases this year carried penalties of $3.5 million and $4.348 million. 

Despite this activity, there remained competition for risks with good security maturity and loss histories, and improving coverage. Major insurers continued to enhance their cyber risk management tools, providing additional benefits to those clients who choose to use those resources.

MANAGED CARE ORGANIZATION E&O
Managed Care Organization E&O continued to grow as an area of exposure. Considerable activity persisted with health systems formulating Accountable Care Organizations, creating their own insurance companies to write health benefits, and participating in contracts with insurance companies in which providers assume expanded responsibility for disease management, enrollee tracking and management, and advisory services to outside practices.

Although the creation of smaller MCOs by hospital health plans has allowed insurers to diversify their books to include a portfolio of smaller accounts, underwriters are concerned about the increasing complexity of healthcare organizations. At times, that complexity has made it difficult to identify and quantify the potential risks of plan design, case management and general population health.

On a macro level, carriers continued to be concerned with the uncertainty of the repeal and/or replacement of the ACA and continued consolidation of managed care entities. Carriers closely monitored changes to the ACA. Changes in the funding and structure of the ACA may have a material impact on the managed care market. 

Underwriters were increasingly concerned about current or future claims alleging:

  • Antitrust
  • Design and/or administration of cost control systems (incentives, quotas, etc.)
  • Down coding (insufficient revenue to providers) and allegations of deliberate slow reimbursement
  • Civil rights actions from patients who are denied care 
  • Allegations of miscalculation of medical expense ratios
  • Releases of protected health information, personally identifiable information, and payment card information
  • Cyber coverage being increasingly pulled out of the Managed Care E&O policy

The marketplace for Managed Care E&O coverages remained competitive. Many healthcare accounts placed this coverage in their captives, but on smaller accounts that insure these coverages the following trends emerged:

  • There were fewer overall markets writing this coverage.
  • Ironshore, One Beacon, AWAC and AIG appeared among the leading insurance carriers in Managed Care E&O cover, consistently providing competitive quotes.
  • Some markets offered a credit (0% to 3%) if the small grant of Cyber coverage was pulled out of the policy to be covered under the Insured’s Cyber policy.
  • Rates remained static unless: (1) the Insured had adverse claims development; and (2) there was a material change in exposure (e.g., number of enrollees, type of services provided, etc.).  
  • For this coverage, underwriters did not seem to have any mandatory rate increases unless warranted due to changes in exposure or claims experience. However, the carriers will seek rate and premium increases comparable with an increase in exposure.
  • Retentions (SIRs) depend on the type and size of the organization, but there should not be significant deviations from the past year. However, when claims or material increases in exposures (enrollment) occurred, underwriters generally tried to increase retentions and increase premium (rate).
  • Overall market appetite in this space remained unchanged and underwriters will continue to entertain everything from small managed care contracting vehicles on up to large national health plans.

MEDICAL STOP LOSS: HEALTH RINSURANCE, EMPLOYER RISK & PROVIDER RISK
In the first half of 2018, the Medical Stop Loss and Reinsurance market continued to see upward pressures on rates driven by the rising costs of specialty drugs and increased frequency of high cost ($1+ million) claims. Such pressures could be countered by high-quality data and a willingness to adapt. High standards and detailed data often returned a competitive, but disciplined market, while poor data resulted in a difficult market. Additionally, the established and growing use of captives in this business lead to a wider access of markets being willing and able to accurately price the risk.

Government regulations remained an important consideration moving into 2018. Despite the current administration’s unsuccessful attempts at repealing the Affordable Care Act in 2017, the legislation has faced some serious challenges in 2018. The lack of federal action to improve specific weaknesses in the ACA and actions by the current administration to exacerbate those weaknesses continued to cast doubt on the ACA’s longevity. The ability to adapt in this ever-changing healthcare landscape and find underwriters who have adapted with it remained essential.

Mergers and acquisitions of clients was a distinct challenge in 2017 and remained so thus far in 2018, as new leadership brought new risk management strategies different than the ones that had suited clients in prior years. The uncertainty of renewal in many cases created a need for greater client management and a push to win new accounts.

These types of market conditions present the Insurance and Reinsurance industry with both challenges and opportunities for innovation. 

A few ongoing trends and updates to note regarding the Medical Stop Loss market are:

MARKET DEVELOPMENTS

  • PartnerRe reported a $120 million net loss to its shareholders for Q1 2018. 
  • In June 2018, a significant number of PartnerRe executives and underwriters in their Managed Care and Corporate team left the company to form a new Reinsurance market entry named Sequoia Reinsurance, financially backed by ELMC Risk Solutions and led by CEO Dan Bolgar. PartnerRe’s remaining leadership has said that the company remains fully committed to the market sector. Staffing additions will be a challenge due to talent scarcity.
  • HM Life announced that their 12-year relationship with MGU Risk Based Solutions (RBS) is ending and they are bringing underwriting and claims in house. The RBS team is exploring options. HM has hired industry veterans Scott Machut and Mark Lawrence. HM intends to expand in the Provider and ACO market sectors.
  • Munich Re announced in late 2017 that they were exiting the HMO Re, ESL and PXS markets. The managers underwriting this business facilitated buyouts of Munich’s current accounts and left the company to continue underwriting HMO Re, ESL and PXS. The Munich MBO team formed a new MGU, using Nationwide and Everest paper to write ESL and HMO/PXS, respectively.

