Global Insurance markets have continued to harden throughout 2020. This article discusses the underlying causes and some of the implications that insureds should be prepared for going into 2021.
General Market Conditions
Throughout 2020, the commercial insurance markets have become increasingly challenging to policyholders. Insureds are experiencing premium increases and restrictive terms and conditions on renewal policy forms across most insurance lines, with double digit or, for certain industries such as construction, real estate, and hospitality, even triple digit increases for property, D&O, employment practices liability and umbrella/excess liability coverage. Many insurers are also imposing unfavorable terms and conditions such as communicable disease (COVID/Pandemic) exclusions. If an insured did not have such an exclusion on its policies, underwriters have been tacking on such exclusions to their renewals.
Excess Liability Availability and Affordability Crisis
In 2020, many excess liability insurers began pulling out of the market while others remained in the market and are selectively not renewing accounts. Those insurers that remained in the market began raising premiums significantly while also reducing capacity. This has caused a world-wide insurance crisis with many insureds considering alternative risk financing options such has captives to finance their risks.
Major Factors Putting Pressure on Insurers
In addition to upward pricing pressures created by the laws of supply and demand, the insurers who continue to provide coverage in the primary and excess markets are being buffeted by the following trends which show no signs of abating:
Big payouts relating to unusually high occurrences of costly natural disasters and severe weather events (especially hurricanes and wildfires).
Social Inflation which is the increase in insurance losses resulting from ever increasing jury awards in tort cases caused by a culture of fault and a desire to exact justice through punitive damages.
Limited investment returns in more conservative investments in a near-zero interest rate environment which forces insurance companies to protect their profit margins through more vigorous underwriting benchmarks, decreased coverage exposure and premium increases.
The Effect on Insureds
Expect new questions on insurance applications, especially involving your plans and procedures for dealing with the pandemic. In addition, you may find that your organization is being benchmarked by new standards. For example, for the first time, an underwriter for one of our large real estate clients used a crime survey map and significantly raised deductibles and lowered limits for assault and battery and other crimes on a dozen properties that the map indicated were at higher risk.
As mentioned above, the excess/umbrella liability insurance market is experiencing a world-wide insurance crisis. Where placements in 2019 might assume four excess liability insurers to complete a $100 million excess liability tower, it now takes at least twice the number of insurers to complete the same tower. Some layers may be on a quota share arrangement where, for example, two or more insurers share in a limit of $25 million within the Excess liability tower. This results in higher premium cost and complicates claims handling in a large loss.
Reconsider your retention strategy as a risk financing tool. See Risk Retention for a one-page primer on retention strategies and tactics. Given the ongoing hard commercial insurance market, some organizations might benefit from setting up a captive insurance program for certain risks.