YE 2016 Market Report


Executive Summary

Looking back at 2016 we see a year that may have posed more questions than it answered. The passing of Brexit in the UK set in motion a journey into uncharted territory, which will need mapping over the coming two years. The shift of Presidential administrations in the U.S. has thrown Healthcare reform and the extent of regulatory governance into the spotlight and the insurance industry will have to evolve and respond accordingly.

We also saw a continued march down the path of technological, and corresponding social, advancement and change, with insurers working overtime to develop coverage and capacity for the growing world of risk from:

  • Artificial Intelligence
  • Drones
  • Driverless Cars
  • The Internet of Things
  • Social Media
  • Cyber Crime

The industry itself saw M&A and/or underwriting shifts from some of its major players, including AIG, Endurance, Ironshore, Axis and others. With a continued and extended soft market, insurers are looking for differentiation and scale. Overall pricing reductions have slowed, though remain the expectation across most lines. The impact of the prolonged competitive market is catching up though, with the 2016 combined ratios for many commercial P&C underwriters inching above 100% into the realm of unprofitability. The combination of depressed pricing and Cat losses that were two-thirds higher than in 2015, according to Munich Re, is impacting profitability. Again, per Munich Re, last year 750 relevant Cat events occurred, which is higher than the 10-year average of 590; the U.S. experienced the most number of events since 1980. Despite those results capacity remains plentiful, as insurers look to deploy capital and gain market share.

Looking ahead, we see no reason to expect significant disruption in the capacity supply or the competitive nature of the market. We expect to see continued M&A activity within the insurer and brokerage communities and refinement in underwriting appetite and specialization.

We hope you find this review of 2016 and forecast for 2017 to be informative and useful. We present it in the following sections:

  • Market Overview: provides a high level summary of 2016 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.

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Market Overview

Aviation

Despite a number of Airline losses, 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. Capacity is plentiful and continues to grow as new entrants move into the aviation space and many insurers look to write larger lines to maintain premium level in the face of falling rates. Carriers are hungry for new business and competition is driving down rates on desirable classes of business/accounts. 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 will struggle to maintain renewals and could face rate increases.

Benefits

Increases to healthcare premium costs have slowed over the past 15 years, and 2016 saw the lowest increase at around 3 percent. Yet, healthcare increases continue to outpace workers’ wages and inflation and remains a primary concern for employers. Increased deductibles are a primary strategy to control costs, but employers are also looking at ways to improve healthcare delivery through telemedicine, limiting provider networks and other innovative strategies. The average annual premium cost for employer-sponsored health insurance is $6,435 for single coverage and $18,142 for family coverage. In 2016, the percentage increase for healthcare premiums was the lowest it has been in 15 years at around 3 percent. Healthcare markets are becoming more consolidated, shifting to fewer and bigger players.

Casualty

Reinsurers, although relieved with modest rate growth in auto liability, largely signaled further erosion of rates in early 2017, fanned by over-capitalization and absence of any monumental insured catastrophic events. As a result, enterprising reinsurers are sliding nearer to risks by diversifying into the primary insurance space; further bloating the casualty market. Analytically-sound underwriting sat juxtaposed with increased pressure to maintain book of business, which led to broader terms for multi-year rate commitments and collateral requirements. Even though the market remained competitive, more sophisticated underwriting tools seem to limit market swings (more internal collaboration with underwriting/actuaries/claim). Brokers sought early agreements on terms, in response to the stretch of underwriting resources to accommodate expanding workload of new account opportunities.

Cyber Risks

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. Overall capacity and market interest for educational institutions remains adequate. The breadth of coverage and rating remains highly variable across the marketplace. The financial institution arena continues to be one of the most effected industry classes by cyber incidents. The cyber risk market for healthcare remains relatively competitive with adequate capacity. Renewal premiums are trending upwards based on modest increases in net patient service revenues. Coupled with the relatively low exposure to PII and PCI, professional firms are a preferred class for some insurers, so even on our primary/non-contributory basis, pricing remains extremely favorable. The insurance market continues to be selective when it comes to underwriting retail risks. Cyber claims continue to increase, in both number and severity, and evolve beyond the standard releases of protected information. Cyber coverages have evolved more rapidly than most other lines in order 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

There are some tangible signs that the market is again going to look to increase rates for 2017. It should be anticipated that not only will rating increase but 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 for that purpose.

Energy

Overall Property and Casualty rates in the Energy sector have continued to fall as a result of a supply and demand imbalance. The energy industry continues to improve in safety and accident prevention. Insured property losses in the energy sector so far this year include $906 million in upstream market losses and $1 billion in downstream market losses. However, these losses are not historically unusual and are unlikely to reduce capacity or influence rates in the short-term. Focusing again on the basis of supply and demand, the cost of insurance capital is at a historic low and new capacity continues to flow into the market. This trend shows no signs of change, so 2017 looks to be another year of reducing insurance rates for the energy sector.

Environmental

The market remained relatively unchanged from Q3 to Q4. The number of carriers offering pollution liability and contractors liability coverage remained abundant. The most notable Environmental market changes of 2016 included the exiting of AIG from the North American Site Liability market, as well as the combination and integration of the ACE and Chubb operations, following ACE’s acquisition of Chubb. There are nearly 20 retail markets offering Environmental coverage, with a smaller group of insurers providing 10-year policy terms for “transactional” policies. Carriers offering longer terms implemented minimum premiums, regardless of risk or limits (generally $85,000 to $100,000). Underwriters continue to provide a high degree of flexibility and tailored coverage for industry-specific risks. The Environmental market is expected to remain relatively stable and consistent throughout the first quarter of 2017. The preservation of expiring terms and conditions will remain a challenge as the industry still does not offer a standard form, or form structure.

Healthcare

The Medical Professional liability coverage line continued as one of the most profitable in the property/casualty marketplace. Concerns over weakening financial performance, continued soft market pricing, diminishing reserve redundancies, low interest rates and other challenges led to leveling in MPL premium in 2016. We saw slight premium decreases to flat renewals on average. The increase in the severity of MPL claims continued in 2016 and we anticipate similar increases in 2017 as reported claims settle. 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 leading to increased discomfort by underwriters.

Rates continued to fall, slightly, for many underwriters as evidenced by declining premium volume in the industry as a whole. In many cases, some carriers were compelled to lower their rates to maintain market share as competitors wrote business at rates that they perceived to be at inadequate 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.