EXCHANGE LIVES

  • The final ACA exchange enrollment for 2018 was 11.8 million lives, which is a 3.3% decrease from 12.2 million lives in 2017. This indicates strong interest from consumers in getting or remaining covered, despite actions by the current administration to undermine the ACA. Signs point to the further erosion of insurance coverage in 2019, including: the repeal of the individual mandate penalty included in the 2017 tax law; recent actions to increase the availability of insurance policies that are not in accordance with ACA minimum benefit standards; and support for Medicaid work requirements. 
  • Major markets (i.e., Aetna, Anthem, Blue Cross Blue Shield, and Humana) reduced their presence in the exchange market in 2018, citing large losses and growing uncertainty surrounding the future of the Affordable Care Act under the new administration. Aetna and Humana pulled out completely, while Anthem and Blue Cross only offer exchange plans in select states.
  • A number of major markets had extremely poor experience with newly Insureds, which resulted in higher rates and large losses. With more data of the newly Insured population becoming readily available, there is a push to better understand how to most efficiently and effectively serve this market segment. 

MEDICARE SHARE SAVINGS PROGRAM (MSSP) AND NEXT GENERATION ACOS

  • The total number of MSSP ACOs increased from 480 at the beginning of 2017 to 561 in January of 2018. Similarly, the total number of assigned beneficiaries increased from 9.0 million to 10.5 million.
  • With many of the Accountable Care Organizations (ACOs) in the final year of their upside-only risk contract (MSSP Track 1) for 2017, they began shifting into the MSSP’s two-sided risk options effective 2018. 
  • To ease this transition to Track 2 or 3, the Centers for Medicare & Medicaid Services (CMS) introduced Track 1+. Based on Track 1, this intermediary model tests a payment design that incorporates more limited downside risk compared to Tracks 2 and 3 (as well as elements of Track 3) to help ACOs better coordinate care. Furthermore, Track 1+ ACOs will be eligible to participate in advanced Alternative Payment Models (APMs) under the Quality Payment Program created by MACRA.
  • The introduction of the Track 1+ model combined with the shift of many ACOs to two-sided risk contracts has increased the percent of ACOs in risk-based tracks from 9% in January 2017 to 18% in 2018.
  • The Next Generation ACO Model is an initiative for ACOs that are experienced in coordinating care for populations of patients. It will allow these provider groups to assume higher levels of financial risk and reward than are available under the MSSP.
  • In 2017, it was difficult to find markets that were willing to price ACOs moving from Track 1 to Track 1+ or higher in 2018 due to their unfamiliarity with the risk. As more performance years of results are published by CMS, markets should feel more comfortable effectively pricing ACOs. Additionally, increased use of captives by ACOs will provide better market access.

MEDICAID ACCOUNTABLE CARE ORGANIZATIONS

  • Ten states have implemented Medicaid Accountable Care Organizations (ACOs) to align provider and payer incentives with the goal of managing costs and delivering quality care to beneficiaries. At least 13 more are actively pursuing them.
  • These ACOs, similar to their Medicare counterparts, will focus on value-based payment structures, measuring quality improvement and analyzing data.
  • Medicaid ACOs will also be required to provide financial guarantees, such as a letter of credit or surety bond. Consistent savings have been available through surety bonds over letter of credit pricing for Medicare ACOs and similar results are expected for Medicaid ACOs as they continue to emerge across the U.S.

MEDICARE ACCESS AND CHIP REAUTHORIZATION ACT OF 2015 (MACRA)

  • This Act creates a new Quality Payment Program to reward physicians for providing higher quality care to Medicare beneficiaries by implementing two payment tracks: Merit-Based Incentive Payment Systems (MIPS) where providers are evaluated on their performance in four categories; and Advance Alternative Payment Models (AMPs), that are designed for providers who have experience coordinating care. Risks and rewards are accepted by the provider with the promise of meeting quality measures. These two tracks will begin in 2019.
  • The first year of performance measuring began in 2017 and results will determine the payments to providers in 2019.

SPECIALTY PHARMACY

  • Costs related to pharmaceuticals continue to increase year over year and cause financial challenges for health systems. Reinsurers continue to be impacted by multi-million dollar pharmaceutical claims.
  • Both high-cost orphan drugs and drugs developed to treat conditions like Hepatitis C are driving costs up due to their heavy use and high demand. Additionally, high-cost drug claims often require more time for the reinsurer to review, which can lead to delayed claim payments.

SELF-FUNDING

  • Since the Affordable Care Act (ACA) passed, there has been significant growth in self-funding. Many fully insured plans contemplated and successfully transitioned to self-funded plans.
  • Benefits of self-funding include more control over the plan document, less regulatory oversight, and flexibility to choose providers and networks that best fit the plan. Additionally, the ACA implemented the removal of limits, making Medical Stop Loss insurance a tailored solution for protecting those plans that elect to self-fund.
  • The number of claims exceeding $1 million more than doubled in the past five years, and now, although less than 2% of Stop Loss claimants produce costs over $1 million, those claimants account for 18.5% of the total Stop Loss payments. These higher associated claims costs are expected to somewhat slow revenue growth in the Stop Loss market; however the risk-mitigation, customization, and regulatory savings aspects of the market will continue to make it an attractive segment of Health insurance.

