Q2 2017 Market Report


Executive Summary

As predicted, the property/casualty market continued to operate with an abundance of capacity and competitive terms through the first half of 2017. Premium growth in the market averaged  three percent, which was roughly in line with U.S. economic growth and was somewhat contained by the high degree of market saturation and fierce competition amongst carriers for market share, as well as the absence of catastrophic loss events. Small pockets of risk may see some rate pressure (e.g., Cyber insurance may have higher rates given the pervasive nature of recent ransomware attacks; and automobile liability may see higher rates due to an increased frequency and severity of loss) but at a macro level, the trend supports a continued buyers’ market.

Factors identified in our earlier report such as the passing of Brexit, Healthcare reform and regulatory governance continue to merit monitoring, but have not created measurable change within the property/casualty market. Following this trend of external forces on the U.S. property/casualty market, there are additional areas of potential impact that necessitate watching as we move through the remainder of 2017. Those areas are outlined below.

Technology
Digital technologies including social media, telematics and big data are transformative. There will be an impact on marketing, distribution, customer service and pricing strategies.

Cyber Risks
Insurers face pressure to keep products relevant as digital attacks increase and expose previously unanticipated areas of vulnerability. At the same time, insurers will face pressure to create robust security systems within their own firms.

Talent
With a generation of insurance professionals retiring in 2017, insurers will need to attract Millennials to fill the gaps. There will be an additional demand to expand staff in the areas of data science, cyber risk, digital marketing and more to position their firms for the future.

Customer Expectations
Services in other digitally enabled industries cause demand for more personalized experiences from insurers and 24/7 access. Combined with price sensitivity, there is greater pressure on comparison shopping and client retention.

Pricing
Greater competition and pricing transparency will hold down fees. Insurers need to reconsider pricing models as the ‘pay-as-you-go’ approach gathers appeal and analytics provide deeper customer insights.

Catastrophes
Moderate activity keeps downward pressure on pricing. Only a very large and unexpected event (or series of events) has the potential to be market-changing. That said, after years of relative calm, a big loss event could be more likely.

We hope you find this review of the first two quarters of 2017 to be informative and useful. We present it in the following sections:

  • Market Overview: provides a high level summary of 2017 developments by market segment.
  • 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

The overall safety record of the aviation industry, along with standards imposed by the FAA (and similar regulatory bodies outside the U.S.) and industry groups, contribute to aviation insurance underwriters experiencing a high degree of comfort regarding the risks of aviation losses. Capacity continues to grow with new market entrants, and insurers sought to write larger lines to maintain premium levels in the face of falling rates. Carriers seeking new business drove down rates on desirable classes of business/accounts. We expect operators with good loss experience to receive premium/rate reductions during 2017.

Benefits

Medical cost trend has continued to decrease slightly, and we expect the percentage of medical trend to remain flat or to slightly increase over the next year. Healthcare continues to outpace inflation, and affordability for employers and employees is a continued concern. Employers have made plan design changes to control costs, but it is getting more difficult to continue shifting costs to employees. We expect consumers to demand more convenience, value, and a better overall experience from providers. This could mean incorporating more mobile-friendly tools, video consultations for non-emergency visits, and transparency in costs and billing practices.

Casualty

Overall, the casualty market remained soft with signs of plateauing in the middle market space. Insurers continue to protect their most profitable accounts with rate reductions, improved terms, multi-year commitments and more relaxed collateral requirements. Overall, the primary market is still soft, but pricing is starting to flatten out. Auto liability remains an exception due to the increasing frequency and severity of losses. There continues to be an abundance of excess casualty capacity in the marketplace. After years of rate reductions, higher excess layers are priced at or near minimum premiums.

Cyber Risks

Cyber claims face increased interest from regulators on the state and federal level. Capacity and market interest for educational institutions remains adequate. While continuing to be one of the most affected industry classes, market trends for the financial institution arena are stable with minimal to no increases in premium for institutions with favorable loss experience. For healthcare institutions, renewal premiums are trending upward based on modest increases in net patient service revenues. For professional service firms, pricing remains favorable. We find that the insurance market continues to be selective when it comes to underwriting risks for retail businesses.

Entertainment

There are some tangible signs that the market is again going to look to increase rates for 2017, as well as more onerous policy terms and conditions applied by insurers. Festival adverse weather cover will be subject to greater rate increases in both the U.S. and Europe. Reduced insurer appetite for such risk and a deteriorating claims experience will present challenges to the broker market. Capacity has remained stable, with some isolated increases for the better performing syndicates and will remain largely sufficient for purpose.

Environmental

Acquisition activity and underwriting inconsistency have defined the environmental insurance market for the past few years. The number of carriers offering pollution liability and contractors liability coverage remained abundant; however, there are fewer insurers than there were in January 2016. Rate increases tended to be industry-specific or as a result of loss experience. Increased competition on renewals has continued to yield decreased premiums/rates. Incumbent carriers sought to keep rates flat or very near flat. Claims handling reputation, as well as quality and timeliness of service, may begin to have a more profound impact on insurer selections in late 2017 and beyond.

Healthcare

For the first half of 2017, Medical Professional liability continued to be one of the most profitable lines of business in the property/casualty marketplace. However, concern about weakening financial performance, continued soft market pricing, diminishing reserve redundancies, low interest rates, and other challenges impacted MPL premium. Rates continued to fall slightly for many underwriters as evidenced by declining premium volume in the industry as a whole. While the traditional medical professional liability, Managed Care E&O, and Medical Stop Loss coverage areas remain stable, the emerging risks areas are evolving and present real concerns for healthcare organizations.

Management Risk

The D&O marketplace remained competitive through the first half of 2017 with an abundance of capacity helping to keep primary premiums flat. Self-insured retentions remained stable. There continued to be an abundance of capacity in the Employment Practices Liability marketplace and we anticipate capacity and competition to remain abundant. The Commercial Crime market remained stable, with pricing relatively flat on renewals with incumbent carriers. No major shift is anticipated in the Crime marketplace. The Fiduciary Liability marketplace remained competitive, but insurers pressed for higher premiums.

Marine Cargo & Hull and Liability

Marine Cargo as well as Marine Hull and Liability both saw flat to slight decreases in premium rates through the first half of 2017. With an abundance of capacity across the entire Property and Casualty marketplace, we expect the soft market trend to continue for near future. The U.S. and overseas Marine Hull and Liability insurance market(s) continue to enjoy a wealth of capital and the ability to provide an impressive amount of limit capacity. Competitive insurance terms and pricing should continue through 2017.

Property

The first half of 2017 saw few major catastrophic losses. Premium rate changes continued to fall with a flat to 15 percent decrease through the first half of 2017. Ample capacity continued to be available and most large programs continued to be oversubscribed at the time of binding. The pace of rate decreases does show signs of slowing. Overall, we are seeing lower deductibles and increased sublimits for a number of coverages. We see no reason to suspect a market turn in the observable future.

Surety

The surety market continued its profitable trend in 2017. The contract and commercial surety industries are predicted to grow 5 to 10 percent this year; however, the surety industry will face some major challenges in the remainder of 2017 and into 2018. Rate and underwriting pressure will likely be the norm barring a major catastrophic economic event within the industry. As a whole, 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.