Management Risk

The D&O marketplace remained competitive through the end of 2016. Competition among insurers, including newer entrants, continued to put downward pressure on premiums. Prices declined modestly or remained flat for risks across most industry segments. There continued to be an abundance of capacity in the Employment Practices Liability (EPL) marketplace in 2016. Insureds with limited exposure changes and claims activity saw pricing and coverage terms remain relatively flat. As we move into 2017, we anticipate that capacity, and therefore competition, will continue to remain abundant. The Commercial Crime market remained stable through the end of 2016, with pricing remaining relatively flat on renewals with incumbent carriers. We anticipate underwriters to exert pressure on policyholders to increase deductibles as a means of saving premium. Our most active and volatile area within the management and professional liability coverages continues to be Network Security and Privacy, i.e., “Cyber” liability and related first party coverage. Capacity in the Cyber marketplace continued to be abundant. Nevertheless, competition among markets, both in terms of premium and in the widening swath of pre-breach and post-breach services, has heightened.

Marine Cargo & Hull and Liability

The marine cargo marketplace remained soft. Coverage terms were extremely broad thus far in 2016 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% of annual premium eligible to be returned dependent upon loss experience. 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. 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 first two quarters of 2017 being comparable to the last quarter of 2016. Our forecast for the near future is a continued soft market with rate reductions continuing on loss-free accounts.

Professional Liability

Despite consolidation of insurers, high levels of capacity in the professional liability segment persist, serving to keep rates in check. Competition for excess layers is robust and rates are low. Capacity in the professional liability market is at historically high levels. While abundant capacity will serve to keep rates in check, taking advantage of market conditions will require planning and inside knowledge of the market.

Property

The market remains well capitalized with an end to the soft market nowhere in sight. Alternative capital continues to put downward pressures on rates with the trend expected to continue well into 2017 given the low interest rate environment in which we are currently operating. We expect retail rates to continue to soften into 2017. Underwriters are beginning to push back on accounts that have premiums well below their technical pricing; the market is finding its bottom. The trend of market consolidation continues as evidenced by recent announcements such as the Liberty Mutual purchase of Ironshore or the Sompo purchase of Endurance. There is also a trend of existing carriers altering their distribution model and/or capacity offerings to become more meaningful players.

Surety

The Surety market in 2016 continued its profitable trend as the top 100 companies appear to be trending toward a pure loss ratio around 12.5% on what appears to be an overall premium increase of 3%. In 2016, ENR 400 contractors had combined volume that exceeded the previous high water mark for the industry, which was set in 2008. The commercial surety sector continued to show solid premium growth. The surety industry will face some major challenges in 2017. Rate and underwriting pressure will likely be the norm barring a major catastrophic economic event within the industry. The surety industry, as a whole, 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 the surety space in 2017.

Transportation and Logistics

We expect rates for Customs Surety to remain flat at the beginning of 2017. Customs and Border Protection (CBP) has continued to automate their systems to facilitate the electronic importing and exporting of goods. CBP is drafting new bond guidelines as eBond becomes more prevalent and bond liability determination gets centralized away from ports of entry. During the year as a whole, and especially in the final quarter, the transportation insurance marketplace remained highly competitive, which kept rates and premiums for Logistics Liability policies relatively stable. U.S. Customs Bonds rates should also remain flat throughout the beginning of 2017, with an increased focus on underwriting and collateral requirements. Lower insurance premiums for Logistics Liability policies, the availability of broad coverage options and increased capacity continued for the end of 2016 and will continue for the beginning of 2017. In this relatively soft marketplace, strong competition will force insurers to keep rates and premiums stable for Q1 2017.

Taking the Industry’s Temperature

The “Big Picture”: Year-End 2016 P&C Insurance Industry

The P&C industry* reported a widening underwriting loss in 2016, as overall reserve additions were reported for only the second time since 2005. Prior year reserve strengthening in 2016 was driven mainly by weaker results in personal auto and commercial casualty lines. While the substantial reserve additions of the three AIG pool companies in our composite are noteworthy, it is important to note that current year underwriting results were also unprofitable, in part on higher catastrophe losses. Operating returns in 2016 continued to decline, as did direct premium growth rates, while capital returned to parent companies remained substantial. However, net capital gains were solid and helped composite surplus grow 3.8% in 2016.

Underwriting and Operating Results

Reported U/W results deteriorated notably in 2016. Loss reserve additions at AIG and within the commercial casualty and personal auto line were the main drivers of weaker results in 2016 as the industry* reported overall reserve additions for only the second time since 2005 (in 2015 the industry* made fairly modest reserve additions overall.

% Change in Surplus

Surplus grew 3.8% in 2016, after rising 1.5% in 2015, as operating earnings and solid net capital gains on strong equity market performance were partly offset by capital returned to parent companies.

Gross and Net Premium Leverage

Gross and net premium leverage remained steady over the last five years and surplus growth has mostly kept pace with premium 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

Premium Overview*

Coverages Rate change Q4 2016 Anticipated 2017
General Aviation Flat to slight decrease Flat (dependent upon losses)
Products Liability Flat to slight decrease* Flat (dependent upon losses)
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

Overview

Despite a number of Airline losses, 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.

While airline risks and losses garner a lot of media attention, 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 for several reasons:

  • Capacity is plentiful and continues to grow as new entrants move into the aviation space and many insurers look to write larger lines to maintain premium level in the face of falling rates.
  • Capacity currently available exceeds 200% and is well above 100% even for historically harder to place risks (e.g., foreign operations; general aviation manufacturers; helicopter operations; Maintenance, Repair, and Overhaul providers; etc.).
  • Carriers are hungry for new business and 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

Consolidation of several large market players, as well as an uncertain economic forecast has some pointing to a potential hardening of the market, but until these consolidations result in a reduction in capacity, or economic conditions provide for increased cash flow elsewhere, soft market conditions will continue.

Capacity and competition for market share continues to drive rates but the market is showing attritional loss fatigue and many markets are attempting to hold a hard line. Any expectation for a hardening of the market would be precipitated by consolidation of markets and a significant reduction in available capacity.

As underwriting profit margins continue to tighten, the market has 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 will struggle to maintain as-is renewals and could face rate increases.