Emerging Risks

Technological advancements; disruptive innovations threatening core business models; recurring natural disasters with catastrophic impact; soaring equity markets; turnover of leadership in key political positions; cyber breaches on a massive scale. These and a host of other significant risk drivers are all contributing to the risk dialogue happening in boardrooms and executive suites according to a report by Protiviti and North Carolina State University’s ERM Initiative (July 2018).

Key stakeholders in healthcare organizations are requiring greater transparency about the nature and magnitude of the risks they are undertaking in executing an organization’s corporate strategy,

SHIFTING DYNAMIC IN CARE DEMANDS
As population health and value-based payment models take center stage, there is a shift from providers having control over the price and quality of care, to patients having ultimate control based on their ability to view provider quality scores and perform comparisons in order to make more informed decisions about who will provide their care. Also, a generational shift to Millennials as active decision-makers is fully underway. New approaches for receiving and obtaining care are necessary, and providers are having difficulties identifying and being flexible enough to address new requirements on a timely basis.

OPIOID CRISIS
The epidemic of opioid misuse and abuse continues to have a profound economic impact on individuals, employers, and other groups that sponsor Health insurance plans, as well as on the care delivery system. Costs associated with opioid abuse have increased dramatically in recent years, including drug abuse treatment services and lost productivity. In just five years, claims charged to insurance companies to treat opioid dependence or abuse grew from $72 million to $722 million — an increase of almost 1,000%.

No one should be surprised that the personal injury lawyers’ national trade group in Washington hosted a seminar in September 2017 entitled: “Rapid Response: Opioid Litigation Seminar” to educate attendees about how they might leverage growing litigation opportunities involving opioid misuse and abuse. One of the breakout sessions was even titled, “Opioids: The Next Tobacco.”

TELEHEALTH/TELEMEDICINE
Advances in technology, the current physician shortage and the dramatic increase in the number of patients seeking care under the Affordable Care Act have led a growing number of healthcare facilities to expand their use of telemedicine to deliver services to patients in hospitals as well as in remote locations. Over half of all U.S. hospitals now use some form of telemedicine to treat patients.

The delivery of healthcare via telecommunication technology presents healthcare providers and organizations with unique risks and challenges. Some of the main areas of concern are licensing, credentialing/privileging, online prescribing, informed consent, and the privacy/security of confidential health information.

SEXUAL HARASSMENT
Last year, a JAMA study found that nearly one-third of women in academic medical faculties reported having experienced workplace sexual harassment. According to that report, women also perceived and experienced more gender bias than men.

According to Becker’s Healthcare Review (6 December 2017), at least 3,085 employees at general medical and surgical hospitals filed claims of sexual harassment with the U.S. Equal Employment Opportunity Commission between fiscal years 1995 and 2016.

According to EEOC data obtained by BuzzFeed News, 170,000 sexual harassment claims were filed during the 21-year period. Roughly 83% of the claims were filed by women, while 15% were filed by men. Two percent of individuals filing complaints did not specify a gender.

This trend illustrates, among other things, a lack of sexual harassment and diversity training and sexual harassment policies as a general matter in the industry.

WORKPLACE VIOLENCE
Hospitals may be places of healing, but they also have become the scene of an increasing number of violent incidents. Such incidents not only put patients at risk but also medical professionals, who are often the targets of attacks, harassment, intimidation and other disruptive behavior. The incidence rate for violence and other injuries in the healthcare and social assistance sector in 2012 was over three times greater than the rate for all private industries.

THE COMPLEXITY OF SEPSIS RELATED CLAIMS
Healthcare-Acquired Infections (HAIs) cost the U.S. healthcare system billions of dollars each year and lead to the loss of tens of thousands of lives. At any given time, about 1 in 25 hospital patients has at least one such infection, according to the Centers for Disease Control and Prevention.

PANDEMIC INFECNTIONS
Growing concern about Ebola and other infectious diseases has forced healthcare facilities to review their current practices and consider the impact that a potential nationwide pandemic would have on their organizations and the communities they serve. The ability to deliver care with minimum disruption and safeguard the health of workers and patients will depend on planning and preparation measures that organizations undertake today.

Forecast

The softness of the market over the past decade is changing. Continued tightening in the marketplace is expected. While capacity is still available, the recent consolidation activity of Medical Professional Liability carriers is likely to continue in order to sustain market share and create underwriting efficiencies. 

Underwriters, such as Zurich, Berkley, C.N.A., and the Aon/ASHRM report, expect the upward trend in claim severity to continue, as detailed in their benchmarking analysis. While there are fewer malpractice cases filed, they are more expensive to defend, thereby driving up legal and related expenses for carriers and self-insured entities.

Emerging risks are evolving and present real concerns for healthcare organizations that require a proactive risk management approach. Consumers demand a healthcare experience that mirrors the convenience and transparency of their banking, retail, transportation and other purchasing experiences. Healthcare organizations need to evolve with these changing demands from their customers while insurance carriers and brokers must provide cutting edge solutions to address developing risks.

Executive & Professional Risk

Market Overview

The trends of the last few years continued with the D&O marketplace remaining competitive throughout the first half of 2018. Abundant capacity was a driving force, helping keep premiums in line with recent periods, subject to individual Insured’s risk profiles. Primary layer carriers attempted to secure mid- to high-single-digit increases in premium, but generally renewed accounts closer to expiring premiums when pressed. Excess markets typically sought to follow primary carrier increases, but market leverage usually meant the first excess carrier renewed flat and then all other excess carriers followed suit. Self-Insured retentions remained stable. Excess capacity also helped to stabilize pricing in the Employment Practices Liability, Crime, and Fiduciary Liability markets.