Transportation and Logistics

We expect rates for Customs Surety to remain flat for the duration of 2017. The transportation insurance marketplace remained highly competitive, keeping rates and premiums for Logistics Liability policies relatively stable. Insurance markets are beginning to look for new ways to grow and specialty segments like transportation insurance may see an increase in competition. Insurance premiums should remain stagnant; and strong competition should lead to downward or stable pricing for the remainder of 2017.

Taking the Industry’s Temperature

The “Big Picture”: Three Months 2017 P&C Insurance Industry

 

The P&C industry* had notably better reported underwriting results in the first quarter 2017 (3M17) vs. year-end 2016, as substantial reserve releases offset a sharp deterioration in the 2017 accident year result (impacted by very large catastrophe and other weather-related losses in the period). Annualized operating earnings and returns in 3M17 improved relative to year-end 2016. Surplus showed decent growth while direct and net premiums both grew over 3% (annualized) in 3M17. Total investment return increased notably in 3M17, in part on solid net capital gains, while the net investment yield continued to decline.

 

Underwriting and Operating Results and Premiums

After fairly flat results in 2014 and 2015, the composite AY combined ratio deteriorated in both 2016 and 1Q2017 - impacted by higher storm losses. The reported combined ratio has been stable over the last few periods except in 2016, when it was distorted by a large one-time reserve charge at a composite company.

% Change in Surplus

Surplus grew 2.1% in the first three months of 2017 as somewhat lower operating earnings and solid net capital gains outpaced continued shareholder dividends paid to parent companies.

Gross and Net Premium Leverage

Net premium leverage was basically flat through 2016, but declined modestly in 1Q2017 as surplus growth slightly outpaced annualized premium growth, while gross leverage remained stable; both measures continue to reflect ample financial capacity to write business.

% CHANGE IN PREMIUMS WRITTEN

Net premium growth was minimal in 2016 and 1Q2017 , while direct premium growth slowed notably in 2016 (reflecting in part a softening rate environment), but growth in 1Q2017 jumped sharply. Net premiums in 2014 and 2015 were adjusted for a large reinsurance transaction involving the two lead subsidiaries in the GEICO group.

 

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

Reports

Aviation

Premium Overview*

Coverages Q2 2017 Q4 2016
General Aviation Flat (dependent upon losses) Flat to slight decrease
Products Liability Flat (dependent upon losses) Flat to slight decrease*
M/MRO Flat (dependent upon losses) Flat (dependent upon losses)
Airlines Flat (dependent upon losses) Flat (dependent upon losses)
Helicopter Flat (dependent upon losses) Flat (dependent upon losses)

*Based upon individual loss ratios and exposure base

Market Overview

The airline market remains unchanged from our last report at year-end 2016. Aviation remains one of the safest forms of travel with over 87,000 aircraft flights daily in the U.S. alone. The overall safety record of the industry and the standards imposed by the FAA (and similar regulatory bodies outside the U.S.), as well those developed by industry groups such as the International Air Transport Association, give underwriters of aviation insurance a high degree of comfort regarding the risks of loss associated with aviation operations.

Aviation insurance encompasses a wide range of risks including aircraft operations of many types, manufacturing and even satellite and spacecraft risks. Most underwriters do not limit themselves to one narrow aspect of aviation risk and thus have a spread of risks in their portfolio. This factor, along with abundant capacity, has negated any potential negative impact on pricing in the aviation insurance market to date.

Pricing & Capacity Overview

The soft rate trend continues, mainly due to:

  • Plentiful capacity (over 200 percent) with new entrants willing to write larger lines to maintain premium level amidst falling rates.
  • Capacity is over 100 perfect even for historically harder to place risks (e.g., foreign operations; general aviation manufacturers; helicopter operations; Maintenance, Repair, and Overhaul providers; etc.).
  • Carriers are aggressively seeking new business with competition is driving down rates on desirable classes of business/accounts.
  • The reinsurance market, a leading indicator of the direct insurance market, continues to soften due to an influx of alternative capital from pension funds and other sources.

Forecast

Despite market consolidation and an uncertain economic forecast, soft market conditions will continue to prevail. Rates continue to be driven by capacity and competition for market share. Capacity would need to shrink considerably before market conditions favored insurers.

With shrinking profit margins, underwriters have become more loss-sensitive. We expect operators with good loss experience could still receive premium/rate reductions during 2017. The average account should see flat conditions while accounts with poor experience could face rate increases.

Benefits

Market Overview

Medical cost trend has continued to decrease slightly and is at 6 percent in 2017. This single-digit increase is moderate compared to past years, but is not sustainable long-term. “The convergence of the Affordable Care Act, increased administration, carrier consolidation in many markets, escalating prescription drug costs, and lack of employee trust to engage in disease and care management programs continues to cause year-over-year trend increases that are four times the rate of CPI (inflation),” notes Integro’s David Wachtel.

Healthcare continues to outpace inflation, and affordability for employers and employees is a continued concern. Employers have made plan design changes to control costs, but it is getting more difficult to continue shifting costs to employees. Instead, employers are looking to control costs by optimizing healthcare delivery through telemedicine, limited or lower-cost provider networks, care coordination and other innovative strategies.

Healthcare Costs & Plan Design

The average annual premium cost for a family of four covered by an employer-sponsored health plan is $26,944 according to the 2017 Milliman Medical Index. In 2017, the average annual premium increase is the lowest it has been in years, largely due to increased deductibles and cost sharing to employees.

Deductibles and copayments have more than doubled in the past six years, and employees are paying a larger percentage of the healthcare cost. Plan design changes also aim to drive desired plan utilization, thus indirectly reducing plan costs. For example, increasing emergency room copays encourages use of urgent care, which is less costly, but increased deductibles and cost sharing has had some unintended consequences as well. Surveys have shown that employees, particularly those with qualified high-deductible health plans, have delayed a procedure or physician visit because of the cost. According to Aflac’s 2017 Workforces Report, 33 percent of employees surveyed have avoided going to the doctor due to high medical costs.

In today’s tight labor market, benefits play an important role in recruiting and retaining talent. Employers are looking for ways to enhance and leverage their benefit offerings to remain competitive.

Prescription Drug Costs

Prescription drugs account for 20 percent of health plan costs, and are trending at the rate of 13.5 percent per year. Specialty prescriptions are driving a significant amount of this cost, representing 40 percent of total prescription costs and 8 percent of total health plan costs. The cost of specialty drugs varies greatly by provider, and a lack of competition has resulted in higher drug prices.

Employer strategies to control specialty drug costs include:

  • Increasing prescription copays
  • Establishing a specialty drug copay
  • Adding a separate deductible for prescription drugs before copay schedule begins
  • Limiting prescription quantities
  • Including a closed formulary, which excludes certain brand name drugs
  • Requiring prior authorization or genetic testing for certain drugs
  • Including a step-therapy provision, which requires individuals to first try a low-cost alternative
  • Directing employees to lower-cost preferred drugs on their plan’s drug formulary and promoting the use of price transparency tools
  • Conducting annual or semi-annual audits to ensure discounts, fees and rebates are accounted for properly

Health Reform Legislation

A key initiative for the Trump Administration has been to repeal and replace the Affordable Care Act (ACA). Republicans in both the Senate and the House have proposed repeal and replace legislation using the budget reconciliation process, but nothing has materialized. While the situation changes daily, to this point Republicans have been unable to gain the support necessary to pass repeal legislation and employers have therefore not been impacted.

