The excess casualty market faces a rough road ahead. After a difficult 2020, the market is likely to remain hard at least through 2021 and possibly into the following year. Carriers continue to reduce limits and increase premiums as they grapple with the aftereffects of underpricing in the soft market. Much of the hardening is being driven by losses in auto, and also where social inflation is leading to more so-called ‘nuclear’ verdicts. Along with auto fleets, construction, real estate, habitational and hotels stand among the more difficult markets.
Large excess placements are taking many more carriers to fill out as insurers spread their exposures in smaller layers across more risks. Given widespread reductions in capacity, insurers are taking a much harder stance in negotiations. Insureds that have not yet seen a large hike in excess rates should expect significant increases ahead. Those accounts that are non-renewed are likely to face the steepest hikes. Strong submissions with excellent data will be viewed far more favorably by busy underwriters. Creativity can prove an advantage as brokers who have strong relationships with markets, as well as the expertise to consider new ways of building excess placements can achieve the best results for clients.
SOCIAL INFLATION AND THE LONG TAIL
Casualty claims often have a “long tail” and those now developing from the soft market are proving more expensive than anticipated. At the same time, persistent low interest rates mean that insurers aren’t earning as much on the money set aside for future claims. Social inflation, the self-reinforcing trend of higher verdicts leading to higher expectations for awards and settlements, is proving the most challenging.
The trend to higher jury awards and the growth in the number of jurisdictions seen as likely for adverse verdicts heighten expectations for higher payouts. Insurers are paying more than expected for claims arising from the soft market of recent years when competition among carriers was more intense. For auto claims, for instance, losses over $1 million used to be uncommon. Now it’s uncommon to see large fleets without a loss of $1 million, and the bigger the fleet, the likelier such claims are. Fatal cases that five or seven years ago would have settled for $2 million are settling at $7 million to $10 million.
Jury awards in cases involving trucking companies have reached into the tens and even hundreds of millions of dollars. These so-called ‘nuclear verdicts’ make it very difficult for insurers to price correctly for future losses. Social inflation has led defense attorneys to settle cases they might have litigated in the past due to fears that a trial could result in an astronomical award. In an environment of escalating awards, the long tail nature of casualty claims increases the uncertainty for carriers.
Another factor is the trend toward litigation funding, where hedge funds and private investors provide funds for plaintiffs’ attorneys to pursue cases, freeing them from the need to self-finance the litigation. This year, however, the backlog in cases due to the pandemic may increase pressure on both sides from trial judges to settle cases more expediently.
As verdicts have soared, cases that would have been settled within the primary limits may now exceed the lead excess layer and reach higher into the excess tower. Insurers that would have been comfortable putting up a lead $10 million excess layer, may only offer half of that or less. As the norm for verdicts is being recalibrated higher, carriers are seeking higher attachment points to protect themselves. Carriers that had preferred to be lower in the excess tower recognize that their chances of being exposed at a $5 million attachment point are significantly greater and may want to attach at $10 million or higher.
Regardless of where a carrier might sit in an excess tower, more prefer to limit their exposure to tranches of $5 million or $10 million instead of $25 million. While significant competition still existed two or three years ago, today there are concerns in certain classes of business that it may not be possible to obtain adequate limits on a high enough tower, or that there may not be enough available capacity for the toughest risks.
In some cases, even standard markets are shortening lines and increasing attachment points. More standard markets are reducing their umbrella capacity or not offering umbrella coverage. This is creating voids in the marketplace for specialty risks, construction, habitational and owners, lessors and tenants’ risks. More specialized accounts that have been insured through special programs are seeing those capabilities disappear.
While some new capacity is coming into the market, generally it is more opportunistic and insufficient to replace the reductions in limits by existing markets. The new capacity is more interested in offering smaller layers and with restrictions on appetites. Some new facilities have launched as MGAs and MGUs, but they are also offering shorter lines targeting specific books of business where they see opportunities at the right rate. In construction, more capacity may become available from insurers or the Bermuda and London marketplace.
RATES HEADING HIGHER
Rates are heading higher into 2021 although not likely at the same scorching pace as 2020 when doubling of prices on renewals was not uncommon. In the lead excess position, which has seen some dramatic increases already, the pace of increases may taper off somewhat. Those accounts that have already seen a large rate increase should expect more modest hikes. Increases in the low teens should be viewed as a good result. Accounts that have only had small rate increases over the last few years, however, should expect to see substantial hikes in 2021.