Coverages Year-end 2017 Mid-year 2018
D&O Liability Flat Flat to slight increase
EPL Flat to slight increase Flat
Commercial Crime Flat to slight increase Flat
Fiduciary Liability Flat to slight increase Flat

D&O Liability

PREMIUM/CAPACITY OVERVIEW
Primary rates remained relatively stable throughout the first half of 2018 with renewal pricing in line with those expiring across most industry segments (in the absence of material changes in risk). A number of markets (e.g., AIG, Chubb, HCC, XL, etc.) continued to make attempts at leading the marketplace into increasing rates, but when presented with viable competition, they renewed closer to flat. In addition, carriers continued to receive pressure to provide broader terms and conditions. In general, enhancements to existing coverage were available on a risk-specific basis and entity coverage for government investigations became more broadly available.

Although more carriers now have the capability of offering locally-admitted foreign policies, there are only a handful of markets able to satisfy the needs of multi-national corporations with operations in numerous countries. 

The Excess marketplace continued to remain competitive with increased interest from Excess markets seeking market share, which drove down rates. Many programs have already capitalized on this phenomenon, but additional savings may still be available.

COVERAGE OVERVIEW
The Pay Ratio Disclosure Rule adopted by the SEC, which enforces section 953(b) of the Dodd-Frank Act, went into effect for fiscal years that started on or after January 1, 2017. This means that the 2018 proxy season will be the first time many public companies will make pay ratio disclosures pursuant to that rule. The rule generally requires companies to disclose: (1) the median of the annual total compensation of all its employees (other than the CEO or any equivalent position); (2) the annual total compensation of its CEO (or any equivalent position); and (3) the ratio of those two amounts. Litigation could arise in connection with these disclosures from activists who file lawsuits based in part on ratios that may be out of line with peers, or even ratios that are simply higher than average, increasing potential D&O risk exposure.

For the fifth year in a row, federal securities class action lawsuits continued to rise. In 2017 there were 412 filings compared to the previous record level of 271 during the whole of 2016, representing an increase of more than 50%. M&A lawsuits were the driver of this with 198 suits filed, more than double the 85 that were filed in 2016.

The first half of 2018 continued at this unprecedented level with 204 securities class action lawsuits filed, including 83 (40%) merger objection suits. Recent studies have suggested that although the percentage of mergers and acquisitions becoming subject to merger objection litigation has declined, the costs of merger objection litigation have increased. It remains to be seen what the net impact of these competing forces will be on insurer losses.

Claims arising from the #MeToo harassment and discrimination phenomenon are still developing, and it is likely too early to predict what impact such claims will have on the D&O (and EPL) marketplace. Claims could be significant. Michigan State University has approved a settlement of $500 million to the more than 332 sexual abuse victims of Dr. Larry Nasser; MSU reportedly maintains coverage for the exposure, although details of the coverage and insurer responses to the claims are unknown.

Employment Practices Liability

PREMIUM/CAPACITY OVERVIEW
Primary rates remained relatively stable. There were few significant coverage enhancements offered in the first half of 2018, but insurers were generally amenable to modifying endorsements and improving coverage on a case-by-case basis.

Markets remained concerned about California and Florida exposures due to high frequency and severity losses, as well as wage and hour risk.

COVERAGE OVERVIEW
Wage and Hour coverage remains rare because of premium expense, as well as retention levels. At least one Bermuda insurer offered the coverage with a retention of less than $1 million.

Commercial Crime

PREMIUM/CAPACITY OVERVIEW
The Commercial Crime market remained stable during the first half of 2018 with most policies being renewed at levels consistent with the expired policy. Larger accounts with revenues of more than $1 billion have tended to be loss leaders for Crime markets because of international exposures and difficulties in maintaining internal controls overseas. Rather than imposing premium increases, markets have sought to “right size” deductible levels for multi-national corporations. Smaller-sized accounts remain a preferred class for markets with premiums and deductibles remaining competitive.

COVERAGE OVERVIEW
Social Engineering Fraud continued to be an exposure where coverage was expressly endorsed with a sub-limit onto the policy by insurers; however, two recent court cases (Medidata and American Tooling Center) received federal appellate court decisions holding that, in those specific instances, the computer fraud-related sections of Insureds’ crime policies covered a company’s losses from email payment instruction schemes.

Fiduciary Liability

PREMIUM/CAPACITY OVERVIEW
Similar to EPL and Crime coverage lines, the Fiduciary Liability marketplace was competitive during the first half of 2018, with policies experiencing stabilized pricing in the absence of material changes in risk. Although many public companies have removed their own stock as an option on 401(k) plans, those that have not remain under close scrutiny, with insurers often imposing higher retentions on them.

COVERAGE OVERVIEW
Consistent with recent periods, there continued to be activity by plaintiffs’ law firms, asserting claims of excessive fees in 401(k) plans. In these matters, plaintiffs generally alleged that plan fiduciaries breached Employee Retirement Income Security Act of 1974 (ERISA) duties of loyalty and prudence by offering investment options that carried high fees and performed poorly. Despite these claims, Fiduciary Liability pricing remains stable, due largely to abundant capacity and resulting competition among markets.