Cost Transparency & Consumer Experience

With the rise in consumer-directed health plans, such as Health Savings Accounts (HSAs), there has been demand for education and tools to help employees better manage their plans and make informed healthcare decisions. Cost transparency tools, such as GoodRx and Healthcare Bluebook, are shedding light on the discrepancy of cost between providers and helping consumers to make more informed decisions for medical procedures and prescription drugs based on price and quality. Employers are also getting on board by taking more responsibility in educating their employees about their benefit plans and the associated costs.

FORECAST

We expect the percentage of medical trend to remain flat or to slightly increase over the next year. With fewer employers making plan design changes, plan utilization may begin to rise. There will be greater pressure for transparency in cost and quality among providers in an effort to bring health prices down.

Employees with high-deductible health plans are more exposed to healthcare costs and are becoming more aware of their own utilization. We expect consumers will start to demand more convenience, value, and a better overall experience from providers, similar to the user experience they enjoy in other areas of life. This could mean incorporating more mobile-friendly tools, video consultations for non-emergency visits, and more transparency in costs and billing practices.

Prescription drugs will continue to be a major cost-driver, and employers will make addressing prescription costs a top priority in their benefits planning. Heightened political and public attention to prescription drug costs could pressure drug companies to moderate prices.

Casualty

Premium Overview

Coverages Q2 2017
Workers Compensation Flat to slight rate decreases
General Liability Flat to slight rate decreases
Auto Liability Single to high single digit rate increases
Umbrella/Excess Liability Slight to flat rate decreases

Market Overview

Overall, the casualty market remained soft in the second quarter of 2017 for national accounts, with signs of plateauing in the middle market space. Insurers continue to protect their most profitable accounts with rate reductions, improved terms, multi-year commitments and more relaxed collateral requirements.

Primary Casualty

The primary market is still soft as a whole, but pricing is starting to flatten out. Auto liability remains an exception due to the increasing frequency and severity of losses. Programs with clean loss experience are seeing rate increases. Workers compensation programs with favorable loss experience are receiving flat to slight rate decreases. We are seeing a push for additional collateral for loss sensitive business, regardless of insureds’ financial strength. Clients with poor financials are being hit the hardest.

Workers compensation premium auditors are carefully scrutinizing class codes to ensure that payroll is properly classified. Payroll is being reclassified into higher risk class codes, resulting in unanticipated additional premium charges.

Umbrella / Excess Casualty

There continues to be an abundance of excess casualty capacity in the marketplace. After years of rate reductions, higher excess layers are priced at or near minimum premiums. Premium savings can still be achieved on the umbrella layer with aggressive marketing, but marketing results are entirely dependent upon loss experience and industry sector. Markets that target higher hazard risks are starting to write softer classes of business at lower minimum premiums to balance their underwriting portfolios. Higher hazard risks have experienced challenges filling out capacity due to aggressive pricing on towers.

Forecast

Absent any major losses impacting the industry as a whole, we foresee the existing soft market conditions to continue given the abundance of market capacity. Current areas of underwriting focus include drone activity, fleet safety, wild fires, and the opioid epidemic. We expect to continue to see the high rate of insurance company acquisitions and mergers.

Cyber Risks

PREMIUM OVERVIEW

Coverages Q2 2017 Q4 2016
Education Flat to slight increase Flat to slight increase
Financial Institutions Flat to slight increase Flat to slight increase
Healthcare Flat to slight increase Flat to slight increase
Professional Services Flat to slight increase Flat to slight increase
Retail Flat to slight increase Flat to slight increase

MARKET Overview

Cyber risk (i.e., compromise, release, alteration or destruction of data) has ripened into a systemic issue challenging organizations operating in most, if not all, industry verticals. No longer are the avoidance, detection and mitigation of malicious intrusions into an organization’s digital environment solely the purview of the IT Security/Privacy department; but rather, it is an enterprise-wide endeavor. Organizations that marry technology with policies and procedures empower employees to actively participate in the protection of data assets. The evolving threat landscape has also forced cyber risk insurers to adapt. Here, we will provide a brief update on the state of cyber risk and how it has influenced the market during the first half of 2017.

Pricing & Capacity

Education

Overall capacity and market interest for educational institutions remains adequate. A small number of insurance providers shy away from education as a class, but this has not significantly impacted the provision of competitive terms for our clients.

The breadth of coverage and rating remains highly variable across the marketplace. Marketing exercises have produced a pronounced spread in premiums, with the highest quoted at more than double the lowest provided. Overall, it is expected that rates will trend upwards and this sizable gap will shrink.

Coverage offerings tend to be standardized, with little specialization for the educational industry as of yet. The standardized coverage offerings reflect the same variability amongst providers as is evident in other classes of Cyber risk. The gap between traditional Crime coverage and Cyber offerings will become more relevant in 2017 as phishing attacks against educational institutions continue to rise in scope and efficacy. Further, the relatively recent burst of activity by state legislators enacting and expanding privacy laws in the education sector will likely have an impact on the market and coverage going forward. This is a trend we are watching closely.

Financial Institutions

The financial institution arena continues to be one of the most affected industry classes by cyber incidents. However, the market trends have continued on a stable path with minimal to no increases in premium for institutions with favorable loss experience. In addition, there is ample capacity domestically and overseas, which allows for large multilayer programs to be structured and helps keep pricing in check. The cyber and privacy related guidance financial institutions have received over the years from FINRA and other regulatory bodies, have helped this sector proactively mitigate exposure at levels beyond that of many other industry classes.

From an exposure standpoint “Cyber” and traditional financial institution E&O coverage lines continue to blur and claims can potentially overlap. Clients have seen limited options from the marketplace where they can join the Cyber/Tech and financial institution E&O onto one policy with one carrier. This seems to be a shortfall within the marketplace and coverage disputes could be avoided if this was more readily offered.   

Healthcare

The cyber risk market remains relatively competitive with adequate capacity. Renewal premiums are trending upwards based on modest increases in net patient service revenues. Material changes in net patient service revenue or adverse claims development will result in a rate increase ranging from 5% to 15 percent. In instances where an insured has experienced a major release of data, carriers are offering renewal terms; however, rates can increase upwards of 100-150 percent. Retentions are trending flat, but premium savings are available for insureds willing to accept higher retentions.

Professional Service Firms

Professional liability policies for accountants and lawyers generally cover liability arising from the disclosure of, or failure to protect, client confidential information. Accordingly, the potential for overlap exists between a professional liability policy and the third party liability coverage in a stand-alone cyber policy. As a result, our approach when placing cyber for accountants and lawyers is generally to position the cyber as primary and non-contributory insurance and have the professional liability sit excess.

Professional Service firms continue to struggle with Social Engineering claims. Coverage for such claims can sit within a stand-alone cyber insurance policy and/or a commercial crime policy. However, limits tend to be low and retentions high. Notwithstanding the exposure to Social Engineering claims, generally speaking, most insurers view professional service firms as relatively low risk so pricing remains favorable. 

Retail

Retail businesses continue to be a target for cybercriminal attacks. The insurance market continues to be selective when it comes to underwriting retail risks. Many underwriters find control of data protection to be a significant underwriting concern depending upon whether they are evaluating large retailers who often centralize governance procedures and training or franchised retailers who might manage data security on more of an ad hoc basis. In terms of coverage, the issue of fines and penalties associated with Payment Card Industry Data Security Standards (PCI-DSS) has become an important one to highlight for any retail clientele that transact using credit cards. Not all PCI-DSS fines and penalties coverage is the same since some coverage is linked to compliance standards and industry assessments while others provide only penalty-specific coverage (e.g., contributions to a consumer redress fund). It should be noted that coverage for fines and penalties typically only exists to the extent such are insurable in the relevant jurisdiction. 