Benefits

Marketplace Overview

Although the rise in the average cost for healthcare has slowed in recent years, it continues to outpace workers’ wages and inflation, and controlling costs remains a priority for employers. Pharmacy costs are one of the biggest cost drivers, representing nearly 17 percent of healthcare expenditures. To reduce premium costs, employers are increasing deductibles, but they are also looking beyond plan design and shifting their focus to optimizing healthcare delivery through telemedicine, provider networks, care coordination and other innovative strategies. Also, new technologies and legislation continue to introduce fast-paced change into the industry.

Healthcare Costs & Plan Design

The average annual premium cost for a family of four is $25,826 according to the 2016 Milliman Medical Index. In 2016, the percentage increase for healthcare premiums was the lowest it has been in 15 years at 4.7 percent. This modest increase in comparison to prior years is due, in large part, to increased plan deductibles. Enrollment in a high-deductible health plan with a savings option, such as a Health Savings Account (HSA) or Health Reimbursement Arrangement (HRA), is now at 29 percent (up from 24 percent in 2015) according to the 2016 Employer Health Benefits Survey conducted by Kaiser Family Foundation and the Health Research & Educational Trust.

In an effort to control healthcare costs, employers have also shifted focus to how healthcare is consumed and delivered. Such strategies to optimize healthcare delivery include:

  • Introducing telehealth services and discount pharmacy programs.
  • Offering on-site clinics and kiosks.
  • Limiting choice in physicians and hospitals to those that focus on lower costs, better outcomes and higher quality care.
  • Improved enrollment technologies and decision support tools.
  • Greater level of engagement with care coordination and disease management programs.

The Impact of the Affordable Care Act

At the close of 2016, employers completed a milestone year for the Affordable Care Act (ACA) with the completion of mandated reporting responsibilities. In the seven years since President Obama signed the ACA into law, we have seen mixed results of its impact. The percentage of uninsured Americans today has decreased and is now at 8.6 percent according to the National Health Interview Survey. Yet, the ACA has seemed to do little to decrease costs and has placed tremendous administrative burden on employers to comply. Over the past two years, many carriers have pulled out of the public exchanges, reducing the competition in the market.

In anticipation of the Cadillac Tax, which is scheduled to begin in 2018, some employers with high-cost plans have scaled back on their health plan offerings. With the election of the new President, there will likely be changes to the law, but it is not yet clear what those will be and what impact they will have to the costs and administration for employers.

Industry Consolidation

Healthcare markets are becoming more consolidated, shifting to fewer and bigger players. Notably, the two largest mergers, Anthem’s $48 billion deal with Cigna and Aetna’s $37 billion merger with Humana, are under scrutiny with the U.S. Department of Justice. There are debates about whether or not these mergers will lead to higher premiums. Insurers claim the consolidation should lower prices, because they will have more negotiating power with physicians and hospital groups, but it is unclear if these savings will be reflected in employer premiums.

Communication & Technology

Healthcare reform, and the complexities and changes in the marketplace are demanding more engagement from both employers and employees, and thus, increasing the need for communication and technology. Compliance with ACA reporting was a major focus for employers in 2016. Many looked to an outsourced vendor to assist with reporting responsibilities.

The pressure to recruit top talent has forced HR to think more like marketers and to communicate their total rewards in a compelling way. Employers are also thinking about ways to segment their workforce to deliver specific benefit offerings and tailored messages that are more relevant and personalized for employees.

FORECAST

As President Trump takes office, employers anxiously wait to see how the new Administration will impact healthcare reform. It is unlikely that ACA will be repealed in full; however, many changes are expected including a removal of the Cadillac Tax provision. The Trump Administration strongly supports HSAs, and Republican lawmakers have put forth expansion bills to make HSAs even more favorable. In light of this, more employers will offer high-deductible health plans coupled with an HSA, and enrollment will continue to surge.

We expect the U.S. Department of Justice to strike down the proposed mega mergers arguing that the deals would cut competition and raise rates for consumers. However, these large insurers may look for smaller acquisitions where they could grow in specialty markets.

Two of the biggest drivers of healthcare spending are specialty prescriptions and chronic diseases, and we will continue to see more engagement on a patient level to help curb these costs and reduce wasteful spending. On-site clinics will increasingly become a part of the healthcare landscape. There will also be more focus on plan management and care coordination between insurance companies and providers to reduce costs and improve outcomes for the patient. Telemedicine will continue to grow and lead the way to improved access to care and communication between providers. With its rapid growth, telemedicine will require more regulation to ensure the quality of care and to set national guidelines since medical care varies widely from state to state.

Technology to help employers enroll and administer their benefits will continue to disrupt the market. As the healthcare system becomes increasingly complex and additional responsibility and cost-burden is shifted to employees, we expect more technologies to emerge to help consumers navigate the healthcare system, find lower-cost treatments and gain easy access to care.

Casualty

While modest rate growth occurred in auto liability, over-capitalization and absence of monumental insured catastrophic events led to a further erosion of rates in early 2017. Enterprising reinsurers are sliding nearer to risks by diversifying into the primary insurance space, which is further bloating the casualty market.

In the fourth quarter of 2016, we saw broader terms for multi-year rate commitments and collateral requirements. The market remained competitive, brokers sought early agreements on terms and more sophisticated underwriting tools seemed to limit market swings.

Premium Overview

Coverages Q4 Marketing Results
Workers Compensation Flat to slight increase
General Liability Slight rate reduction
Automobile Liability Single digit rate increase
Umbrella/Excess Liability Moderate rate decrease

Market Overview

Workers Compensation, General Liability and Automobile Liability - Auto liability and loss-impacted workers compensation pricing was conservative when solicited on a stand-alone basis. Stung by severe losses, underwriters focused on auto liability loss control and fleet safety efforts and held the line against rate reductions. Insurers in an incumbent position encouraged loyalty with multi-year rate commitments and loosened collateral requirements.

Umbrella and Excess Liability - Plentiful capacity led established excess liability markets to uncomfortably carve rates within the working layers. Those perched high above hazardous layers inched near minimum premium as new market entrants continued to suppress rates.

Forecast

Larger-scale economization, desire for market share growth, and new product opportunities will encourage M&A deals. 