Forecast

As long as abundant capacity remains available from the marketplace, no significant changes in the pricing or coverage offerings for these lines of business are expected throughout the remainder of 2018. 

Marine

Premium Overview

Coverages Year-end 2017* Mid-year 2018
Marine Cargo Flat Flat to 10% increases on clean loss records; larger increase with poor loss history
Marine Hull & Liability Flat with slight increases in the last few weeks Flat to 10% increases on clean loss records; larger increase with poor loss history

* Based upon renewal with incumbent market. Greater rate decreases/broader coverage terms could be achieved with marketing.

Marine Cargo & Stock Throughput

MARKET OVERVIEW
The hurricane season was extremely active during 2017, and directly affected the Cargo and Yacht books of business. Lloyd’s probably suffered more than most, posting a $2 billion loss for 2017, against a profit of $2 billion for 2016. The Marine lines of business represented $500 million of this loss (with a calendar year combined ratio of 122.45%).

As the largest Marine insurer/reinsurer, Lloyd’s is taking a hard look at strategies to turn losses back into profits. They have identified seven classes of business and requested business plans from all Syndicates in the hopes of turning the Marine Hull, Yacht and Cargo classes around, among others.

Developments in London may allow an eager U.S. market to write business that traditionally would have gone to London underwriters. Still, there remains a considerable amount of non-U.S. based business, which U.S. underwriters would not consider due to the geographic location of operations, claims history, and other issues specific to particular Insureds.

To counter this, a number of London-based underwriters have established satellite offices in America. Additionally, many U.S. underwriters have reinsurance treaties in London markets, which means their ability to quote, competitively or otherwise, could be tied to their reinsurance allowances, terms and conditions.

CAPACITY OVERVIEW
While all Cargo underwriters have generally suffered recently due to pricing reductions year over year, Lloyd’s and London companies were hit particularly hard. Many brokers used line slips for much of their general business, and some of these line slips showed poor to very poor results, which led many underwriters to abandon them.

U.S. underwriters suffered less than the London market as a result of last year’s hurricanes, and were thus able to take advantage of capacity reductions and pricing increases in London. There were even new entrants into the U.S. Cargo market, with the aim of capitalizing on tightening conditions.

COVERAGE OVERVIEW
Coverage terms tightened in the London market as capacity continued to contract, while U.S. underwriters continued to offer broad terms and conditions.

Profit sharing continued to be available for most accounts when marketed, generally with a maximum of 25-30% of annual premium eligible to be returned dependent upon loss experience.

FORECAST
The depth of the corrective measures now being taken in the London market will determine what to expect in the year ahead. U.S. underwriters could continue to take on accounts that are being displaced in London, as long as they remain aggressive and there is a benign finish to the CAT loss year. There will be some impact to U.S. carriers’ abilities once many of the London-centric reinsurance treaties renew in early 2019.

Marine Hull & Liability

PRICING OVERVIEW

Hull
Fleet business remained attractive despite low rates. Typically, these were placed into multiple markets so no one market had a full grip on the business. Assuming low loss ratios, these were renewed as expiring. Small fleets and doubletons/singletons (usually placed more into London than the U.S.) saw small rises, as did green/brown water accounts.

Ancillary coverages such as Increased Value and War Risks were profitable, but accounted for only a small percentage of overall premiums written. These rates were typically flat. Underwriters started to look more closely at conditions and deductible levels and exercised more quality control than before. Overall, underwriters were much more selective about the business they wrote (new and renewal) and were not afraid to walk away, even from longstanding accounts.

Protection & Indemnity (P&I)
International Group Agreement P&I Clubs

Another year with zero general increases did not reduce the competition between Group Clubs. In February, many large and longstanding ship owner members chose to move all or part of their fleets to different Clubs. Post renewal, there has been movement of staff within the Clubs with several well-known underwriters moving Clubs and some movement from the broking market to the Group. 

Financially, the Group continues to do well with some Clubs choosing to return funds to owners. Renewals in 2019 should continue at current terms.

Fixed Premium Market
The sale of Navigators’ P&I book to Thomas Miller Specialty in January heralded a year of change within the fixed market. A downsizing of the teams at MS Amlin, restructuring at Lodestar, and rumors of other facilities being sold should create change in the fixed market.

The advent of a two tier fixed system made up of facilities that are either run by P&I Clubs (or Club managers) and those who are independent of Group Clubs appears to be on the horizon. The result of these changes has been a slight hardening of the market over the last six months, which may continue.

Liability
Generally, this market continued to produce profits, albeit smaller than in the past. Reserving strategies remain prudent as the tail for these accounts can be considerably longer than for Hull or Cargo-related risks. Therefore, typical renewals were flat. 

CAPACITY OVERVIEW

Hull
Capacity remained plentiful worldwide, with an excess of $1 billion available. The largest valued risks, such as new cruise ships, were placed fairly easily. Lloyd’s market employs a risk weighted capital strategy where less capital is needed to write Hull than the equivalent for Liability, due to the short/long tail nature of the different businesses. This encouraged non-marine syndicates at Lloyd’s to begin writing Hull business.

P&I
Capacity is plentiful with most of the fixed premium markets providing up to $1 billion where requested.

