If Standard Carriers Are Tightening Terms and Conditions, What Does This Mean for the Wholesale and Specialty Markets?

Experts in the wholesale and specialty space share the challenges and opportunities they face during the current hard market and COVID-19’s impact.

By: Alex Wright | September 3, 2020

The standard insurance market is under huge pressure, with prices increasing and capacity retreating across most lines. The market was already in a tough spot in the face of rising historical claims and outsized jury verdicts, even before the COVID-19 pandemic struck.

Now, underwriters and brokers not only have to contend with keeping costs down while providing clients with adequate coverage, but they must do so in the context of their own ever-changing business models and crisis-related exposures.

While primary carriers have been forced to ramp up rates, reduce limits, tighten terms and conditions, or exit underperforming/unprofitable markets altogether, there has been one glimmer of hope for insureds: The wholesale and specialty industry has stepped up to meet the needs of policyholders struggling to find coverage.

This market’s exponential growth is reflected by the top five states accounting for 82% of surplus lines premiums written, which increased premiums by 7.6% year-on-year at the end of May.

“For surplus lines companies, considering their inherent rate and form flexibility, when there is uncertainty in the market, which is one result of the pandemic, surplus lines companies have historically been in a good position to step up with innovative products and fulfil the market need while other sectors of the market retrench and become more cautious,” said David Blades, associate director, industry research and analytics at A.M. Best.

To continue these conversations and to meet industry needs, the 2020 Wholesale and Specialty Insurance (WSIA) Annual Marketplace will be held virtually this year.

Rising Premiums

The percentage of total U.S. commercial insurance industry premium written on a non-admitted basis is estimated to be around 10% for the past decade, according to Brenda Austenfeld, managing director at RT Specialty. And submissions are continuing to rise, she said.

Joe Cellura, president, North American Casualty, Allied World

“We are now seeing unparalleled submission flow to non-admitted carriers, which does not factor in the specialty admitted business we are also placing throughout our segment of the industry,” Austenfeld said.

On the eve of WSIA, key talking points for underwriters, brokers and risk managers in this space will be around the impact of COVID-19 on businesses, excess capacity, coverage gaps, legislative and regulatory restrictions, and the fight for talent. The overriding challenge for the industry remains capacity, said AXA XL’s head of E&S casualty, Matt O’Malley. With insureds unable to get the limits they used to in the standard market, they are increasingly turning to wholesale and specialty providers.

“Many underwriters in the standard market are no longer willing to offer their insureds, for example, $25 million lead umbrellas,” O’Malley said. “So, most of that business is now coming to the wholesale and specialty market, for say, $15 million excess of the primary layer.”

Tower Gaps

Many insureds are unable to secure an adequate level of coverage in the standard market and programs are expiring, leaving coverage gaps in their insurance towers, according to Joel Cavaness, president of Risk Placement Services. That makes putting together the right program even more complex, he added.

“It takes twice as long to get a deal done, and it’s even more complex in the current climate,” he said. “You have to try and provide all the various layers of the tower, agree [to] limits and make sure that all forms are consistent between the different carriers.”

Then there are rising reinsurance costs, which went up again at the 7/1 renewals, some of which will have the knock-on effect of being passed on to insureds. This has come as a double whammy for businesses already reeling from effects of the pandemic, he added.

“The biggest challenge is communicating expectations throughout the tri-party relationship.” — Joe Cellura, president, North American Casualty, Allied World

“It has certainly led to a lot of difficult conversations with our retail partners, trying to explain to them and our mutual why prices are going up and what to expect in the near future,” said Josh Ammons, property broker and branch leader of AmWINS Brokerage of the Carolinas. “COVID-19 has only compounded the challenges arising from the current insurance market environment.”

“Currently, they are facing a huge amount of uncertainty because of COVID-19’s impact on their businesses,” O’Malley said. “So, we need to do everything we can to support them in getting sufficient capacity as we move towards 2021, even if their risks are changing daily.”

Bryan Sanders, president of Markel Specialty and the 2020 WSIA president, added: “We saw a similar situation after Superstorm Sandy in 2012, and after Hurricanes Harvey and Maria in 2017, which were extremely costly for the entire industry. The wholesale, specialty and surplus lines market is designed just for these situations and exists to insure those risks that are declined by the admitted market.”

Wholesale Demand

There’s also a push from insureds and brokers for other markets to handle specific risks. Underwriters are asking specialty wholesale brokers to distribute their product, particularly directors and officers (D&O) coverage. The biggest issue, however, is meeting expectations on all sides.

“The biggest challenge is communicating expectations throughout the tri-party relationship,” said Allied World North American Casualty’s president Joe Cellura. “Customers are struggling to project what their business may look like in the near-term, carriers are looking for solutions to emerging risk while trying to be protective of the long-term sustainability of the industry, and brokers are maintaining a delicate balance as the landscape changes almost daily.”

Regulation and legislation has been another big hurdle since the pandemic started. Almost every state has issued its own guidance on a range of insurance matters, not least grace periods on premium payments, he added.

“WSIA members are fully committed to working with insureds and their industry partners to help them manage through these impacts,” said Kelley. “But it has been challenging to wade through the wide-ranging and varied guidance, so we continue to advocate for consistency and uniformity.”

But with all these challenges, there have been opportunities, too. Among the biggest areas of opportunity have been public D&O and large commercial property risk.

“More than ever, this is an opportunity for us to shine and be creative to help our retail partners and insureds when they are struggling for a solution,” Ammons said. “When they are coming to us at the 11th hour, we need to step up and do everything to address their needs.” &

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].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

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.