Looser, competitive underwriting and allowance for long-term deals will likely endure for general and excess casualty. Forecasted rising inflation under the Trump administration may impact long-tail loss reserves, creating a more calculated and discerning underwriting environment for high-hazard risks. 

Rates for workers compensation will continue to mildly deteriorate, with exception to New York and Florida, where rating bureaus pushed for double digit increases.  Interest in opt-out legislation will be renewed in the southeastern U.S.

Other concerns on the horizon include:

  • The prospect of lowered corporate tax rates and weakened regulation served up by the new Trump administration.
  • Wider usage of interconnected smart devices heightening security and bodily injury concerns.
  • Growing interest in soft target and workplace violence legal liability protection accompanied by proper employee training.
  • Implications of automation on workers compensation pricing and auto liability loss trends.
  • Slide in vocational training efforts that threaten safety and effectiveness for a new generation of skilled laborers.
  • Insurers wary of privacy and bodily injury exposure possibly reacting to the prevalence of unmanned aircraft with restrictive and exclusionary language.

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Contingency

The Contingency insurance market in London is mostly focused 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; provide protection against the occurrence of adverse weather conditions; and 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 last five years, the music industry has witnessed a steep increase in bands’ touring activity. 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 are now attracting attendances in excess of 60,000 to 140,000 patrons per day and generate significant revenues for the organisers.

There have been some significant market losses within the contingency area in recent years although last year has appeared at this stage to have outperformed, in terms of Insurers’ profitability, the three previous years. Artist illness and accident claims were widely reported in the media and weather-related losses in North America for both 2015 and 2016 have increased considerably year on year.

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, the market rates for 2016 demonstrated some minor increases towards the end of the year and a slight hardening of applied policy terms and conditions. While the market view is that further increases will be required in 2017, such increases do not appear to be too significant at this stage.

Forecast

There are some tangible signs that the market is again going to look to increase rates for 2017. It should be anticipated that not only will rating increase but 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 for purpose. 

Cyber Risks

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 must marry technology with policies and procedures that 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 briefly consider how issues encountered in 2016 may influence market realities in 2017.

Business Segment Q4 Marketing Results Rate change 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

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.

Financial Institutions

The financial institution arena continues to be one of the most effected 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.  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 be blurred 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%. In instances where an insured has experienced a major release of data, carriers are offering renewal terms; however, rates can increase upwards of 100% to 150%. Retentions are trending flat, but premium savings are available for insureds that are willing to accept higher retentions.

The healthcare industry has a unique set of exposures:

  1. Digitization of medical records, clinical systems and medical imaging creates a major challenge in protecting patient privacy and securing IT infrastructure.
  2. Security threats include unauthorized access to patient information, inability to access information and impaired integrity of information.
  3. Federal and state security and privacy laws have increased regulatory reviews including meaningful use audits. Heightened scrutiny is likely to result in increased fine and penalty assessments.

Professional Service Firms

For accountants and law firms, their professional liability policies generally include liability arising from the disclosure of confidential information. As professional liability is their primary risk driver, these clients already buy reasonable levels of coverage including the cyber liability risk, so cyber limits purchased are smaller than we would otherwise propose. Because of this overlap, our preferred approach to cyber remains requesting the cyber is primary and non-contributory to the professional liability. There are fewer insurers willing to write on this basis, but it is gradually increasing. Coupled with the relatively low exposure to PII and PCI, professional firms are a preferred class for some insurers, so even on our primary/non-contributory basis, pricing remains extremely favorable.

Retail

Retail businesses in 2016 experienced a general increase in number of cybercriminal attacks compared to other industry sectors. The processing of large volumes of personal information, especially credit card data, has made them an easier target for breach activity. The insurance market continues to be selective when it comes to underwriting retail risks. Retail business is a risk appetite that does not suit all cyber risk insurers. For example, some 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. Payment card brands can impose a variety of fines and penalties upon non-PCI-DSS compliant retailers pursuant to a merchant services agreement. While almost all forms of liability insurance will include a contractual liability exclusion (and some a specific fines and penalties exclusion), cyber risk insurers over the past few years have addressed this potential gap by providing explicit PCI-DSS coverage, often sub-limited. 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 (i.e. contributions to a consumer redress fund).  Insured should review representations as to PCI-DSS Coverage carefully.

Claims

Cyber claims continue to increase, in both number and severity, and evolve beyond the standard releases of protected information. Ransomware attacks and social engineering (also referred to as spear phishing) attacks 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 active interest in cyber incidents. The past year has witnessed the New York State Financial Services Department focus on implementing a more prescriptive cybersecurity regime and the Federal Trade Commission prosecuting more than 50 enforcement cases involving data security issues. 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 fines and penalties.

Standing continues to prove too high a hurdle for the plaintiffs’ bar. The Courts have yet to bring a data-breach class action case to verdict based, in part, on the plaintiffs’ inability to adequately allege concrete harm. Although the plaintiffs’ bar has not relented in its quest to find a winning formula, the third party liability aspect of cyber claims primarily remains, for now, a cost of defense issue.

Cyber coverages have evolved more rapidly than most other lines in order 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.

Forecast

Although it remains difficult to determine the attack vector du jour, it seems that 2017 will see the continuation of: (1) ransomware attacks; and (2) DDoS attacks originating from compromised Internet-of-Thing (IoT) devices. As reported by multiple industry insiders, ransomware attacks are expected to grow in both number and sophistication. The growth is attributable primarily to bad actors seeking to increase their return on investment. To achieve their goal, actors have started to broaden their attacks to include enterprises that have been historically overlooked and introduce ransomware that encrypts critical data and/or systems (I.e., crypto-ransomware).

In addition to increased ransomware attacks, DDoS attacks originating from compromised Internet-of-Thing (IoT) devices are on the rise. Bad actors are exploiting unsecure IoT devices to create Botnets that range in size from a few dozen compromised devices to as large as over one million devices. It seems clear that bad actors have moved away from using computers and servers to launch DDoS attacks and now favor exploiting unsecured IoT devises.

Energy

Premium Overview

Coverage Rate Change in 2016
Upstream (Exploration & Production) -10% to -15%
Downstream (Refineries; Petrochemicals; Utilities) -5% to -20%

Pricing and Capacity Overview

Overall, Property and Casualty rates in the Energy sector have continued to fall as a result of a supply and demand imbalance.