Liability
Generally, capacity remained the same, if not greater, than in the past. The largest account written was the reinsurance of the Group Clubs, which used about $4 billion of capacity in the open markets.

COVERAGE OVERVIEW

With the exception of Cyber, which is being addressed on a daily basis and is a major concern, terms and conditions were negotiable.

FORECAST

Some Lloyd’s Syndicates have now withdrawn from Hull business due to management pressures. Since Lloyd’s can refuse business plans that do not show a return to profitability, more Syndicates may shut their doors to Hull.

U.S. carriers’ capacity to capitalize on the changes occurring in the London market will determine the state of the worldwide market through the remainder of this year and into the next.

Professional Firms

Market Overview

The Professional Firms market for Accountants and Lawyers is highly competitive. Likewise, consolidation among insurers has yet to have any meaningful impact on rates, due to the large number of underwriters in this class. Despite abundant capacity however, insurer management is increasingly focused on underwriting profit, which has resulted in limit, retention and appetite discipline. Broad coverage continued to be available.

Premium Overview

Coverages Year-end 2017 Mid-year 2018
Accountants Professional Liability Flat to slight increase Flat to slight increase
Lawyers Professional Liability Flat to slight increase Flat to slight increase

Capacity & Coverage Overview

ACCOUNTANTS COVERAGE
Market conditions remained soft, with significant capacity available from both domestic and offshore insurers. There were some signs of firming, with certain insurers becoming less aggressive than in recent years, including incumbent markets not being as willing to significantly reduce premiums to retain business. Firms with substantial growth or paid claims saw increased premiums and retentions. Domestic insurers sought ways to grow their premium base, and were willing to consider opportunities outside of their traditional focus areas, which may lead to further softening. 

Large firm segment – Firms continued to show strong revenue growth from both organic and acquisition activity, with insurers being able to capture only a portion of that through premium increases. Clients with losses or open claims experienced flat or increased rates, which in many cases, were partially or totally offset by increased retentions. Excess layers specifically were very competitive and included newer entrants vying for market share.  Some insurers reduced capacity to more conservative levels. Broad policy wording and customizable coverage continued to be provided.

Small to mid-size firm segment – Premiums were generally flat. Insurers traditionally playing in the smaller firm segment have been showing interest in larger firms. While this is partly driven by the growth in average revenues, insurers have seen good results in the small firm segment and now seek to expand their target market.  

LAWYERS COVERAGE
Lawyers’ professional liability rates remain at historically low levels due, in large part, to abundant capacity available in the U.S., London and Bermuda. In 2017, firms generally saw flat to +/-2% rate renewals. However, faced with frequent severe claims, the lawyers’ professional liability market has exhibited underwriting discipline regarding line size, self-insured retention levels and law firm risk profile. Firms with a history of losses face greater challenges maintaining low rates and favorable terms and conditions than in the past. 

Large firm segment – In response to flat demand for legal services, law firms have grown by increased acquisition and lateral hire activity. Consequently, underwriters have increased their focus on minimizing exposures to, and charging for, prior Lawyers’ Professional Liability rates remained low and there was abundant capacity available in the U.S., London and Bermuda. Firms generally saw flat to +/-2% rate renewals. However, evident underwriting discipline belied any assertion of a truly soft cycle.  

The frequency of legal malpractice claims was flat compared to 2017, and levels appeared to be trending slightly downward. However, underwriters contended that increasing frequency of severe claims, first noted in early 2017, remained a threat to profitability. Consequently, strategies to minimize exposure to severe claims evolved in 2018. Familiar underwriting discipline regarding line-size and law firm risk profile remained anchor practices. 

In early 2018, underwriters’ focus on increasing self-insured retentions was apparent, particularly for larger firms. Another major consistency in the market was underwriter reaction to adverse claim history and development. Fewer underwriters were inclined to compete hard for firms with adverse claims histories. This dynamic emboldened incumbent insurers to seek more substantial rate increase for firms with adverse claims development. 

Large firm segment – The improved economy resulted in improved demand for large law firm legal services, particularly in higher loss severity areas involving corporate transactions and M&A. While underwriters were poised to handle the risk of such practices, many underwriters exhibited concern regarding pervasive allegations of conflicts in related claims of legal malpractice. Firms in this segment experienced modest rate increases and more concerted efforts to increase self-insured retention levels on primary layers. Rate increases on the primary layers were partially offset by leveraging abundant excess capacity. Firms with large losses struggled to avoid more significant rate increases. Broad coverage and capacity in excess of $600 million was available to this segment.

Mid-size and small segment – Although there was ample capacity interested in writing this segment, mid-size regional firms were identified by several insurers as a source of severe claims. Generally, firms in this segment experienced flat to modest rate increases of 1-2%. However, underwriters in the mid-size segment have become less inclined to compromise sought-after rate increases in the face of competition and are now more likely to seek higher self-insured retentions. Mid-size and small firms must consider the value of their relationship with incumbent insurers and develop a strategic approach to leveraging abundant capacity reflecting that value.

FORECAST

Soft market conditions and healthy capacity should continue for the remainder of 2018, with the exceptions as noted. Firms with clean records will continue to see competition for their business, while those with claims will see some upward rate or retention pressure. Although abundant capacity will keep rates in check, taking advantage of favorable market conditions will require planning and knowledge of the market and its many participants.

