Insight and Intelligence on the London & International Insurance Markets 23 Apr 2018

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Post-HIM market reveals selective underwriting approach: Willis

  • 17 April 2018
  • There is growing evidence that upwards pricing momentum for US commercial property insurance is already waning, even as underwriters continue to digest record-breaking 2017 cat losses.

    According to Willis Towers Watson, this supports the theory that the hard/soft cycle - where rates spike in response to cat losses before gradually easing - is no longer the main economic force driving the US P&C industry.

    In the firm's latest Marketplace Realities report, head of broking in North America Joe Peiser noted that property rates initially rose steeply for buyers with cat exposures and losses.

    But now those increases are already moderating, with some better risks even able to achieve price decreases.

    "The swiftness with which the industry recapitalised was something of a marvel, especially to those of us who have lived through past insurance cycles and seen plenty of chaos, carrier failures, pricing upheavals and the creation of new insurance start-ups," Peiser commented.

    Because insurers cannot rely on the old market cycle to generate long-term gains, they will have to provide better, more valuable products and do so more efficiently to improve profitability, he surmised.

    That is already beginning to happen as carriers look to grow and become strategically diverse through M&A, said Peiser. Other steps firms are taking include cutting expenses through technology and automation, underwriting more selectively, and creating solutions for emerging risks like cyber, he added.

    Rather than trying to hold the line on rates against the fundamental laws of supply and demand, carriers are talking about treating risks individually, walking away from under-priced business and seeking modest rate rises that the market will accept, the executive suggested in the report.

    "True, this approach could prove to ring hollow, but in the immediate aftermath of 2017's losses, insurers that took a broad-brush approach did not succeed. Selective, careful underwriting appears to be succeeding," said Peiser.

    This approach from underwriters means that overall there are now more lines of business that are seeing rate increases than there were in the broker's last update late last year.

    Back then there were seven lines of business in which Willis was forecasting decreases, seven with increases and nine where there was a mix of increases, decreases or flat pricing.

    In last week's update, however, only two lines were predicted to see price falls across the board in 2018, with 10 set to increase and 10 with a mixture.

    Property moderates

    In property, Willis said rates for non-cat exposed placements would range from down 5 percent to up 5 percent. Rates are expected to climb between 5 percent and 15 percent for cat-exposed accounts, and between 15 percent and 20 percent for those that are both cat-exposed and loss-affected.

    That compared to previous predictions made in November of flat to 5 percent increases for non-cat risks, 10-20 percent rises for cat-exposed accounts, and 20-25 percent hikes for cat-exposed business with losses.

    Moderating price increases are a reflection of limited upwards pressure on reinsurance rates together with the influence of alternative capital, which remains "undaunted" despite the 2017 loss experience.

    The broker suggested that aggressive marketing from buyers ahead of renewals may be rewarded. It also advised insureds to set themselves apart from their peers by creating submissions that had "distinguishing data and narrative".

    Buyers should also expect insurers' decision-making to take longer than in recent years as underwriters take a more selective approach.

    On wordings, Willis observed that underwriters had not shown significant pushback, except on "non-physical" damage and a move to increase percentage deductibles and caps for cat exposures.

    The firm also pointed to differences in the approach of underwriters by region, with the London market initially seeking broad-brush rate increases in the early days post-HIM.

    That had allowed US domestic carriers and Bermuda markets to pick up some market share, although London insurers had since become more "targeted" in their underwriting and pricing.

    Casualty rates pick up

    In casualty, Willis said that so far there had not been a widespread increase in rates, despite many in the market believing property cat losses would have a knock-on effect.

    But it added that certain lines of business remain challenging, with buyers experiencing incremental upward pressure on general liability, umbrella and excess liability.

    The firm is now predicting pricing in casualty to be flat to 4 percent higher, compared to flat to up 3 percent in its last update for general liability and umbrella.

    "Both the retail insurance and reinsurance markets are starting to notice abnormal, negative development with their liability loss portfolios. This trend has led to several major umbrella and excess insurance carriers reducing their available capacity, particularly for large multi-billion-dollar corporations," noted the report.

    Pressures are also mounting in auto liability, where pricing is now forecast to rise by 5-9 percent, up from the 3-8 percent increase previously anticipated.

    The broker said two years of steady price increases in auto liability had not been sufficient to keep pace with loss trends and adverse developments.

    In healthcare professional liability, rising frequency and severity of claims in long-term care and senior living facilities are putting "tremendous upward pressure" on rates as the market contends with exits by some carriers.

    Pricing in that segment is forecast to rise by 5 percent to 20 percent, said Willis.

    Meanwhile, cyber rates are forecast to be in the range of down 3 percent to up 5 percent for organisations without claims or recent incident.

    There are, however, pockets of more significant hardening emerging in some lines of US commercial lines insurance business, such as environmental, employment practices liability insurance and financial lines (see box-outs).

    D&O in transition

    One segment of the financial lines market seeing change is directors' and officers' (D&O) liability, where leading insurers are displaying discipline, according to Willis.

    "Rates will continue to firm - less soft, but not hard - except where still-ample competition sees this firming as an opportunity to displace a competitor," said the broker.

    It added: "For most, insurer quality (financial strength and coverage expertise) and long-term relationships will justify smaller discounts or, in more cases now, paying slightly more premium. Nevertheless, buyers who market their placements will find more opportunities to pay less."

    Willis is now predicting D&O rates to be in the range of down 5 percent to up 5 percent, but within that private and not-for-profit companies will see renewals flat to up 10 percent, while primary layers for public companies will be down 5 percent to up 7.5 percent.

    Meanwhile, the firm suggested that overall D&O loss trends are "more balanced" than some headline numbers suggest.

    #MeToo impacts EPLI rates

    While price increases for employment practices liability insurance (EPLI) remain moderate overall, at flat to up 5 percent, segments of the market are seeing a much more significant uptick.

    Perhaps unsurprisingly amid the wave of post-Harvey Weinstein #MeToo headlines, rates are hardest in the media and entertainment sector.

    Here rates are climbing in the 15-30 percent range at renewal, according to the Willis report.

    "Media/entertainment clients are experiencing the most significant increases due to the industry's surge of sexual harassment allegations. These clients have also seen reduced limits and separate retentions for sexual harassment claims," it observed.

    The firm also reported that California EPLI rates are up in the 5-10 percent range, based on heightened legal requirements in the state.

    Across the EPLI segment, Willis suggested that corporate culture at buyers will be "more important than ever" in the underwriting process.

    "Expect increased scrutiny of internal policies and procedures regarding sexual harassment and gender-bias claims," it advised.

    Losses drive environmental market turn

    Another industry segment experiencing a market turn is environmental, where pricing is expected to rise 10-20 percent for site pollution liability and combined environmental, casualty and professional covers.

    The contractors' pollution liability line is showing more stability, however, with rates flat to up 10 percent at renewal.

    "The environmental insurance market is experiencing its first hardening in over a decade," said Willis.

    The turn is down to years of mounting losses that have led carriers to either exclude indoor air quality risks such as mould and legionella in habitational classes of business, or severely restrict cover on a named-peril or time-element basis.

    Meanwhile, the impact of AIG's retrenchment from site pollution risks is still being seen, with insurers looking to build market share demonstrating a more cautious approach to known conditions and policy term, according to the report.

    "This caution is based on their assessments of this portfolio's performance for the first two years since AIG's exit," said Willis.

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