U.S. Casualty Market Outlook

Helping you come through for your clients

The year 2019 marked a reckoning for the casualty insurance market as loss trends continued from prior years. Carriers responded with reduced capacity, conservative underwriting practices and increased rates, causing a broad firming in the primary Liability and liability and umbrella/excess liability marketplace. This firming trend continued well into Q1 and Q2 2020, with expectations that things will remain unchanged throughout the year and likely into 2021. The umbrella/excess market during the first two quarters of 2020 experienced double-digit and even higher rate increases, reductions in total capacity of at least 25%, and higher attachment point requirements.

“Carriers began reducing capacity in the excess market in 2019 from lead $20 million to $25 million in limits to lead $10 million, and now to lead $5 million,” explained Adam Mazan, RPS area president, Southern California.

“We’re also seeing some carriers unwilling to quote the lead excess layer. Actuaries are taking a close look at the origin of losses, which has resulted in only a handful of carriers ready to take the lead layer and asking significant premium to do so,” Mazan continued.

“The majority of markets want to attach in excess of $5 million, $10 million or more, with very few options on the lead. In 2018, there were probably around 25 markets vying for the lead layer on an account, and most willing to offer $25 million, whereas today you may have five or 10 depending on the class of business,” said Mazan.

The reduced limits in the excess tower, however, do not come with a corresponding decrease in rates, causing more insureds to cut back on the limits they purchase. Moreover, carriers involved in an excess placement are looking to review underlying quotes and pricing.

“They are unwilling to allow carriers attaching at the higher levels to charge higher premiums per million than at the lower levels,” noted Shawn McCall, CPCU, ARM, RPS area senior vice president.

It also takes more time in today’s environment to put together a tower.

Each deal needs to be restructured in lieu of working with the incumbent carrier on the renewal pricing based on the same tower structure. This often involves introducing new carriers, reaching out to additional markets to get the most competitive terms and pricing to structure the placement.

In addition, COVID-19 has put additional pressure on the need for rate adequacy. Insurers and reinsurers are experiencing a near-zero interest rate environment and are unable to offset underwriting losses with investment income. No matter how well capitalized the industry is, poor results are forcing carriers to remain steadfast in obtaining firmer rates.

“In the past, insurers stair-stepped rates in 20% increments; now we are seeing rate increases of 50%–75% with capacity twice as expensive as it was in 2019,” said Mazan. Carriers are also adding pandemic exclusions to primary and excess policies moving forward.

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WHAT’S DRIVING THE MARKET

The firming casualty market is a result of deteriorating loss trends due to an unprecedented number of massive claims.

Catastrophic liability losses stem from automobile accidents, active shooter events, liquor liability-related accidents and incidents, personal injury lawsuits, construction defect claims, opioid casualties, sexual assault and molestation claims, and wildfire litigation, resulting in unsustainable loss ratios and carriers looking to obtain adequate rates.

Nuclear verdicts driven by social inflation, for example, have hit $250 million-plus in high-profile cases, driven by an aggressive plaintiffs’ bar, litigation funding and sympathetic juries with anti-corporate sentiments.

The commercial auto liability market has predominately been responsible for cutting into carrier profitability and driving up excess rates.

According to data collected by Advisen, between 2016 and 2019, the number of catastrophic auto liability claims (characterized as having a reported cost of $15 million or greater) increased 87%.

In response, carriers have exited some markets, overhauled their books of business to meet stricter underwriting guidelines, or made adjustments to pricing and coverage terms to reflect their exposures and prepare for future losses.

“Any risk with an auto exposure is facing higher primary auto liability rates and subsequently higher excess rates, with the excess more difficult to place due to fewer carriers in the space today,” said Zach Burdine, RPS area president, Texas.

Industries hit hard by diminished capacity, appetite changes and rate increases in the excess space include transportation, habitational, energy, construction, sports and entertainment, restaurants and bars, and the religious sector, among others.