On the supply side, capacity has increased in both upstream and downstream markets for the eleventh year in a row. This continued increase is driven by the availability of capital, relatively low loss levels, and a lack of opportunities to generate attractive returns in the current low-yield environment. These inflows of capital have led to intense competition between insurers.  In an effort to reach premium income targets, insurance companies are renegotiating coverages at improved terms and widening coverage offerings.

On the demand side, oil prices rebounded in 2016 (the price of oil in January 2016 for a barrel of the benchmark West Texas Intermediate (WTI) crude oil was $30, and rose to $53 by year end). Still, the sector has fewer new exploration projects and overall, drilling operations have been scaled back. Large-scale development projects are one of the drivers of demand for insurance in the oil & gas industry but, having taken on heavy debt loads in the preceding boom, companies have been preserving as much cash as possible and pursuing aggressive cost-cutting measures. This has translated into reduced risk management budgets, which will continue to put pressure on premiums.

Insured Losses

The energy industry continues to improve in safety and accident prevention. The oil and gas industry has fewer incidents of injury and illness for workers than the private sector overall. Oil refining and pipeline transportation businesses have less injury and illness among workers than the manufacturing and transportation sectors. This has resulted in less frequent losses – but those claims have also become more costly. Claims cost inflation has been particularly evident in primary auto liability losses.

Insured property losses in the energy sector through December 2016 included $906 million in upstream market losses and $1.2 billion in downstream market losses. However, these losses are not historically unusual and are unlikely to reduce capacity or influence rates in the short-term.

Forecast

Focusing again on the basis of supply and demand, the cost of insurance capital is at a historic low and new capacity continues to flow into the market. This trend shows no signs of change, so 2017 looks to be another year of reducing insurance rates for the energy sector.

Environmental

Premium Overview

Coverages Rate change Q4 2016 Rate Change Q3 2016
Pollution Legal Liability/Site Liability -15% to +5% -20% to flat
Contractors Pollution Liability -15% to flat -20% to flat

The market remained relatively unchanged from the third to fourth quarter in 2016. The number of carriers offering pollution liability and contractors liability coverage remained abundant. Depending on the marketing strategy for renewals, some insureds experienced flat to double-digit premium and rate decreases. Increases tended to be industry-specific and/or as a result of loss experience.

Market and Coverage Overview

The most notable Environmental market changes of 2016 included the exiting of AIG from the North American Site Liability market, as well as the combination and integration of the ACE and Chubb operations, following ACE’s acquisition of Chubb. Notably, AIG and ACE were both top-three insurers in terms of market-share.

AIG’s impact on the market began in early 2016, when their exit from Site Liability (and other products) was announced. Whether marketing was planned or not, non-renewed site liability business has also moved, which caused submissions to flood the marketplace. As a result, underwriters at the other insurers had a surplus of opportunities, and to some degree, could be more selective. This will likely continue through 2018, when all AIG 3-year policies will have been be replaced.

There are nearly 20 retail markets offering Environmental coverage, with a smaller group of insurers providing 10-year policy terms for “transactional” policies. Insurers offering longer terms tended to implement minimum premiums, regardless of risk or limits (generally $85,000 to $100,000).

Despite, the AIG and ACE/Chubb impacts above, which effectively removed $100MM site liability capacity, overall market capacity is abundant, with availability in excess of $500MM. Certain insurers reduced exposure by decreasing overall limits on some risks (e.g., Zurich has capped itself at $25MM on business moving forward, down from $50MM previously). In contrast, Berkshire Hathaway added $100MM capacity to the marketplace, and some other insurers have expanded their capacity selectively. Annual or shorter-term “renewable” site liability policies were competitively-priced with broader terms and conditions being offered on certain classes of business like light manufacturing, real estate and healthcare.

Underwriters continue to provide a high degree of flexibility and tailored coverage for industry-specific risks. More stringent underwriting guidelines continue for development projects, especially for sites with known issues, industrial properties, and urban projects. Mold was standard in many forms and is often included in coverage with less underwriting information than what has historically been required. The market remains inconsistent with respect to coverage arising from bacterial and viral threats.

Lender requirements for new or refinanced assets remained a driver for insurance in some cases. Environmental insurance continued to be used to back up indemnifications or to sit in excess of an indemnity agreement and escrow, especially where known or suspected conditions were present.

Increased competition on renewals has continued to yield decreased premiums/rates by up to 15% (depending on the marketing strategy). With respect to rate, incumbent carriers appeared to be at a disadvantage, often seeking to keep the rate flat, but often will broaden coverage where possible. Even with rate decreases from other carriers, some insureds elected to renew with the incumbent due to continuity and other business relationships. The quality and timeliness of service may begin to have a more profound impact on insurer selections in 2017 and beyond.

Across most industries, there continues to be increased interest in environmental insurance solutions. There was also a continued increased trend in the volume of claims.

Forecast

The Environmental market is expected to remain relatively stable and consistent throughout the first quarter of 2017. However, continued effects from AIG’s exit, Chubb’s ongoing integration, and new effects from recent announcements surrounding acquisitions of AWAC and Ironshore (by Fairfax and Liberty, respectively) could change appetites for risk. The preservation of expiring terms and conditions will remain a challenge as the industry still does not offer a standard form, or form structure.  Lastly, in addition to terms, conditions and pricing, claims handling and overall policy servicing capability may begin to factor more heavily into insurer selections.

Healthcare

Marketplace Overview

The Medical Professional liability (MPL) coverage line continued as one of the most profitable in the property/casualty marketplace. Concerns over weakening financial performance, continued soft market pricing, diminishing reserve redundancies, low interest rates and other challenges led to leveling in MPL premium in 2016. We saw slight premium decreases to flat renewals on average.   The increase in the severity of MPL claims continued in 2016 and we anticipate similar increases in 2017 as reported claims settle. 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 leading to increased discomfort by underwriters.

Rates continued to fall, slightly, for many underwriters as evidenced by declining premium volume in the industry as a whole. In many cases, some carriers were compelled to lower their rates to maintain market share as competitors wrote business at rates that they perceived to be at inadequate 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 the larger Health Systems rather than enter into independent practice.

Cyber-attacks continued to make headlines across all industry sectors with healthcare being significantly impacted from a customer privacy perspective. In 2016, we saw a marked increase in extortion incidents in which malicious code (i.e., ransomware) was introduced into a healthcare organization’s computer system. 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.