Claims

Cyber claims continue to increase and evolve. Ransomware attacks and social engineering fraud are increasingly common and have the potential to impact more than one line of insurance. As the threats evolve, it is important to address cyber risks and consider potential recovery options under a broader range of insurance coverages.    

Regulators continue to take an active interest in cyber incidents at all levels. Like cyber risk itself, attention by regulators transcends industry and business size. In the past year we saw increased state regulation in the education space. In March 2017, the New York State Department of Financial Services Cybersecurity regulation went live. On the international stage, the General Data Protection Regulation (GDPR) was approved in April 2016 with an enforcement date of May 2018. Insureds should pay close attention to cyber policy coverage grants and sub-limits so as not to be left exposed to the threat of ever increasing regulatory fines and penalties that can often set the stage for follow-on civil litigation.

The WannaCry attack in May 2017 and the Petya/Golden Eye attack of June 2017 will likely have an impact on the insurance market and coverage in the near future. Both attacks highlight the pervasive and highly unpredictable nature of cyber risk. From an insurance carrier standpoint, these attacks are reminders to evaluate risk aggregation strategies and underwriting criteria. From an insured standpoint, the attacks are reminders to continually evaluate cyber risk management strategies as well as overall insurance portfolios. Given the significant and widespread nature of these attacks, we are likely to see insurance carriers tightening or changing their stance on risk appetite, underwriting criteria and potentially pricing. We should also be watching for changes in the scope of coverage being offered.

FORECAST

Cyber coverages have evolved more rapidly than most other lines to meet new cybersecurity threats. Proactive reviews of existing coverages and real time requests for the ‘latest and greatest’ coverage enhancements are important steps in achieving broad based coverage for cyber exposures.    

Entertainment Contingency

Market Overview

While the Contingency insurance market in London writes a broad range of covers. Integro focuses on cancellation/interruption covers for music concerts and festivals; theatrical and film productions; conferences; exhibitions; and sporting events. Policies can be individually tailored to cover the non-appearance of individual artists due to illness and accident, and provide protection against the occurrence of adverse weather conditions. Policies may also be extended to include, for example, claims arising from the cancellation of events or productions due to acts of terrorism, outbreak of communicable diseases or a declaration of national mourning.

In the past five years, the music industry has witnessed a steep increase in band touring activity as the development of free media and low cost music purchases to the public have driven down artist revenues from record sales. It is not uncommon for tours by major artists to gross in excess of $100 million revenues. Global tours now reach not only into North America and Europe but Asia, Australia and South America as well. The music festival market has seen even greater growth within this period. There are now more than 600 music festivals in the UK annually and the North American market has expanded in similar fashion. Major festivals now attract attendances in excess of 60,000 and up to 140,000 patrons per day, generating significant revenues for the organizers.

There have been some significant market losses within the contingency area in recent years. In 2016 profitability for Insurers was weak and, unfortunately, may well end up reflecting similar poor years in both 2014 and 2015. Artist illness and accident claims have been widely reported in the media. Weather related losses in North America thus far in 2017 have remained challenging, mirroring the patterns for the past two years.

Pricing & Capacity Overview

Recent years have witnessed deteriorating loss ratios for Insurers due to reduced rating and excess capacity in the market. There have been a number of new entrants into the market and their desire to establish an account has not only driven pricing downwards, but has led to broader coverage being offered and an easement of normal policy terms and conditions.

In overall terms, 2016 market rates demonstrated some minor increases towards the end of the year and a slight hardening of applied policy terms and conditions. While further increases are expected in 2017, such increases do not appear to be too significant at this stage. Recent large losses may alter the position over the third quarter of 2017.

Forecast

There are some tangible signs that the market will seek to increase rates during 2017. In addition, there will be more onerous policy terms and conditions applied by Insurers. A particular area that will be subject to greater rate increases will be for festival adverse weather cover, both in the U.S. and Europe. Reduced Insurer appetite for such risk and a deteriorating claims experience will present challenges to the broker market. Capacity has remained stable, with some isolated increases for the better performing syndicates, and will remain largely sufficient.

Environmental

Premium Overview

Coverages Q2 2017 Q2 2016
Pollution Legal Liability/Site Liability -20% to +10% -20% to flat
Contractors Pollution Liability -15% to flat -20% to flat

Acquisition activity and underwriting inconsistency have defined the environmental insurance market since 2016. The number of carriers offering pollution liability and contractors liability coverage remained abundant; however, there are fewer insurers than at the beginning of 2016. Depending on the marketing strategy for renewals, many insureds experienced flat renewals without marketing, but when programs have been marketed, double-digit rate decreases have been possible. Increases tended to be industry-specific and/or as a result of loss experience from the risk or class. Indoor air quality losses, as well as PFOA/PFOS losses, have caused insurers to revise their underwriting on entire classes of business.

Market Overview

The most notable Environmental market impact continues to be the wake created by AIG’s exit from site-pollution business in early 2016. Since multi-year policy terms are common, the effects of AIG’s exit are expected to impact the market for roughly the next two years.

ACE was a top three Environmental insurer from a market share perspective; its acquisition of Chubb has, and will likely continue to, impact the market at least until the relatively common three-year policy terms have been through a renewal cycle (i.e., renewed or replaced). Notably, the Chubb name and brand survived this acquisition; however, for environmental risks, it was the ACE forms and underwriting that survived. Since forms are non-standard and written differently, legacy Chubb insureds have found that this is nearly the equivalent of changing insurers.

More recent acquisition activity has included Liberty’s acquisition of Ironshore, and Fairfax’s acquisition of Allied World (AWAC). In contrast to the ACE-Chubb acquisition, Ironshore’s Environmental underwriting will reportedly survive, replacing the Liberty International Underwriters (LIU) surplus lines paper.

The overall impact to insureds from the above mentioned activity has been “consistent inconsistency,” especially in regard to ongoing underwriter and form changes. It has been especially troublesome for some insureds currently with AIG, Chubb, and to a lesser degree, LIU, to learn that they are unable to preserve exact terms and conditions that no longer fit the surviving underwriting appetite. 

The creativity of underwriting has appeared to diminish overall, making it more difficult for prospective buyers to find innovative or atypical solutions. Overall, the buyer experience has worsened; if not corrected by the underwriting community, this could negatively impact the overall industry in the long term.

The entrance of Sirius and Pioneer into the environmental insurance space creates nearly 20 retail markets offering environmental coverage, with ample capacity for most insureds’ needs. Only a small group of insurers, however, continue to provide high-limit, 10-year policy terms for transactional placements. 

Specific classes of business that have been increasingly difficult to insure include: healthcare, hospitality, redevelopments, and any risk linked to PFOA/PFOS chemicals. These classes join pipelines and mining, which have historically been subjected to ultra-high underwriting scrutiny.

Increased competition on renewals has continued to yield decreased premiums/rates by up to 20% (depending on the marketing strategy and risk-specific factors). With respect to rate, incumbent carriers appear to be at a disadvantage, often seeking to keep the rate flat or very near flat. 

Forecast

Claims handling reputation, as well as quality and timeliness of service may (justifiably) begin to have a more profound impact on insurer selections in late 2017 and beyond. Insureds would be wise to read their policy wordings carefully when changing forms, ask questions, and look beyond premiums alone when selecting an insurer.