Among the markets that may be most difficult are auto, construction and habitational.
Clients with significant auto fleets should be prepared for a tough market and continued rate increases. Auto has been driving the tightening in the excess market as sky-high claims become more common. In the past, excess carriers were less concerned about auto because they saw little likely exposure to such claims. Today, with jury awards reaching into the tens of millions of dollars and higher, excess carriers rate their chances of being exposed much more seriously. Carriers have to consider that they could be hit for an entire $25 million limit.
Requests for auto buffers are becoming more common. Instead of attaching at the traditional $1 million primary limit for transportation risks, carriers may want to be at $2 million or $5 million above that, making it necessary to place that coverage separately at additional costs.
As in other areas, data is playing a bigger role in auto. Underwriters are relying more heavily on CAB (Central Analysis Bureau) reports that monitor factors such as vehicle maintenance, driver fitness, and logbook violations. Companies with poor CAB scores are seen as bigger litigation risks because those scores will factor into trials and settlement talks as well as decisions on whether or not to defend a case.
The construction market is difficult, particularly in New York, although Florida is also becoming tougher. In New York, there is no light at the end of the tunnel as rates continue to climb and the loss experience deteriorates. The cost of claims is growing due to a New York law permitting “action-over” claims on both workers’ compensation and general liability policies, and the so-called “Scaffold Law” that imposes absolute liability on property owners, construction companies and contractors for accidents involving falls at construction sites. For claims involving falls in New York City, high six-figure payouts on both worker’s compensation and general liability policies are not uncommon.
Because of the poor loss experience in New York, most excess carriers want to attach at primary limits of $2 million per occurrence with a $4 million aggregate and $4 million products completed, even for more ordinary risks such as interior contractors. Many excess carriers will require a minimum of $5 million or higher attachment point. The markets that will attach at the traditional limits are very expensive. General contractors in New York often require subcontractors to carry the higher limits. Excess carriers may also seek aggregate reinstatement clauses on the primary layer.
Nationwide, construction has become a tougher market due to the focus on auto fleets. Many excess carriers are cutting limits and will only offer up to $10 million. Excess towers that used to be built in lots of $25 million are being pieced together in smaller layers. Carriers are also tightening up on terms. Some carriers have cut back their per location limits and are capping coverage at twice the limits rather than offering unlimited per location coverage. Carriers are also hesitant to offer DIC coverage on wraps.
HABITATIONAL AND REAL ESTATE
Habitational remains extremely tough, particularly small habitational accounts and those with adverse risk qualities such as subsidized, student and elderly housing. Capacity is declining, and the remaining and new capacity are seeking much higher rates. The second-best options are what’s available at prices that may be double what they had been in 2018 and 2019. Carriers are highly focused on the condition of individual properties and their associated risk scores.
Previously a lot of the excess coverage in real estate was provided by risk purchasing groups but far fewer are now available. In New York City, risk purchasing groups are not available for subsidized or student housing. Many carriers are seeking higher primary limits as well.
Hotels have come under intense pressure because of concerns about potential COVID liabilities. One perceived risk is that COVID might be spread through air filtration systems, which makes it highly challenging to obtain coverage for venues where large numbers of people might gather such as conventions centers, concert halls, sporting arenas and hotels. This market is likely to remain difficult until the trend in COVID claims becomes clearer.
Adequate excess capacity remains for products coverage, although some areas are more difficult, such as pharmaceutical products and high hazard classes like children’s toys and sporting equipment. On the tougher products, carriers are pruning limits and asking for higher premiums, making it necessary to be more creative in building out a program.
After the massive wildfires of recent years, carriers are very wary about providing coverage in areas seen as high risk. This market is particularly difficult for utilities. While primary markets may still offer wildfire coverage because their exposure is more limited, excess carriers are avoiding it because of the heightened risk of catastrophic losses. While there are still a few domestic carriers that will write excess with wildfire coverage, the Bermuda and London markets are typically needed to fill out the towers. Buyers can also expect coverage to be expensive.
Anything that has a catastrophic vertical exposure or is subject to explosion, like refineries, will continue to struggle with finding capacity in large enough tranches. A refinery seeking $100 million in excess limits, for example may require 20 carriers, each of which is going to have its own targets for rates.
