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Excess/Surplus

Not So Fast on Any Hard Market

Conditions seem ripe for rates to rise, but overcapacity in excess & surplus and elsewhere hinders hardening.
By: | February 20, 2018 • 6 min read

Underwriting cycles were traditionally characterized by big swings up and down. A few years of declining rates, influx of capacity and limited profitability would reliably give way to a hard market following a big loss event.

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“Historically, we would drive rates into the ground, and then a major event would occur. We would get huge rate increases for 18 to 24 months, but eventually the rates move back down and you give it all back over a few years while you wait for the next big thing to happen,” said Joe Tocco, chief executive, North America, Insurance, XL Catlin.

“I’ve been doing this for 30 years, and that’s always been the way the market moves … But I don’t see those cycles playing out going forward.”

By traditional standards, the havoc wrought by three major hurricanes, an earthquake and ongoing wildfires in the second half of 2017 should be the “big event” that shakes up the market and firms up persistent soft conditions.

But this is not a traditional market. Whereas significant losses in the past may have knocked out some excess & surplus carriers or driven others to pull out of the most-affected lines of business, capacity doesn’t appear to be going anywhere this time around.

Joe Tocco, chief executive, North America, Insurance, XL Catlin

That’s largely due to the presence of so much alternative capital.

According to a Deloitte report detailing the insurance industry outlook for 2018, surplus capital was at an all-time high of $704 billion as of June 30, 2017.  This capital will bear the brunt of the loss as it is tested for the first time.

The market’s claims response will reveal any inadequacies in risk selection and reserving, and the weakest players in excess & surplus could potentially leave the insurance space if they take too heavy a loss.

But the primary market won’t see much disruption.

Lukewarm Rate Rise

“I am not predicting a hard market in the traditional way of rising prices and a lack of capacity in any way, shape or form,” said Duncan Ellis, U.S. property practice leader, Marsh. “We are seeing a push from the market for prices go up but not binding those rates to the degree that the underwriting community had hoped for. A governor on the desired price rise is that capacity continues to be plentiful.”

Ellis reported mid- to high-single digit percentage rate increases across the broker’s book of business. He anticipates those numbers to lift even more but not by a significant amount.

“The industry was at a place where rates were not sustainable. It couldn’t afford much more rate decline. The second half of 2017 merely put a point on that.” — Jeff Beauman, vice president, All-Risk Underwriting, FM Global

That holds true for the excess & surplus market, which has not seen notable post-catastrophe price increases or diminishing capacity, domestically or globally. Global markets in general are not recognizing new rates following last year’s large-scale losses.

“We have not seen the anticipated rate hardening of business emanating from European and international programs,” said Dawn Miller, CEO, AXA Insurance Company. “However, rates have risen on a case-by-case basis in our U.S. portfolio. It appears that this trend could diminish somewhat throughout the year.”

However, Liberty Mutual Global Risk Solutions vice chairman Kevin Kelley reported 15 to 20 percent increases in U.S. property rates, and 5 to 10 percent increases in casualty. Even in lines where rates aren’t jumping, he sees a stabilization in rate decreases.

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“We’ve hit a floor across the board and are seeing a clear change in market sentiment,” he said. “The wind is no longer blowing in our face. I can’t tell you whether it will be a gentle breeze or a strong gale, but it is at our backs now.”

The most affected classes of business will be wood construction multi-family real estate and auto, Ellis said. According to the Insurance Council of Texas, Hurricane Harvey damaged an estimated 250,000 private and commercial vehicles resulting in insured losses as high as $4.75 billion. Other estimates placed the number of damaged vehicles as high as 1 million.

Deloitte’s outlook report also surmised that most premium gains in the year ahead will come from the auto market, which was already experiencing some hardening as loss frequency and severity worsened.

“A lot of markets are just starting to realize the overall impact on their portfolios,” XL Catlin’s Tocco said.

A Transitioning Market

Many of the market adjustments underway began before the 2017 catastrophes. After year-over-year rate declines for more than a decade, something had to give.

“The industry was at a place where rates were not sustainable. It couldn’t afford much more rate decline,” said Jeff Beauman, vice president, All-Risk Underwriting, FM Global. “The second half of 2017 merely put a point on that.”

“In E&S as well as the traditional property markets, you were starting to see pricing trending more favorably prior to the hurricane activity,” Tocco said. “It was the beginning of a transition, and the storms accelerated that transition.

Jeff Beauman, vice president, All-Risk Underwriting, FM Global

Kelley emphasized that insurance leaders have to take the reins in maintaining that acceleration and keeping the market on track.

“Education will be very important,” he said. “It’s incumbent upon leaders like myself to educate our frontline on our performance so they can understand and participate in what has to be done in terms of rate change and other underwriting considerations.

“I think today there are many executives who feel one way about how the market should move, and that needs to be communicated clearly to the front line of underwriters so as not to lag behind.”

Risk and Relationships

Many industry leaders say that 2017’s significant losses will spur a reinvigoration of underwriting discipline.

“When you have long periods without major events — as we had prior to 2017 — underwriters tend to underestimate how much money they need for a certain risk,” Beauman said. He recalled the effects of the 2004-05 hurricane seasons:

“That was the last time there was any significant movement in property rates. We saw such sharp upticks in price, because many carriers didn’t fully understand the risks in their books, and they were surprised by how large the losses were.”

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Heavy losses from 2017 and subsequent rate increases will make underwriters more aware of the risks in their portfolios and more fastidious in maintaining appropriate pricing going forward. That means evaluating each risk for its own merit on an individual basis.

“Pricing risk should really be a function of what a client is doing to protect themselves, more so than what the market is doing,” Beauman said.

The dynamic of the client-insurer relationship will also be subject to some change as market conditions shift.

“It’s been a buyer’s market for many years with pricing going down along with a broadening of terms and conditions,” Marsh’s Ellis said. “As underwriters seek higher rates and we transition away from such a buyer’s market, strong carrier partnerships will matter in arguing for reasonable increases.

Risk managers should meet face-to-face with underwriters early and often to get a good understanding of what changes to expect, so they can message that appropriately within their own firms as well as risk differentiate themselves.

“Over-communicate,” he said. “Nobody likes a surprise.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.