Healthcare

Premium Overview

Coverages Q2 2017 Q1 2017
Medical Professional Liability Flat to slight decrease Flat to slight decrease
Managed Care E&O Liability Flat Flat
Medical Stop Loss Liability Flat to slight decrease Flat to slight decrease

Market Overview

Medical Professional Liability

For the first half of 2017, Medical Professional Liability (MPL) continued to be one of the most profitable lines of business in the property/casualty marketplace. However, concern about weakening financial performance, continued soft market pricing, diminishing reserve redundancies, low interest rates, and other challenges impacted MPL premium. Generally, we observed slight premium decreases to flat renewals during this period. An increase in the severity of MPL claims has continued into 2017 and we anticipate similar increases for the remainder of the year as claims settle. According to the March 2017 Conning Report, the forecast for 2017 is that declining premium will cause the combined ratio to continue to rise.

Claims inflation, the effect of batch claims, challenges to tort reform, increasing coordination by plaintiff attorneys in a shrinking client market, oversupply of insurance capacity, and a reduction in the availability of reserve releases are factors that continue to challenge underwriters.

Rates continued to fall, slightly, for many underwriters as evidenced by declining premium volume in the industry as a whole. In many cases, carriers were compelled to lower their rates to maintain market share to stay competitive with carriers writing business at those rates for lower levels.

Medical professional liability insurers continue to face declining market share because of the ongoing acquisition of physicians and physician practices by hospitals and health systems. In addition, many newly trained physicians are opting to join larger health systems rather than enter into independent practice. According to the Conning Report, the number of independent healthcare professionals has declined from approximately 62 percent nationally to approximately 33 percent from 2008 to 2016, while there has been a commensurate increase of hospital employed physicians during the same timeframe. Healthcare reform accelerated physician employment that has been underway these past few years. Whatever reversals may occur with healthcare reform, either in the short- or long-term, likely will not reverse the trend in physician employment since uncertainty in the marketplace does not promote independent physician practices.

Market Consolidation

During the first half of 2017, the merger and acquisition activity announced in 2016 culminated in Sompo’s acquisition of Endurance in March 2017, Liberty’s acquisition of Ironshore in May 2017, and Fairfax Holding’s acquisition of Allied World Assurance in July 2017. These strategic transactions are intended to complement the acquiring carrier platforms and should not have an impact on the MPL underwriting teams.

We have also seen underwriters in both London and Bermuda, such as Hiscox, announce their decision to exit the healthcare marketplace, noting they cannot continue to support inadequate rates underwritten by competitors.

Cyber Privacy and Network Security

Cyber-attacks continued to make headlines across industry sectors with the healthcare industry a prime target from a customer privacy perspective. In the first half of 2017, we continued to see a marked increase in extortion incidents in which malicious code (ransomware) impacted healthcare organizations’ computer systems. The ransomware attacks have the impact of significantly hampering healthcare providers’ ability to timely access patient histories, drug histories, surgical schedules, and other critical clinical information. These delays may create a greater likelihood of negative patient outcomes.

Managed Care E&O

Managed Care Organization (MCO) E&O continues to grow as an area of exposure as healthcare systems and large physician groups grow in complexity and expand their service offerings. Considerable activity persists 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, the complexity makes it difficult to identify and quantify the potential risks.

On a macro level, carriers are concerned with the uncertainty of the repeal and/or replacement of the Affordable Care Act (ACA), continued consolidation of managed care entities and increased competition created by new entrants into the managed care marketplace. Carriers are closely monitoring changes to the ACA, as the new administration begins its efforts to repeal and replace the Act. Changes in the funding and structure of the ACA may have a material impact on the managed care market. Carriers anticipate that 2017 will yield further consolidation of managed care entities. One would expect rates to be adversely effected by the foregoing; however, new sources of capacity threaten to further depress rates.

Underwriters are 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 denied care
  • Allegations of miscalculation of medical expense ratios
  • Releases of protected health information, personally identifiable information, and payment card information

Capacity from insurers that typically specialize in MCO E&O continues largely unchanged from 2016 in the first half of 2017. The rates have remained fairly static unless: (1) the insured has adverse claims development; and (2) there is a material change in exposure (e.g., number of enrollees, type of services provided, etc.).

Medical Stop Loss: Health Reinsurance, Employer Risk & Provider Risk

In 2017, the medical stop loss and reinsurance market continued to be driven by data quality. The high standard and detailed data often returns a competitive, but disciplined market while poor data results in a tough market. Additionally, ripple effects from the ACA are still evident, as the industry continues to place an ongoing emphasis on value based care. These type of market conditions present the insurance and reinsurance industry with both challenges and opportunities for innovation.

A major challenge is adapting to the ever-changing healthcare landscape and finding underwriters who have adapted with it, especially for provider risk. The current Administration’s vocal commitment to repealing and replacing the ACA signifies potential for even greater changes in the industry in the months to come.

Ongoing trends and updates to note in regards to the medical market in general and the Provider Stop Loss and Employer Stop Loss markets are:

  • Exchange Lives
    • As of March 2017, there are 10.3 million consumers in the United States with effectuated (paid premiums and an active policy) coverage.
    • Major markets, such as Aetna and Anthem, have announced that they will be pulling out of the exchange market, citing the large losses and the growing uncertainty surrounding the future of the ACA under the new Administration.
    • A number of major markets have had extremely poor experience with newly insureds, which has 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 Shared Savings Program (MSSP) and Next Generation ACOs
    • With many of the Accountable Care Organizations (ACOs) in the final year of their upside-only risk contract (MSSP Track 1), they will begin the shifting into the MSSP’s two-sided risk options.
    • 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 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.
  • Medicaid Accountable Care Organizations
    • Many states have taken interest and to date, ten states have implemented Medicaid ACOs to align provider and payer incentives with the goal of managing costs and delivering quality care to beneficiaries and at least twelve 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. Integro has seen success in achieving consistent savings through surety bonds over letter of credit pricing for Medicare ACOs and would expect to see similar results for Medicaid ACOs as they continue to emerge across the U.S.
  • Medicare Access and CHIP Reauthorization Act of 2015 (MACRA)
    • MACRA 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 4 categories; and Advance Alternative Payment Models (AMPs), which 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.
  • Specialty Pharmacy
    • Costs related to pharmaceuticals continue to increase year over year and cause financial challenges for health systems. (Re)Insurers continue to be impacted by multi-million dollar pharmaceutical claims.
    • High-cost orphan drugs are driving costs, as well as6 drugs developed to treat conditions such as Hepatitis C that are in high demand and are utilized at a high frequency. This can cause serious financial concerns.
  • Self-Funding
    • Since the ACA passed, there has been significant interest in self-funding. We continue to see many fully insured plans contemplate and successfully transition to self-funded plans.
    • The benefits of self-funding include more control over the plan document, less regulation, 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.

Emerging Risks

Regulatory E&O

As Federal and State governments focus on reducing healthcare costs, there has been greater emphasis on False Claims Act enforcement (FCA). Whistle-blower actions, moreover, are on the rise as they (often current or former employees) seek a share in recoveries obtained. While not limited to the healthcare industry, it has been the largest target of government and private actions with $2.5 billion recovered in 2016. Billing claims from large employers and other commercial payers, moreover, is an increasing exposure as they contract directly with healthcare providers.