“London, for example, is no longer looking at habitational risks with proper terms,” explained Bill Wilkinson, RPS president, national casualty brokerage, “and, if they do, defense coverage is included inside the policy’s limit along with an exclusion for assault and battery.”

The firming casualty market is a result of deteriorating loss trends due to an unprecedented number of massive claims.

BY-LINE FIRST QUARTER 2020 RATE CHANGES RANGED FROM -1.2% TO +17.3%

QUARTER COMMERCIAL AUTO

WORKERS’ COMP

COMMERCIAL PROPERTY

GENERAL LIABILITY UMBRELLA AVERAGE

Q1 2020 9.60% -1.20% 12.00% 5.70% 17.30% 8.70%Q4 2019 10.50% -1.90% 9.70% 5.80% 13.60% 7.60%Q3 2019 9.10% -2.70% 8.80% 4.60% 9.80% 5.90%Q2 2019 8.40% -2.50% 8.50% 3.20% 5.70% 4.60%Q1 2019 8.80% -3.30% 5.80% 2.00% 3.30% 3.40%

High 28.60% 24.90% 45.40% 26.00% 51.90% 35.30%Low -11.60% -12.30% -15.00% -13.60% -13.50% -13.20%

Source: The Council of Insurance Agents & Brokers (CIAB)

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2019–2020 LOSSES/$250 MILLION+ COMPANY CAUSE JURISDICTION AMOUNT

Pacific Gas & Electric Corp Fires U.S. Bankruptcy Court $13,500

Johnson & Johnson Risperdal—product liability Philadelphia Court of Common Pleas 8,000

Monsanto Roundup Superior Court of Alameda County, CA 2,055

Mallinckrodt Opioids Federal—Northern District of Ohio 1,600

Johnson & Johnson Pinnacle hip replacements Federal—Northern District of Texas 1,000

MGM Resorts International Las Vegas shooting Clark County District Court, NV 800

Hyundai @ Kia Product liability Federal—Central District, Santa Ana 759

Johnson & Johnson Talcum powder New Jersey Superior Court 750

Canadian Military Sexual assault Federal Court of Canada C900

Johnson & Johnson Opioids Cleveland County District Court, OK 572

Southern California Edison Wildfires Superior Court of CA 360

Johnson & Johnson Transvaginal pelvic mesh Superior Court of San Diego County, CA 344

Lead Paint Manufactures Lead paint—California Superior Court of Santa Clara County, CA 305

Schnitzler Southeast Truck accident Muscogee County State Court, GA 280

Monsanto Dicamba herbicides Federal—Eastern District of Missouri 265

*$MillionsSource: Advisen

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No matter how well capitalized the industry is, poor results are forcing carriers to remain steadfast in obtaining firmer rates.

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HABITATIONAL

Although the amount of losses in the habitational multifamily market has not reached the level of automobile or product liability claims ($15 million–$25 million), this sector has been experiencing a significant rise in claims activity in the $1 million–$5 million range, which has bled into the excess market. The uptick in casualty claims involves active shootings and other violent crimes, pool drownings, and serious slips and falls.

There has also been a rise in habitability claims related to the living conditions of a building. These are typically class-action suits brought about by multiple tenants and don’t require a specific incident of bodily injury or property damage. These claims are difficult and expensive to defend.

The admitted market, in response to these losses and underwriting deterioration, has dramatically reduced its capacity or exited the habitational sector completely, opening the door to more E&S business and substantially higher pricing for insureds.

“Historically habitational accounts were far more aggressively priced by the admitted market, typically 25%–35% lower than the E&S market” said Mazan. “In a typical marketplace if a carrier chose to non-renew an account, the insured would pay the difference between what the standard carrier and the E&S markets were charging.

“Today, however, in a class of business considered very distressed, an insured is not only paying the differential cost between the admitted and E&S markets but also the rate increase that comes with a firm market.

