Excess and Surplus Insurers Were Already Raising Prices. Then Came COVID-19

Already grappling with a shaky run due to several years of massive Nat CATs, the E&S market is facing even larger hurdles thanks to COVID-19.

By: Alex Wright | May 18, 2020

It was the perfect storm waiting to happen.

For years, insureds have traditionally enjoyed reduced rates and large coverage limits across the board in the excess and surplus (E&S) market.

But when carriers were hit by mounting losses arising from prior year loss development, a series of large jury verdicts and adverse weather events, it became clear that this protracted soft market was unsustainable.

During the last year or so, many have been left with no choice but to increase prices — in some cases by as much as hundreds of percentage points — and reign in capacity.

Among the biggest rises were in directors and officers’ (D&O), property, commercial auto and excess casualty insurance.

To make matters worse, now companies are being crippled with the economic fallout from COVID-19, with many being forced to shut or layoff staff, most notably in retail and hospitality.

“When most underwriters are confronted by significant levels of uncertainty related to the frequency of very large losses, they often reduce capacity and take exposure to large loss off the table,” said David Bresnahan, executive vice president at Berkshire Hathaway Specialty Insurance.

“Now introduce the COVID-19 crisis and accompanying global economic distress and you are layering even more uncertainty on top of an underwriting market that was already off-balance.”

Escalating Losses

Joel Cavaness, president, Risk Placement Services

The E&S market enjoyed stellar growth over the past decade before sustaining record losses from Hurricane Harvey, Irma and Maria; the California wildfires in 2017; and further losses from Hurricane Florence and Michael in 2018.

Additionally, the E&S market remains grossly underpriced as medical costs have escalated and jury awards continue to increase.

To correct this, carriers adjusted their premiums upwards and tightened their limits, resulting in a hard market.

The Wholesale & Specialty Insurance Association, for one, forecast that this trend will continue until at least the end of this year, if not longer.

“It was not uncommon for a carrier to offer a billion-dollar limit on a property policy,” said Joel Cavaness, president of Risk Placement Services.

“Those days are gone now — companies are now ensuring much greater consistency among the layers of coverage.”

Jim Auden, managing director and head of North Americans Property/Casualty at Fitch Ratings, said the larger players, such as Lloyd’s of London and AIG, pulled back sharply on coverage terms being offered, with lower limits and higher insured deductibles.

Among the most pronounced changes, he said, were in the hardest hit segments such as commercial property, commercial auto and liability.

“Rates hardened considerably at year-end 2019,” said Auden.

“Again, the hardest hit areas of property and auto have seen continual rate increases for some time, but more recently casualty, liability umbrella and D&O are seeing significant increases on weaker results, particularly from more high-severity claims arising from rising litigation and settlement costs.”

Casualty is another area that spiked, according to Matt Dolan, president of North America Specialty at Ironshore and executive vice president of global risk solutions at Liberty Mutual.

That’s because higher jury awards have forced many carriers to re-evaluate their position, he said.

“We have seen a significant increase in nuclear verdicts as a result of the shift in presumption of negligence by juries,” Dolan said.

Carriers have already started reacting in the wake of COVID-19, with several recently announcing they would be placing communicative disease exclusions on their comprehensive general liability and excess policies for public entities.

There’s also talk within the industry that hospitality sector insurers might follow suit.

COVID-19 Fallout

Bresnahan said rate increases have ranged from single digits to hundreds of percentage points. However, he added that some lines most affected by COVID-19 will be even higher.

Matt O’Malley, head of E&S casualty, AXA XL

“There are some products where COVID-19 and its aftermath represent a catastrophic-sized event,” said Bresnahan.

Rates on excess layers, particularly in casualty, are also now outstripping those on primary layers, according to a recent AmWINS Group report. That has resulted in buyers reducing limits and retaining more risk.

Cavaness said insurers are also having to consider whether they need to adjust coverage for businesses that have had to change their delivery model because of COVID-19.

Therefore, it’s imperative for risk managers to update them of their changing situation on a regular basis, he added.

Robert Raber, associate director at AMBest Rating Services, said another consequence of COVID-19 is E&S carriers are likely to introduce additional exclusions and/or clarify coverage available during pandemics.

But he added these revisions would most likely be brought in at renewal rather than straight away.

“An unknown in the future is demand for broadened coverage for pandemics and, if that can be priced appropriately, to be added to future coverages,” said Raber.

“It’s possible it would reach a cost-prohibitive level.”

Broader Coverage

Some carriers have already expanded their coverage to include COVID-19. Ironshore, for example, has added a coronavirus expense reimbursement coverage to its hospital professional liability policies.

However, a great number of unknowns still remain, particularly in the property market.

These include whether policy extensions are required, if the vacancy/unoccupancy clause applies and if carriers will provide premium payment extensions.

To mitigate against these issues, Matt O’Malley, head of E&S casualty at AXA XL, said insureds should focus on producing a quality submission that’s straightforward for their underwriter to understand. They also need to start the buying journey earlier.

“That gives them plenty of time to have those conversations,” he said. “By getting out ahead of the game, they stand a much better chance of securing a good renewal.”

James Drinkwater, president of AmWINS Group, added insurance buyers need to reach out to their broker and discuss all options with their incumbent insurer, including premium payment extensions, policy extensions and exposure base relief.

“Companies should work with their insurance broker to review loss trends, and to develop loss control and safety programs,” said Tom Jurgens, senior vice president, brokerage E&S at Nationwide.

“Potential insureds need to show carriers that they are being proactive regarding risk management, loss control and safety.” &

Alex Wright is a UK-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.