The Merger & Acquisition activity in 2016 among insurance carriers who underwrite Medical Professional Liability raised some questions as Sompo announced its acquisition of Endurance (expected to close first quarter 2017); Liberty announced its acquisition of Ironshore (expected to close first quarter 2017); and Fairfax Holdings announced its intention to acquire Allied World Assurance (closure date is not confirmed). These strategic transactions are expected to complement the existing carrier platforms and should not have an impact on the MPL underwriting teams.

Managed Care E&O  

Managed Care Organization E&O is a growing area of exposure as healthcare systems and large physician groups continue to grow in complexity and expand their service offerings. Considerable activity continues with Health Systems’  formatting of 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, which makes it difficult to identify and quantify potential risks.

On a macro level, carriers are concerned with the imminent repeal of the Accordable 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 the Act. Conventional wisdom suggests that the ACA will not be fully repealed, but rather revised as to how it is funded and managed. Changes in funding and structure 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. The rates have remained fairly static unless: (1) the insured has adverse claims development; (2) there is a material change in exposure (e.g., number of enrollees, type of services provided etc.); or (3) there is a major marketing effort. Baring the foregoing, premiums are following the increase and/or decrease in exposures.

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

In 2016, the medical stop loss and reinsurance market continued to be driven by data quality. The high standard and detailed data often returned a competitive, but disciplined market while poor data resulted in a tough market. Additionally, ripple effects from the Affordable Care Act were still evident, as the industry continued 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. A few ongoing trends and updates to note in regards to the medical market in general and the Provider Stop Loss and Employer Stop Loss markets follow.

  • Exchange Lives
    • As of March 2016, there are 11.1 million consumers in the United States with effectuated (paid premiums and an active policy) coverage.
    • A number of major markets have had extremely poor experience with the newly insureds, which has resulted in higher rates and large losses.
    • With data of the newly insured population becoming more readily available, there is a push to better understand how to most efficiently and effectively serve this market segment.
  • Medicaid Accountable Care Organizations
    • Many states have taken interest and to date, 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 and at least ten 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 had 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 the 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), which are designed for providers who have experience in coordinating care. These two tracks will begin in 2019.
    • Providers are starting to prepare for the impact of this new legislation, since performance measuring begins in 2017.
  • Specialty Pharmacy
    • Costs related to pharmaceuticals continue to increase year over year and cause financial challenges for health systems.
    • It is not only high-cost orphan drugs that are driving costs. Drugs that are developed to treat conditions such as Hepatitis C are in high demand and are utilized at a high frequency, which can cause serious financial concerns.
  • Direct to Employer Contracting
    • In order to contain costs and increase the quality of care employees receive, there has been substantial interest in and implementation of direct contracts between providers and employers.
    • Those focused on narrow networks with providers that have created successful methods of cost savings and favorable clinical outcomes will be most prepared for the risk associated with these types of contracts.
  • Self-Funding
    • Since the Affordable Care Act passed, there has been significant interest in self-funding. We have and continue to see many fully insured plans contemplate and successfully transition to self-funded plans. 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.

Premium Overview – Rate Change

Coverages Q1 2016 Q2 2016 Q3 2016 Q4 2016
Medical Professional Liability Flat to slight decrease Flat to slight decrease Flat to slight decrease Flat to slight decrease
Managed Care E&O Liability Flat to slight decrease Flat to slight decrease Flat to slight increase Flat to slight increase
Medical Stop Loss Liability Flat to slight decrease Flat to slight decrease Flat to slight decrease Flat to slight decrease
Cyber Risk* Flat to slight increase Flat to slight increase Flat to slight increase Flat to increase

* Many carriers are hyper-sensitive to material changes in exposures (e.g., net patient service revenue, merger or acquisition activity, etc.) and adverse loss development. In the first instance, carriers do not necessarily increase rates; however, premiums increase as a result of a larger exposure base. When faced with adverse loss development, carriers routinely increase rates to offset defense and indemnity payments.

Emerging Areas for Healthcare Organizations

Regulatory Liability/Billing E&O: This is a growing area of concern for healthcare organizations. Healthcare fraud enforcement activity has been increasing as the government seeks to reduce fraud and waste in the healthcare system and False Claims Act whistleblower lawsuits are on the rise.

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 cyber security risks for pacemakers and other implantable devices and suggests this will be a potentially growing area of litigation/suits/claims.

Forecast

Uncertainty abounds with the change in the Administration will have on the Affordable Care Act and the healthcare industry as a whole. According to Elise Barajas, Associate at Gray Reed & McGraw: "Donald Trump's election, and Republicans' control of both houses of Congress, will certainly alter the current healthcare landscape, and our healthcare clients should expect some big changes, although the exact ramifications are still unclear. The repeal (or at least significant paring back) of the Affordable Care Act, as promised by Mr. Trump, could potentially change the current model that pushes providers away from traditional fee-for-service medicine and toward the delivery of value-based healthcare.”  (Becker Hospital Review, Nov 16 2016)

The persistent softness of the market continues to present challenges to medical professional liability insurers despite record profits and low loss ratios. To remain competitive, markets have been forced to decrease rates and premiums. There is an abundance of capacity in the marketplace with new market entrants, as well as the willingness of current markets to expand their capacity.

Clients recognize the importance of their long-term relationships with their incumbent underwriters and this is a key factor in their renewal decisions. While competitive markets may offer terms and conditions at reduced pricing, clients do not always elect to bind with the lowest option, but consider other factors, such as historic premium they have paid to incumbent underwriters to pay claims in the future, risk management services or dollars the underwriters can offer to support the client’s initiatives, and the incumbent underwriter’s willingness to work with the client in designing a program structure that can evolve with the changing healthcare landscape.

The movement of physicians from private practice to hospitals and other large institutions, most of whom self-insure their liability exposures, continued in 2016 and is expected in 2017. 

The record high reinsurance capital and stable to weak growth in reinsurance demand will continue to drive softening in the global reinsurance market for medical professional liability. The competitive market environment is expected to continue throughout 2017, driven primarily by surplus capacity, with pricing stable to slightly decreased in most venues.