With many carriers cutting limits, more carriers are needed to build an excess tower. Until recent years, large $100 million excess towers might be structured in four layers of $25 million, or the lead layer might be split into layers of $10 million, followed by $15 million. Now, such program may require 10 or 12 different carriers, each offering smaller limits than previously. The lead layer can be particularly difficult and expensive. Many carriers in the lead $25 million of excess coverage are quoting as if they are the primary underwriter because of the increased chances of a claim reaching that high.
More carriers are requesting “look-up” provisions to assess the quoted rates of the carriers above them in the tower. If they decide that the carriers above them are getting proportionally more premium, they may ask for higher premiums as well. In such cases, it may be necessary to go back and restructure the excess tower. Or it may be necessary to build the tower inward from the bottom and the top, if the top layer has minimum premiums per million that are non-negotiable.
RENEWALS AND SUBMISSIONS
Agents should be proactive in explaining to clients that the market is very tough and that renewal conversations need to start earlier. Clients whose incumbents offer the same capacity as previously should consider that a good renewal, even though the price may be higher. Those that are non-renewed should expect a much tougher scenario.
Starting early on renewals is crucial because the excess placements are taking more time to assemble. Obtaining primary quotes as early as possible will help to ensure that there is adequate time to place the excess coverage as that will follow the primary. Quick turnarounds on excess coverage may not be feasible in today’s market. In addition, underwriters are being flooded with submissions as carriers take smaller slices of the risk. The best submissions with the best data will be more successful at getting underwriters’ attention. With so much competition for capacity, getting high quality submissions to underwriters as early as possible can provide an advantage.
Clients should be aware of risk mitigation steps they can take, such as improving CAB scores for truck fleets, which can materially impact pricing. Still, one good year will not offset several years of poorer experience. More insurers are looking at 10 years of loss experience so that they can more accurately predict their risk.
A CREATIVE APPROACH
In a difficult market, taking a fresh look and a creative approach to programs can help in achieving the best results. For instance, excess towers may need to be restructured and re-layered. Adding auto buffers can help in securing better pricing and attachment levels on excess placements. Going beyond traditional casualty markets may prove fruitful. For instance, environmental markets may provide an outlet for unsupported excess coverage, so long as the underlying coverage includes environmental exposure. The most advantageous approach will depend on the individual risks.
In such a challenging market, it’s crucial that clients have realistic expectations. Insureds should expect rate increases, the extent of which will depend on the risk. Even insureds that haven’t had losses are likely to see rate increases. Insurers are paying out losses across their books of business, and losses in property market impact the casualty market.
It is crucial to get an early start on submissions. Few renewals are likely to be easy as brokers have to market more widely due to the declines in capacity. Although the excess market is likely to remain tough at least through the end of this year, experienced brokers can still find ways to obtain the best results for clients by trying new approaches and new structures. Brokers who take a creative approach can help clients obtain the most cost-effective and best coverage. Contact your CRC Group producer for more information.
- Brian Bloch is a Vice President in CRC’s Woodbury, NY office and a member of the Casualty Practice Group.
- Josh Chassman is a Senior Vice President, Casualty Broker in CRC’s San Francisco, CA office and a member of the Casualty Practice Advisory Group.
- Philip Cook is a Casualty Broker in CRC’s Birmingham, AL office and a member of the Casualty Practice Advisory Group.
- Jim Hamilton is the CRC Environmental Practice Group Leader and is located in CRC’s Denver, CO office.
- Emalyn Lovitt is a Senior Vice President, Casualty Broker in CRC’s Woodland Hills, CA office and member of the Casualty Practice Group.
- Craig Nettles is a Vice President, Casualty Broker in CRC’s Atlanta, GA office and a member of the Casualty Practice Advisory Group.
- Brent Tredway is the Co-President of CRC’s Brokerage division and is located in Houston, TX.
- Quincy jury awards $411 million in verdict for paralyzed Gadsden County veteran, Tallahassee Democrat, Oct. 5, 2020. https://www.tallahassee.com/story/news/2020/10/05/quincy-jury-awards-411-million-verdict-paralyzed-gadsden-county-veteran/3598588001/
- Georgia jury awards $280 million to Louisiana family in fatal 2016 truck crash, Atlanta Business Journal, Aug. 28, 2019, https://www.bizjournals.com/atlanta/news/2019/08/28/georgia-jury-awards-280-million-to-louisiana.html
- How a Texas fender-bender truck accident turned into a $32 million nuclear jury verdict, Transport Topics, November 20, 2020. https://www.ttnews.com/articles/how-texas-fender-bender-truck-accident-turned-32-million-nuclear-jury-verdict