Property

Market Overview

Last year at this time, there was virtually no catastrophic loss activity to upset the continued competitiveness of the Property market. Then disaster struck, and the third and fourth quarters took an unprecedented turn. Hurricanes Harvey, Irma and Maria (HIM losses), two large earthquakes in Mexico and wildfires in both the wine country and southern California wildfires, made 2017 the costliest catastrophe loss year in history. When it was all said and done, CAT losses totaled $140 billion.

From a CAT loss perspective, the first half of 2018 looked promising, with losses at less than half the 10-year average. Various hurricane predictors have generally predicted slightly below normal activity this hurricane season, which began on June 1.

The real story for the first half of 2018 has been how the market reacted, or didn’t react, to the worst year in catastrophic loss history. After an initial reaction of price hardening and underwriters’ efforts to re-capture the prior prevailing rates, the basic laws of supply and demand squashed the formalization of a hard market. There continue to be pockets of hardening based on loss history and ongoing exposure to windstorm, but for the most part, programs renewing in the first half of the year saw generally flat to low single digit rate increases. While carriers tried to hold the line, or raise rates, on incumbent renewals, they were generally aggressive on new business, forcing competition and holding cost increases in check.

Premium Overview

Coverages Year-end 2017 Mid-year 2018
All Risk Property Flat to single digit rate increases Flat to single digit rate increases

The continued availability of surplus capital in the marketplace has tempered insurers’ efforts to re-capture rate and harden the market.  

In general, the majority of renewals saw generally flat to single digit rate increases. However, there were pockets of hardening that experienced rate increases, such as: Caribbean risks; U.S. mainland coastal properties; and frame habitation and flood exposed properties.     

The particulars of any given portfolio dictate the terms and pricing of the renewal, but in general the half-year market conditions aligned within the following broad pricing categories:

  • Loss-free, non-CAT exposed portfolios: Flat to 5% rate increases
  • Loss-free but CAT exposed portfolios:  Flat to 15% rate increases
  • CAT losses with ongoing exposed portfolio or challenging occupancies, like habitational: 10% - 30% rate increases

Factors that can moderate the pricing include general policy and CAT deductible changes, available new capacity, program structure, limits and sublimits.

Capacity Overview

There was very little pull back in general capacity. Relatively benign treaty renewals allowed most carriers to maintain overall capacity offerings and remain aggressive in deploying it. Some carriers that have traditionally been interested in excess positions only vied for primaries and quota share structures.

The Insurance Linked Security (ILS) market, which many thought would shrink following 2017 CAT events, saw heightened interest from potential investors. A combination of a resilient traditional reinsurance/insurance market and the continued buoyancy of the ILS market, supported robust levels of available capacity.

Coverage Overview

The more closely controlled coverages in a property program (e.g., Contingent Time Element; Cyber; Non-Physical Business Insurance; Earthquake; Flood; and Windstorm) continued to attract underwriting scrutiny.

Flood will again take center stage as the National Flood Insurance Program (NFIP) was extended by the Federal government through November 30, 2018. FEMA has announced that it will look to issue a $500M CAT Bond for the NFIP that will include two types of investments, set at different claim triggers and offering differing returns based on the likelihood of a triggered payout. This will move national flood coverage further into the private sector, which could ultimately raise the cost of coverage for those with the greatest exposure.

Forecast

As the active half of the catastrophe season approaches, questions loom: will clients make it through the year relatively unscathed, or will the market repeat the catastrophic finish of the prior year? With global warming promising bigger, more frequent and wetter storms, will last year’s CAT losses become the new norm, or were they a blip?

If the latter half of 2018 passes without major catastrophes, there’s no reason to believe the market will become any pricier or more restrictive, given the abundance of capacity and associated competition. However, heavy CAT losses could test the ability of capacity to remain resilient. Only time will tell if heavy CAT losses will force investors, reinsurers and insurers to pull back for a period of time. 

Recommendations for 2018 renewals include the following:

  • Start the renewal process early
  • Differentiate your risk with detailed, accurate exposure data
  • Get Incumbent indications and expectations upfront
  • Talk to new markets throughout the year, not just during the marketing process
  • Use the models that the underwriters use to state your case
  • Decide what’s most important and what’s not and be willing to negotiate on the less important things
  • Consider diversifying your market portfolio; consider U.S. domestic, European, Asian, Bermudian and Lloyd’s markets 

Surety

Market Overview

The Surety market continued its profitable trend toward a pure loss ratio of 14.9% on an overall premium increase of 5.6%. In 2017, ENR 400 contractors had combined volume that exceeded the previous high water mark for the industry, which was set in 2008.

The Contract and Commercial Surety industries were predicted to grow 5 – 10% in 2018 and are on track throughout the first half of the year. The recovering economy allowed Surety to grow as business and construction recovered and solidified. Increased public infrastructure spending, specifically in the Transportation, Education and Military sectors, continue to project favorable outlooks for Contract Surety.

Premium Overview

Coverages Year-end 2017 Mid-year 2018
Contract Surety Flat to slight increase Flat to slight increase
Commercial Surety Flat to slight decrease Flat to slight decrease

Coverage overview

NOTABLE TRENDS

  • Recent entrants to the market ramped up their sales efforts and many saw double-digit gains in written premium volume.
  • Reinsurance continued to be plentiful and relatively cheap.
  • Fierce competition in certain market sectors created continued pressure on rates.