Responding to FCA and other billing investigations can result in significant costs to organizations for outside auditors, specialty advisors and defense counsel. Traditional coverage in Healthcare D&O forms, however, provides low sublimits and restrictive coverage terms that can leave the majority of exposure uninsured.

Recently, new products and markets have been introduced that provide higher limits, expanded coverage and offer services to help lower the costs of regulatory and billing claims. Key features include:

  • Expanded definition of “claim” to include investigations and self-disclosure
  • Coverage for fines/penalties in addition to investigate and defense costs
  • Choice of counsel
  • No sublimits
  • Prior Acts coverage from 3-6 years
  • Compliance surveys and gap analysis of compliance program

Medical Devices

The use of Internet-connected devices and “smart” medical devices in healthcare organizations continues to increase, which causes concern that the users are vulnerable to hackers. There has been some litigation claiming cybersecurity risks for pacemakers and other implantable devices and that activity suggests a potentially growing area of claims.

Virtual Care

Virtual care is replacing traditional notions that a medical diagnosis can only be produced in a person-to-person visit. In both developed and emerging nations, new entrants are pioneering pathways that erase healthcare boundaries and enable care anywhere.

Consumers are receptive to this type of care, particularly those in emerging markets where access to quality care is a prevailing concern. For example, according to PriceWaterhouseCoopers’ recent study that surveyed over 24,000 consumers in 29 territories, emerging countries are more inclined than developed markets in owning or using wearable devices, which can be used by consumers to manage their health and wellness.

Where urgent needs prevail, health solutions offered by new entrants can root more quickly especially in less regulated environments like those in emerging countries.

Forecast

The persistent softness of the market continues to present challenges to medical professional liability insurers, despite record profits and low loss ratios. In order to remain competitive, markets are compelled to decrease rates and premiums. While there is an abundance of capacity in the marketplace, the recent consolidation activity of medical professional liability carriers is likely to continue in order to sustain market share and create underwriting efficiencies.

Claim severity must continue to be carefully observed since the trend has been upward in recent years as evaluated by a number of carriers, such as Zurich, Berkley, C.N.A., and the Aon/ASHRM report. The upward trend to date, however, is actuarially manageable, unlike the last years of the 1990s that drove the last malpractice crisis. While there are fewer malpractice cases filed, they are more expensive to defend, thereby driving up legal and related expense for carriers and self-insured entities

Certain states that do not have protective tort reform laws, especially caps on non-economic damages, are the most unfavorable malpractice environments from an underwriting perspective. Claim professionals deem the states of New York, New Jersey, Pennsylvania, Florida and Illinois to be among the most difficult venues in which to litigate malpractice cases due to their lack of tort reform laws.

The Republican control of Congress and the majority of state legislatures after the 2016 election may offer some opportunity for federal and state malpractice reform laws to be enacted as President Trump called for medical liability reform in his address to Congress on February 28, 2017.

The national environment for medical malpractice protection remains favorable. Claim frequency remains low in comparison to the past, but there is an increase in the severity of claims and settlements. Healthcare systems focus on risk management and patient safety over the last two decades is having a favorable impact and needs to continue as health care delivery and reimbursement changes dramatically in the next five years.

While the traditional medical professional liability, Managed Care E&O, and Medical Stop Loss coverage areas remain stable, the emerging risks areas are evolving and present real concerns for healthcare organizations. Consumers are also demanding a healthcare experience that mirrors the convenience and transparency of their banking, retail, transportation and other purchasing experiences. Healthcare organizations will need to evolve with these changing demands from their customers and the insurance carriers and brokers will need to provide cutting edge solutions to these developing risks.

Management Risk

Directors & Officers Liability

Premium/Capacity Overview

The D&O marketplace remained competitive through the first half of 2017. While newer entrants aren’t undercutting incumbents in an attempt to build a book of business in the same way we saw in 2016, the abundance of capacity is still helping to keep primary premiums flat. Excess traditional A, B, C and A-Side layers are now hitting minimum premiums as a result of competition among insurers. As a result, in the absence of material changes in risk, prices declined modestly or remained flat for risks across most industry segments.

Self-insured retentions remained stable in the absence of significant growth, acquisition activity, claims experience or other changes in risk profile.

Placement of policies overseas, whether as underlyers to master U.S. D&O programs or as standalone policies, continues to be an important conversation between brokers and companies with foreign operations.

D&O Claim Trends

  • Increased Federal Securities Class Actions – The number of federal securities class actions filed so far in 2017 has already surpassed the record-setting number seen last year. There were 226 securities class action fillings in the first 6 months of 2017, which is 135% above the 1997-2016 historical semiannual average of 96. If this pace continues, 2017 will see 452 federal court securities filings, which is a 66% increase over the 272 fillings from 2016. This substantial increase in filings is partially due to the continued rise of federal merger and acquisition objection lawsuits, with decisions in both state and federal court questioning the viability of “disclosure only” settlements. Securities class action settlements have generally stabilized. The median settlement, as well as the average settlement in 2016 (excluding aberrational settlements) was consistent with 10-year adjusted averages.
  • Whistleblowers and International Securities Litigation – The SEC awarded $111M to 34 whistleblowers in 2016, a record year for the Dodd-Frank whistleblower law. International securities litigation has continued to develop, along with increasing global regulatory activity.

Employment Practices Liability

Premium/Capacity Overview

There continued to be an abundance of capacity in the Employment Practices Liability (EPL) marketplace through the first half of 2017. Insureds with limited exposure changes and claims activity saw pricing and coverage terms remain relatively flat. Underwriters continue to be cautious of their approach to risks with California-based employees, as the state remains a high frequency and severity jurisdiction. Notwithstanding this concern, however, most insureds with concentrated headcount in California saw their EPL retentions and premiums “right sized” in 2014 and 2015. Barring other material changes, those organizations saw somewhat flat renewal results as well.

As we move into the second half of 2017, we anticipate that capacity, and therefore competition, will continue to remain abundant.

EPL Trends

  • EEOC Activity Climbs – While the overall number of annual EEOC charge filings reached an all-time high following the recession in 2009-2011, filing activity appeared to bottom out in 2014. Filings began to climb again in 2015 and 2016. Last year alone saw a 2% year-over-year uptick in total EEOC charges filed.
  • Retaliation Claims – Continuing a trend that began in 2009, retaliation claims were the most frequently filed EEOC claim in 2016. While employer vigilance is a key to preventing discrimination and harassment in the workplace, attention must also be paid to the controls in place to properly address employee claims of retaliation.
  • Wage and Hour Litigation – This remained a primary concern for many organizations and will continue to be a major issue throughout 2017. Insurance products released in previous years to address the coverage more broadly have gained little traction, in light of terms and conditions that many insureds perceived as too costly. As a consequence, there continues to be minimal coverage available for the wage and hour exposure, with a small number of insurers offering low sub-limits for defense costs.

Commercial Crime

Premium/Capacity Overview

The Commercial Crime market remained stable through the first half of 2017; with pricing holding relatively flat on renewals with incumbent carriers. Where risks were actively marketed and when clients were willing to move insurers, premium decreases were often obtained.

Looking ahead, we do not anticipate any major shift in the Crime marketplace, as competition remains abundant.