Management Risk

Directors & Officers Liability

Premium/Capacity Overview

Coverages Rate Change Q2 2016 Rate Change Q4 2016
Directors & Officers Flat to 10% decrease Flat to 7.5% decrease
Employment Practices Flat to 5% decrease Flat to 5% decrease
Commercial Crime Flat Flat
Fiduciary Liability Flat Flat to 5% decrease

The D&O marketplace remained competitive through the end of 2016. Primary insurers have attempted to maintain rates or to find increases where possible, but competition among insurers, including newer entrants, continued to put downward pressure on premiums. As a result, in the absence of material changes in risk, prices declined modestly or remained flat for risks across most industry segments.

As in recent years, excess layer pricing and rates in 2016 experienced pricing pressure; many insurers offered premium below what historically has been the typical excess rate of 65%-70% of underlying insurer pricing. In addition, 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 the broker and companies with foreign operations.

D&O Claim Trends

  • A record number of federal securities class actions were filed in 2016.
  • There was a substantial increase in 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.
  • 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.
  • Unknown: Impact of the U.S. election and international political climate on courts and domestic and global regulatory agencies.

Employment Practices Liability

Premium/Capacity Overview

There continued to be an abundance of capacity in the Employment Practices Liability (EPL) marketplace in 2016. 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. Thus, barring other material changes, those organizations saw somewhat flat renewal results, as well.

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

EPL Trends

  • EEOC activity continued to climb in 2016. 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.
  • 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 remained a primary concern for many organizations and will continue to be a major issue heading into 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

The Commercial Crime market remained stable through the end of 2016; with pricing remaining 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 anticipate underwriters to exert pressure on policyholders to increase deductibles as a means of saving premium. What remains to be seen is whether competition in this space will mitigate or prevent these increases from manifesting.

Social Engineering/Fraud continues as a “hot topic” in the Commercial Crime marketplace. Examples of the scheme 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. 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 end of 2016; however, insurers are increasingly attempting to press for increased premiums and higher 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 

  • 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 – 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.
  • 2016 also 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 also were filed in 2016. In these cases, plaintiffs assert that pension plans offered by religiously affiliated organizations’ healthcare systems do not qualify for ERISA’s church plan exemption. The question of ERISA exemption qualification is presently before the United States Supreme Court, with a decision anticipated in or before June 2017.

Note: Cyber Security is addressed separately in this report.

Marine

  • Marine Cargo & Stock Throughput
  • Marine Hull & Liability

Premium Overview

Coverages Rate change Q2 2016 Rate change Q4 2016*
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 (e.g., Thailand floods, Taiwan typhoons, Hurricane Sandy) and major accumulation risk claims in Tianjin port in the not too distant past – the markets' overall underwriting results continued to be favorable for marine cargo accounts.

For accounts without storage risks, rate reductions were the norm for those with 3-year loss ratios under 60%. 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 continue to offer competitive pricing for static risks in 2016. This competition between marine and property markets resulted in savings of 5-25% for insureds.

The market was concerned when Hanjin Shipping Co ltd. filed bankruptcy in 2016. However, to date, the impact of physical damage and extra expense claims filed by Assureds has had no measurable effect on the state of the market. We foresee the first two quarters of 2017 being comparable to the last quarter of 2016 as respects Assureds with transit and stock throughput coverage.

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 to add to the list of new markets opening offices in the U.S. including, but not limited to, Munich Re, 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 are commonplace in the U.S. and London. It should be noted that London market can offer higher CAT towers, which means split placements are often the best combination to meet client’s needs.

Coverage Overview

Coverage terms were extremely broad in 2016 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% 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 first two quarters of 2017 being comparable to the last quarter of 2016.

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). This has the impact of consequently expanding 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. Hanjin Shipping, one of the top seven worldwide carriers, declared bankruptcy in 2016. Although its bankruptcy will have an effect on the South Korean economy and certainly employees, other container carriers have consolidated to fill the void.

While the price of oil is comparatively competitive, it has shown an increase in the per barrel costing from a year ago but overall remains relatively low. Consequently, the shipment of oil has stagnated with many oil rigs dormant or used only temporarily 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. The reinsurance market(s) are a cause and a reflection of the primary market(s) situation.

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.

Professional Liability

Market Overview

Despite consolidation of insurers, high levels of capacity in the professional liability segment persist, serving to keep rates in check. Long time market participants with mature books of business will struggle to achieve even modest rate gains in the face of competition. Competition for excess layers is robust and rates are low. In the LPL sub-class, abundant capacity will continue to keep LPL rates low, but concern over the frequency of large losses and increasing levels of demands and costs of resolving matters will discourage pricing much below expiring rates. Moreover, disparate claims experience and lack of concensus regarding claim sources has resulted in varying underwriting appetites and exposure management approaches. The APL sub-class exhibited a spike in severe losses in the years following the financial crisis but more recent accident years have seen a declining number of severe losses. This has led most underwriters to remain engaged at competitive rates.

Capacity Overview

Capacity in the professional liability market is at historically high levels. For example, in the LPL market upwards of $600M to $700M is available to cover large firms. However, underwriters’ recent limit management strategies require accessing more insurers to meet a firm’s coverage demands that exceed $5M. For larger firms, quota share structures on large primary layers are becoming more prevalent as underwriters seek to stretch out their limits to manage exposure. Additionally, capacity available to mid-size firms depends on the individual firm and its risk profile.

FORECAST

Favorable conditions will persist, as abundant capacity will make it very difficult for incumbents seeking rate increases to achieve their goals. While firms with high risk practices or claims activity will struggle to avoid increases, solutions will be available. While abundant capacity will serve to keep rates in check, taking advantage of market conditions will require planning and inside knowledge of the market. Buyers need to determine how to present their firm in the best possible way to achieve access to the available limits and broad coverage at a competitive price.

Property

Last year ended as another in a string of years without a “market-changing” catastrophe event. That being said, 2016 was far from quiet with severe hailstorms taking place across Texas; widespread flooding in Louisiana; wildfires in Canada; earthquakes in Japan and Italy; and Hurricane Matthew bearing down on the east coast of the U.S. The market remains well-capitalized with an end to the soft market nowhere in sight. Alternative capital continues to put downward pressures on rates with the trend expected to continue well into 2017 given the low interest rate environment in which we are currently operating.