CONRACT SURETY
ENR 400 contractors continued to experience significant growth in their backlog. Healthcare, Education, P-3 type infrastructure, and multi-family continued to be strong markets for construction companies. The Contract Surety space saw increased use of collateral arrangements and funds control to enhance the credit capacity of small and medium-sized contractors. Rates were relatively firm.

COMMERICIAL SURETY
The Commercial Surety sector continued to show solid premium growth. The replacement of bank letters of credit with surety bonds for certain obligations continued to gain momentum. Rate competition continued to be fierce for investment grade credits. New entrants and plentiful reinsurance continued to put rate and underwriting pressure on all Commercial Surety players.

There was an increase in the use of surety bonds in place of bank letters of credit in the EU and the industry continued to entertain weaker credits.

Forecast

The Surety industry will face some major challenges in 2018. Barring a major catastrophic economic event, rate and underwriting pressure will likely be the norm. The overall credit picture in the commercial space continues to weaken as many underwriters are entertaining credits far below investment grade, albeit at a hefty price. The Surety industry is positioned to meet underwriting losses due to strong balance sheets, judicious collateral positions, spread of risk via multi-company participation and the continued use of reinsurance. M&A activity should continue in 2018.

Transportation & Logistics

PREMIUM Overview

In the first half of 2018, the transportation insurance marketplace remained competitive, which kept rates and premiums stable for Logistics Liability and All Risk Cargo insurance policies. Rates are expected to remain consistent in 2018.

The implementation of Sections 232 and 301 with increased bond limit requirements, as well as the handling of liquidated damages for late and inaccurate ISF filings presents some additional risk, yet rates for Customs Bonds are expected to remain generally flat for the duration of 2018.

COVERAGE OVERVIEW

U.S. CUSTOMS / MISCELLANEOUS SURETY BONDS
The implementation of Section 232 and 301 brings the possibility of businesses’ duty costs increasing as much as 25%. Section 232 focused primarily on certain steel and aluminum imports while section 301 could potentially affect over 1,300 products defined by Harmonized Tariff Schedule (HTS) subheadings.

Importers are likely asking how this will affect their bottom line; when the trade war will end; and what they should be prepared for next. U.S. Customs and Border Protection (CBP) continues to monitor the importation of commodities that are subject to high-risk antidumping and countervailing (AD/CVD) duties.

A minimum continuous bond will accommodate $500,000 of duties, taxes and fees in an annual period. CBP looks at bond sufficiency in a running 12-month window based on IOR number, not the bond itself. The bond liability on CBP’s notice may not be enough for the importer’s operation.  Importers should evaluate the value of goods they are importing, taking into account the impact of the new tariffs over the next 12 months to ensure their Customs Bond is sufficient.

LOGISTICS LIABILITY INSURANCE
With the implementation of new tariff regulations, it is important for Customs Brokers (CHBs) to be extra careful when classifying commodities on customs clearance documentation. CHBs should ensure that their Logistics Liability policy includes coverage for misclassification of goods with an extension covering Fines, Duties, Penalties & Regulatory Defense.

The U.S. average retail price of diesel fuel has increased by about 60 cents per gallon from this time last year, generating a higher surcharge as a percentage of overall revenue for domestic transportation. As a result, the Surface Freight Forwarder/Broker sector has experienced record revenue growth during this period.

Intermediaries should look for a program with broad coverage that includes a variety of options and enhancements, which may include: 

  • Errors & Omissions or Professional Liability 
  • Contingent Cargo or Cargo Liability 
  • Third Party Liability, Contingent Auto or Freight Broker Liability 
  • Abandoned or Uncollected Cargo 
  • Fines, Duties, Penalties & Regulatory Defense 
  • Claims by an Authority 
  • Claims Expenses

MARKET Overview

NEW PRODUCTS
Shippers often have their own vendor contracts and insurance, which poses a significant challenge to logistics companies coordinating coverage requirements. A flexible insurance program and the purchase of additional insurance coverage or enhancements may address this concern. There are additional factors to consider, such as the ability of the insurance partner to provide larger policy limits when needed, and the ability to designate clients as an Additional Insured and Loss Payee with a waiver of subrogation.

Additionally, there has been a growing demand for Cyber Liability insurance. Clients often act as freight intermediaries, accepting funds on behalf of their clients to pay duties and freight charges. There is a significant risk associated with these activities, which may warrant the consideration of a comprehensive cyber liability program.

If Customs and Border Protection (CBP) decides to adopt a secondary customs bond for importers of antidumping and countervailing duties (AD/CVD) merchandise, both new opportunities and challenges should be expected.

Forecast

U.S. Customs Bonds rates should also remain generally flat throughout 2018, with an increased focus on underwriting and collateral requirements. Many importers will see increased bond limit requirements with the implementation of Sections 232 and 301. 

Lower insurance premiums for Logistics Liability policies, the availability of broad coverage options and increased capacity will continue for the middle of 2018. In this relatively soft marketplace, strong competition will force insurers to keep rates and premiums stable.

 

 

 

 

This material is for informational purposes only and not for the purpose of providing legal or insurance advice. Insurance coverage, and the terms and conditions relating to such coverage, will vary. No representations or promises are made that any particular insurance coverage will be available to any individual or entity seeking such coverage. Integro is not a law firm and does not provide legal advice. If such advice is needed, consult with a qualified adviser.