These 6 Crucial Financial Sector Insurance Coverages Are Experiencing Rate Increases

A variety of factors, including COVID-19 losses, Nat CATS and social inflation, are driving rate increases.

By: Courtney DuChene | September 15, 2021

In early 2020, every part of the economy changed when the COVID-19 pandemic rattled financial markets.

The economy froze as government-mandated shutdowns led to business closures and plummeting stock prices.

All of this came when, nearly a decade after the 2008 financial crisis, banks were finally experiencing growth and prosperity. Following a boom under favorable regulatory and economic trends in recent years, they were back to uncertainty.

Though the economy has somewhat stabilized since the early days of the pandemic, the financial effects of COVID-19 are still very much with us in 2021.

In its Spring/Summer 2021 Financial Institutions Market Update, Gallagher identifies six critical lines of coverage for financial institutions that are currently experiencing rate increases and takes a look at the factors driving these hardening markets.

The trends they identify — COVID-19 losses, natural catastrophes, social inflation — are likely to be familiar, but their continued effects on insurance markets are evolving as the years go on.

1) Cyber Liability

One of the report’s most notable findings is that the cyber liability market has reached an inflection point.

For years, cyber buyers enjoyed a highly competitive marketplace, complete with ample capacity, expanding coverage terms and flat to falling rates.

That all changed with the increase in ransomware attacks and the ensuing carrier reported losses. In 2020, underwriting scrutiny increased, as did premiums. Clients with optimal data security controls saw rate surges of 25-50%, while those with less attractive risk profiles saw 100% or greater increases, Gallagher notes.

“We saw a very quick hardening,” said Eileen Yuen, managing director for Gallagher’s national Financial Institutions practice. “And the reason for it is the confluence of ongoing cyber events, and claims activity.”

Market conditions are expected to harden further after a spate of high profile attacks in 2020 and 2021 and an increase in the total cost of data breaches. Average data breach costs rose from $3.86 to 4.24 million in 2021, according to IBM’s 2021 Cost of a Data Breach Report.

2) Casualty

In contrast to the sharp rate increase in the cyber space, casualty insurance has remained relatively stable for financial institutions.

Rate increases are only in the single to low double digits, according to Gallagher, and are more common in the excess liability market than in primary general liability.

Financial institutions with large umbrella towers should be the most concerned about this line as they are most likely to encounter difficult market conditions, including increasing premiums and restricted capacity.

3) D&O

D&O coverage has long been a pain point for financial institutions.

D&O renewals have been plagued with tightening conditions, reduced capacity and rate increases galore. Carriers reported that 20% premium price hikes were the norm in 2019 and that only continued into 2020.

Gallagher reports that companies with no claims are seeing 15-35% premium increases while those with recently paid claims might see hikes between 60-100%.

Though the market is still hardening, Yuen is positive that there will be market stabilization in the near future.

“We are starting to see some leveling off, if you will, in the directors and officers liability marketplace,” Yuen said. “We’re not seeing the same sharp trajectory of premium increases.”

4) Professional Liability / E&O

A slew of factors are contributing to rate hikes in professional liability and E&O lines.

“If you look at something like professional liability, there are a number of things driving those rate increases — COVID; the work home environment and claims emanating from that relative to workplace practices or discrimination; all of the movements that are going on around diversity and inclusion,” Yuen said. “All of that converged in that particular line of coverage.”

Most E&O and professional liability risks are seeing increases in both rate and retention between 10-30%.

As the year goes on, Yuen notes that financial institutions should pay attention to developments with the coronavirus pandemic and consider how they will affect their E&O and professional liability coverage renewals, especially if they’re vulnerable to litigation over COVID-19. “That could be an area as we move forward where we see an increased possibility of litigation,” she said.

5) Financial Institutions Bonds

An increase in claims activity has led to light premium increases in the financial bonds arena.

Employee theft, social engineering and fund transfer fraud amongst business leaders are all playing a role in driving price increases.

These types of fraud have gotten harder to detect and easier to carry out now that many employees are working remotely, creating precarity in the market.

As a result, financial institutions who previously had multi-year term financial bonds may no longer have that option when renewal comes around.

6) Property

After 2020’s wildly active hurricane and wildfire seasons, it’s no surprise that property insurance markets are hardening. A rise in natural catastrophes and losses driven by global climate change means that rates will continue to increase and capacity will keep shrinking in the coming years.

Additionally, unmodeled risks, like Texas’ winter storm Uri and the derecho storm in the Midwest led to costly losses and are contributing to rising rates.

While the market is likely to continue firming, financial institutions may need to worry less than industries about rate increases in these lines, Yuen said.

“Financial institutions in a general sense are not in the riskiest type of property businesses, nor do they have the largest property portfolios compared to other industry groups,” she explained.

Even as lines continue to see rate increases, financial enterprises can still hold out hope for the future: “The insurance market is cyclical,” Yuen said. “Do we think that we will see some relief in the marketplace in the future? Yes, but I don’t think we know when that will be.” &

Courtney DuChene is a freelance journalist based in Philadelphia. She can be reached 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.