Premium Overview

Coverages Rate change Q1 2016 Rate Change Q2 2016
All Risk Property Flat to 15% decrease Flat to 12.5% decrease

We expect retail rates to continue to soften into 2017. This is based on January 1 treaty renewals, which averaged -5%. Nevertheless, the pace of rate decreases does show signs of slowing.  The double-digit rate decreases, which were ubiquitous in the market in recent years are less common – especially on programs which have already seen several years of compounding rate decreases.  Underwriters are beginning to push back on accounts that have premiums well-below their technical pricing; the market is finding its bottom.

Market Overview

Interest in multiyear policies and one-year renewals with 2-3 year rate locks have become increasingly popular as clients look to secure their competitive pricing and terms into the future and markets look to lock in valued clients in a marketplace flush with capacity. With the pace of rate decreases slowing, focus is shifting to terms and conditions. Markets are increasingly willing to expand coverage via increased sublimits and lower deductibles, especially as an alternative to further rate decreases. At the same time, many insureds are redeploying their premium savings into deductible buy-downs, expanded coverage and purchase of new products in an effort to keep their insurance budgets stable.

Other Observations:

  • Stand-alone terrorism continues to be an attractive alternative to TRIPRA as capacity is on the uptick and pricing is trending downward for all but the most difficult terrorism risks.
  • The stand-alone terrorism market has exhibited an ability to offer innovative solutions to the changing face of terrorism risk with new coverage extensions such as active assailant, which assists insureds in managing and paying for their response to these types of crises.
  • Alternative products such as parametric trigger and MYSL (multi-year single limit) products continue to grow in popularity for markets and clients alike.

Forecast

The trend of market consolidation continues as evidenced by recent announcements such as the Liberty Mutual purchase of Ironshore or the Sompo purchase of Endurance. There is also a trend of existing carriers altering their distribution model and/or capacity offerings to become more meaningful players. This trend began with Endurance hiring Michael Chang (formerly of Chubb) in early 2016 to build out a multi-line insurance offering tailored to the needs of clients in specific industries such as real estate and financial institutions.

Surety

Premium Overview

Coverages Rate change Q1 2017 Rate Change Q4 2016
Contract Surety Flat to slight increase Flat
Commercial Surety Flat to slight decrease Flat to slight decrease

The Surety market in 2016 continued its profitable trend as the top 100 companies appear to be trending toward a pure loss ratio around 12.5% on what appears to be an overall premium increase of 3%. Final SAA numbers will not be available until April.

Important trends in 2016 included:

  • 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.

Contract Surety

In 2016, ENR 400 contractors had combined volume that exceeded the previous high water mark for the industry, which was set in 2008. 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 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 2017. Rate and underwriting pressure will likely be the norm barring a major catastrophic economic event within the industry. The energy space, a heavy user of surety credit, 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.

The surety industry, as a whole, 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 the surety space in 2017.

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

We expect rates for Customs Surety to remain flat at the beginning of 2017. The negotiation of various trade deals by the new administration may affect the importing community, which we will continue to monitor. Also, the continued uncertainty around the handling of liquidated damages for late and inaccurate ISF filings and the increased number of Anti-Dumping cases across the U.S. presents some additional risk.

Premium and Capacity Overview

During the year as a whole, and especially in the final quarter, the transportation insurance marketplace remained highly competitive, which kept rates and premiums for Logistics Liability policies relatively stable. Markets have expanded their product offerings and capacity increased throughout much of 2016. 

Coverage Overview

U.S. Customs / Miscellaneous Surety Bonds

Customs and Border Protection (CBP) has continued to automate their systems to facilitate the electronic importing and exporting of goods. The Automated Commercial Environment (ACE) has become the mandatory single window through which the trade community imports and exports. This has eliminated much of the manual processing and has allowed the trade community to easily and efficiently comply with U.S. laws and regulations. 

The electronic bond environment (eBond) is a component of the ACE environment that has allowed sureties to fully automate bond processing. Benefits of eBond as outlined by CBP include:

  • Provides 24x7 capability for submission of bonds and processing of entries through EDI
  • Standardizes the way CBP interacts with the Trade across ports
  • Provides a single repository for all bonds – continuous and single transaction
  • Enables CBP Officers to focus on trade and law enforcement while reducing the burden on Entry and Import personnel
  • Takes a major step in responding to recommendations from the OIG Audit in June 2011

We feel the benefits of ACE will allow sureties better transparency while providing CBP with the same transparency and ability to ensure a fair and competitive trade environment.   

Change in Bond Guidelines: CBP is drafting new bond guidelines as eBond becomes more prevalent and bond liability determination gets centralized away from ports of entry. Priority Trade Issues (PTIs) represent high-risk areas that can harm the U.S. economy. We believe the new bond guidelines will place greater emphasis on importers of textiles and apparel and require larger bonds for importers of goods, which CBP believes to be within the scope of a priority trade issue.

Logistics Liability

The 25-member Coalition for Fair Port Practices filed a petition in December 2016 that asks the Federal Maritime Commission (FMC) to establish a new policy to clarify detention and demurrage charges imposed when shippers cannot pick up containers, cargo, and chassis for reasons beyond their control. The Coalition deems these charges to be unreasonable. The clarification of these situations would affect the exposure to the insurance company that offers coverage to the NVOCCs for cargo that accrues these charges.

The U.S. Census Bureau announced this month that exports of goods and services decreased in November and for the year to date. Truck tonnage decreased by 0.7% in December according to the American Trucking Association. For the full year, tonnage was up 2.5% compared to 2015. Analysts remain optimistic that 2017 will be a better year for the freight industry. The renegotiation of various trade deals by the new administration also hopes to spur domestic manufacturing, which will impact domestic transportation. 

SOLAS (VGM) – The new SOLAS Verified Gross Mass (VGM) requirement went into effect on July 1st, 2016. All IMO member countries have adopted a mandatory container weight verification requirement, for shippers of containerized cargo, before the container can be placed aboard a vessel.

Forecast

U.S. Customs Bonds rates should remain flat throughout the beginning of 2017, with an increased focus on underwriting and collateral requirements.

Lower insurance premiums for Logistics Liability policies, the availability of broad coverage options, and increased capacity continued towards the end of 2016; however, these should rise as we move into 2017. With some market consolidation in this niche industry and the access to broad coverage options shrinking, this should result in a rate and premium rise over the first half of 2017.