Commercial Crime Trends

  • Social Engineering/Fraud – Examples of this trend can vary widely, but as a general matter, social engineering/fraud refers to an event in which a wrongdoer fraudulently induces an employee to transfer funds or assets to the wrongdoer, as in the case of wiring funds to an illicit account. Coverage is offered with sub-limits of liability, typically starting at $100,000. A limited, but growing number of insurers are willing to offer full limits coverage. Sub-limits higher than $100,000 and full limit options typically result in an additional premium charge with a separate application requirement. Additional Social Engineering coverage can also be obtained through the Cyber Liability market, on a sublimited basis. Policyholders and their brokers should carefully scrutinize policy wording to ensure the coverage being offered is not unduly restrictive. As an example, it is common for insurers to exclude coverage for the exposure if the insured did not independently verify the appropriateness of the transfer request. Insurers frequently remove these limitations upon request for companies with otherwise adequate internal controls.

Fiduciary Liability

Premium/Capacity Overview

The Fiduciary Liability marketplace remained competitive through the first half of 2017; however, insurers are increasingly attempting to press for higher premiums and retentions for claims brought in the form of class actions for organizations with over $1B in plan assets; organizations in the education/not-for-profit healthcare sectors; and organizations that have experienced excessive fee claims. Although underwriters are attempting to find increases where they can, capacity in the marketplace remains sufficient. As a result, for most risks, competition among insurers has largely counterbalanced upward pressures on premiums. In general, absent material changes in risk, insureds are experiencing renewals that are flat to +5% over the previous policy term.

Fiduciary Liability Claim Trends

  • Plantiffs’ Law Firms – There has been increased activity by plaintiffs’ law firms, asserting claims of excess fees in 401(k) plans. In this regard, plaintiffs generally allege that plan fiduciaries breached ERISA duties of loyalty and prudence by offering investment options that carried high fees and performed poorly. In noted instances, excessive fees allegations also have been accompanied by “proprietary fund” cases, which are allegations that fiduciaries breached ERISA duties by selecting mutual funds and other investment options that were managed by affiliates of the plan sponsor and not chosen in the best interest of participants.
  • Class Action Lawsuits – Last year saw the emergence of class action lawsuits against prominent universities alleging excessive fees in their 403(b) plans. In these claims, plaintiffs generally allege that some plans have duplicative options for the same investment styles, which purportedly dilutes the ability of the plan to secure low fees by spreading the assets around in the same investment style.
  • Lawsuits Against Church-Affiliated Organizations – In these cases, plaintiffs assert that pension plans offered by religiously affiliated organizations’ healthcare systems do not qualify for ERISA’s church plan exemption. In June 2017, the United States Supreme Court rejected these claims by unanimously upholding the ERISA exemption for church-affiliated plans. The ruling is a positive development for church-affiliated policyholders and their insurers, as it removes a potentially costly form of fiduciary liability exposure.

Note: Cyber Security is addressed separately in this report.

Marine

  • Marine Cargo & Stock Throughput
  • Marine Hull & Liability

Premium Overview

Coverages Rate Change Q4 2016 Rate Change Q2 2017*
Marine Cargo Flat to slight decrease Flat to slight decrease
Marine Hull & Liability Flat to slight decrease Flat to slight decrease

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

Marine Cargo & Stock Throughput

Pricing Overview

Despite significant natural catastrophes in the not too distant past (Thailand Floods, Taiwan Typhoons, Sandy, etc.) and major accumulation risk claims in Tianjin port, the markets' overall underwriting results continue to be favorable for marine cargo accounts.

Regarding accounts without storage risks, rate reductions were the norm for those with 3-year loss ratios under 60 percent. Even accounts with unfavorable loss experience were able to leverage market competitiveness to maintain flat rate renewals with incumbent markets at renewal.

The results and rating methodology for stock throughput accounts varied by underwriter. While the marine cargo market continued to handle many global storage risks, especially those with catastrophe exposures, property insurers continued to offer competitive pricing for static risks. This competition between marine and property markets resulted in savings of 5-25 percent for insureds.

We foresee the last two quarters of 2017 being comparable to the first half of 2017 as respects transit and stock throughput Assureds.

Capacity Overview

The marine cargo marketplace remained soft. This condition was driven by profitable combined ratios and new players seeking to gain market share by offering competitive pricing and insuring conditions. Brit Ltd. is the latest new retail entrant, adding to the list of new markets opening offices in the U.S. The list includes, but is not limited to, HDI, Swiss Re and Berkshire Hathaway.

Insurers can build upwards of $100MM / $500MM in capacity for a single insured’s transit and storage exposures, respectively. Most domestic U.S. insurers will provide at least $20MM in transit capacity and $10MM in CAT storage capacity. To accommodate higher limits, quota share and layered structures with multiple insurers is commonplace in the U.S. and London. It should be noted that the London market can offer higher CAT towers, which means split placements are often the best combination to meet clients’ needs.

Coverage Overview

Coverage terms were extremely broad thus far in 2017 with most, if not all, markets agreeing to broker manuscript “all risks” policy forms.

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

Forecast

With an abundance of capacity across the entire Property and Casualty marketplace, we fully expect the soft market trend to continue for near future, barring excessive CAT losses, which could lead to rate increases for accounts with storage risk.

Marine Hull & Liability

Pricing Overview

The U.S. and overseas Marine Hull and Liability insurance market(s) continue to enjoy a wealth of capital and the ability to provide an impressive amount of limit capacity. Consequently, we foresee the last two quarters of 2017 being comparable to the first half of 2017.

This is primarily attributable to a relatively major claims-free experience for underwriters, a stabilization of low interest rates and various international underwriters establishing presence in the U.S. and Asian market(s), which consequently expands limit capacity and competition for locally-based underwriters.

Traditionally, accounts with a good claims record and demonstrated conscientious procedures for safety and maintenance enjoy competitive rating and terms. Extra market capacity and increased competition is even giving accounts with fair to poor claims records desirable terms. Hull markets, particularly overseas, can be very competitive while worldwide, liability markets strenuously compete to retain existing clients or win new business.

There has been considerable consolidation of blue water fleets, particularly for container carrying vessels. There have been contractual "mergers" of many well-known shipping companies in both Europe and Asia to address the over capacity of trading vessels. Alliances of container fleet owners have, or will have, a dramatic effect on distribution and trade of these vessels.

The price of oil is still relatively low. Consequently, the shipment of oil is still depressed and many oilrigs remain dormant or are only temporarily used in the U.S. / Mexican Gulf, the North Sea and in the Middle East.

Competitive insurance terms and pricing should continue through 2017.

Capacity Overview

As with the "primary insurance markets,” the reinsurance market(s) have an overcapacity of limit. Consequently, underwriters can obtain substantial capacity limit(s) and competitive pricing. 

Coverage Overview

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

Forecast

Our forecast for the near future is a continued soft market with rate reductions continuing on loss-free accounts. Accounts with losses will see nominal rate increases, but such rate increases will be tempered by the oversupply of capacity. Coverage conditions will be adapted to the needs or requirements of an Assured.

Property

The first half of 2017 saw little in the way of major catastrophic losses. A smattering of tornadoes, wildfires and floods hit the US, but with relatively benign property claim amounts. The high-rise fires and terrorist events that unfolded in the first half of 2017 were tragic headline grabbers, but produced little in the way of loss to the property market.

Premium Overview

Coverages Rate Change Q2 2017 Rate Change Q1 2017
All Risk Property Flat to 12.5% decrease (average: 8%-9%) Flat to 15% decrease

We expect rates to continue their softening into the second half of 2017. As there continues to be a dearth of capacity available, most large programs continue to be oversubscribed at the time of binding. If incumbents struggle with a price, there is usually new capacity ready to step in. Nevertheless, the pace of rate decreases does show signs of slowing. The commonplace 20 percent plus rate decreases over the last few years have dropped to 5-15 percent, with the majority being in the upper single digits.

Market Overview

With the pace of rate decreases slowing, focus is shifting to terms and conditions where we are seeing:

  • Lower Deductibles
    • California EQ (3-4 percent)
    • Tier 1 Wind (3 percent outside of Florida Tri-County)
    • EQ for New Madrid and Pacific Northwest (both 1 percent)
  • Increased Sublimits for Coverages
    • Ingress/Egress
    • Service Interruption
    • Non-Physical Damage Business Interruption
    • Contingent Business Interruption
  • Active Assailant coverage is quoted on many accounts and more clients in the retail and healthcare space are inclined to purchase it.
  • Multi-year offerings are more common as buyers sense the softening may be approaching its bottom.

Other Observations:

  • We see more carriers interested in deploying their capacity on large single-carrier deals.
  • Stand-alone terrorism continues its capacity growth and downward trend in pricing for all but the most difficult terrorism risks.
  • Alternative products such as parametric trigger and MYSL (multi-year single limit) products continue to grow in interest.

Forecast

As we publish this market overview, Hurricane Harvey is passing through Texas and into Louisiana. While the hurricane landfall missed major metropolitan areas, the rains it unleashed on Houston and surrounding areas have been historic in proportion. The devastation is vast, and at the time of this writing, ongoing. Both the residential and commercial insurance markets will feel the effects of Harvey, as the financial loss will likely quickly climb to many billions of dollars. The National Flood Insurance Program (NFIP) may be stretched to its limits. Even with full NFIP coverage, many commercial enterprises will fall short of covering their losses; the Program’s property coverage is, as a general matter, fairly limited and does not provide coverage for Business Interruption. 
 
As we recover from Harvey and claims are paid out, it will be interesting to see whether the storm’s financial and emotional toll will impact the insurance industry enough to turn it. It will undoubtedly tighten the flood insurance market, but will it have a wider affect? The past few years have seen an influx of capacity both from traditional sources as well as from “outside” capital markets. Reinsurance has been relatively inexpensive for insurers who have been looking to expand market share. Two years ago, Hurricane Sandy had little impact on the Market. Will Harvey move the pricing needle north, and if so, for how long?

Surety

The Surety market continued its profitable trend in 2017, with the top 100 companies trending toward a pure loss ratio of approximately 15.5 percent, on what appears to be an overall premium increase of 2.7 percent. As with 2016, thus far in 2017, ENR 400 contractors (top 400 contractors as rated by Engineering News-Record) had combined volume that exceeded the previous high water mark for the industry set in 2008.

The contract and commercial surety industries may grow by 5 to 10 percent this year. A recovering economy has allowed surety to grow as business and construction recovers and solidifies. Increased public infrastructure spending, specifically in the transportation, education and military sectors, points to favorable outlooks for contract surety.

Premium Overview

Coverages Rate Change Q2 2017 Rate Change Q1 2017
Contract Surety Flat to slight increase Flat to slight increase
Commercial Surety Flat to slight decrease Flat to slight decrease

Recent entrants to the market ramped up their sales efforts and, as a result, many saw double-digit gains in written premium volume.

Reinsurance continued to be plentiful and relatively cheap while fierce competition in certain market sectors created continued pressure on rates.

Contract Surety

Combined volume for contractors reached its highest level since 2008, as noted above. 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.

Commercial 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 last year, unlike previous years, wherein bank letters of credit were used almost exclusively. The industry as a whole continued to entertain weaker credits.

Forecast

The surety industry will face some major challenges in the remainder of 2017 and into 2018. Rate and underwriting pressure will likely be the norm barring a major catastrophic economic event within the industry. A heavy user of surety credit, the energy space is particularly challenged as the prices of coal, oil, and natural gas have plunged. The overall credit picture (particularly in the commercial space) continues to weaken as many underwriters are entertaining credits far below investment grade—albeit at a hefty price. As a whole, the surety industry is positioned to meet the underwriting losses that may materialize due to strong balance sheets, judicious collateral positions, spread of risk via multi company participation and the continued use of reinsurance. Merger and acquisition activity should continue in the surety space in 2018.

Transportation & Logistics

  • U.S. Customs Bonds/Transportation Surety Bonds
  • Logistics Liability (Errors & Omissions, Third Party Liability, Contingent Cargo or Cargo Liability) for domestic and international freight intermediaries

Pricing Overview

In 2017, the transportation insurance marketplace remained highly competitive, which kept rates and premiums for Logistics Liability policies relatively stable. With fierce competition and declining rates in many traditional product lines, insurance markets are looking for new ways to grow; specialty segments, like transportation insurance, continue to see an increase in competition.

U.S. Customs Bonds rates remained flat during the first half of 2017, with an increased focus on underwriting and collateral requirements.

Coverage Overview

U.S. Customs / Miscellaneous Surety Bonds

There have been significant factors affecting the customs and surety bond product lines. One of those factors is an executive order that was issued in March 2017 to alleviate shortfalls in duty collections, which have totaled more than $5.7 billion over the past six years. As a result, Customs & Border Protection (CBP) has been directed to implement a risk-based bonding plan to secure liability of Antidumping and Countervailing Duties (AD/CVD). The result of this plan may be the creation of a new supplemental customs bond for importers of AD/CVD or the plan may call for the creation of a new primary bond calculation for importers of subject goods. The inability of CBP to collect duty resulted from the way that duty rates on goods subject to AD/CVD were assessed; namely, those rates were assessed in arrears, often many years after the goods passed through trade. Sufficient bond liability has become a priority trade issue.

Logistics Liability

Throughout the global supply chain, the demand for goods and services continues to increase. As such, freight intermediaries are playing a more pivotal role as they are responsible for coordinating and arranging for the movement of freight throughout the world.

In the United States alone, the transportation industry serves more than 7 million domestic business establishments and over 320 million consumers. The U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS) and Federal Highway Administration (FHWA) expect domestic freight tonnage to grow by 40 percent in the next three decades, from 18 billion tons in 2015 to over 25 billion tons in 2045.

As demand for goods and service continues to increase, freight intermediaries will experience greater exposure to risk and will therefore need more flexible insurance programs. Logistics Liability insurance is designed to provide coverage to freight intermediaries for cargo damage, negligence, third party death, bodily injury and property damage claims. As demand increases and the transportation industry continues to grow, shippers and manufacturers will broaden their insurance requirements and demand more from their freight intermediary partners.

Capacity Overview

We expect competition to increase and more markets to enter the transportation insurance marketplace, which should result in greater capacity in the months ahead.

Forecast

We expect rates for Customs Surety to remain flat for the duration of 2017. Uncertainty around the handling of liquidated damages for late and inaccurate ISF filings, and an increased number of Anti-Dumping cases do present additional risk and may impact future pricing.

Insurance markets will continue to expand their product offerings and look for new areas of growth for the remainder of 2017. One example is the 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 significant risk associated with these activities. If CBP decides to adopt a secondary customs bond for importers of AD/CVD merchandise, we can expect new opportunities as well as challenges.

Insurance premiums will remain stagnant, and we expect markets to invest in new products and segments as competition continues to rise. In this relatively soft marketplace, strong competition will lead to downward or stable pricing for the remainder of 2017.

 

 

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.