Although the amount of losses in the habitational multifamily market has not reached the level of automobile or product liability claims, this sector has been experiencing a significant rise in activity.

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Now that construction projects are back on track, carriers are evaluating the precautions and safety protocols general contractors and subcontractors have in place to mitigate the spread of COVID-19.

“For example, a habitational account written by a standard carrier with a lead of $25 million on the excess paid $30,000 in 2019. The best pricing at that time from the E&S market was about $50,000–$55,000 for the same lead $25 million. Earlier this year, when the admitted carrier opted to non-renew the account, the E&S market came in with a lead $5 million at $95,000.”

Underwriters are also increasingly looking at an individual’s risk characteristics, including crime scores. An account with poor loss experience will have access to fewer markets. Some carriers are including habitational exclusions to their policies while others are limiting their capacity on subsidized housing.

CONSTRUCTION

Although the construction casualty market remained relatively stable in the first half of 2019, the second half of the year saw rate increases, capacity shrinkage and higher attachment points, along with greater underwriting scrutiny and restrictive coverage terms as carriers experienced more losses on long-tail liability lines.

The firming trend has continued into 2020, particularly for residential contractors, utility contractors, street and road contractors and those with auto exposures. Poor loss history and social inflation are behind the firming excess/umbrella market.

“Excess capacity has dropped in large part as carriers within the tower are paying for higher losses. More carriers are needed to get the desired limits. Where it once involved one or two carriers to fill a $10 million tower, it now takes three or four carriers; a $25 million tower can take up to five carriers,” explained Sarah M. Wirtz, RPS area senior vice president/casualty manager, national Environmental practice leader.

Construction defect claims are also on the rise, causing carriers to place coverage restrictions on known losses, exterior insulation and finish systems (EIFS), mold, earth movement, residential construction, and additional insureds.

While California, Nevada, Arizona, Texas, Florida and Colorado have the most significant construction defect problems, many other states are experiencing increased litigation in this area as well.

In addition, much of the construction defect battle has been waged in the residential construction arena, particularly in multifamily housing. Some insurers have withdrawn from residential construction markets altogether or within certain problem regions.

Wildfire exclusions are prevalent, and capacity for coverage in high-hazard areas (California) is virtually nonexistent in the standard market. Securing coverage through the tower is difficult for most insureds.

Amid the COVID-19 pandemic, construction shutdowns and delays reduced payroll, prompting companies to look to insurers for assistance. Some carriers provided lower minimum premiums or offered payment extensions while revenue was down.

Now that construction projects are back on track, carriers are evaluating the precautions and safety protocols general contractors and subcontractors have in place to mitigate the spread of the COVID-19.

“These loss-control measures may involve hiring outside vendors for additional OSHA training, performing temperature checks and contact tracing on employees, scheduling work shifts, and conducting virtual inspections,” said Wirtz.

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Environmental Liability

Construction-related environmental claims continue with great frequency, with exposures arising from indoor air quality, installed building products and excessive siltation.

“Amid COVID-19, we may potentially see greater exposures with restoration and industrial contractors cleaning or remediating office, retail and industrial buildings for returning employees. In addition, we may see more mold and Legionella claims in vacant buildings due to mandatory closures amid the pandemic. Contractors should have the required expertise in this area and be IICRC-certified,” noted Wirtz.

The excess construction market continues to be fluid with regard to capacity, appetite and underwriting guideline changes.

“What a broker asks for on behalf of a client 90 days prior to renewal may be quite different as we get closer to the policy date, making managing client expectations critical,” explained Wirtz. “Is the incumbent willing to remain on an account? Will policy terms be different? Will capacity change? Getting ahead of the renewal and discussing an account early helps us and the broker be creative while not blindsiding an insured.”

New York Construction

The New York construction market continues to firm, particularly for contractors with any exterior exposure due to the increased size of labor law claim payouts.

Capacity is tight; rates are high; deductibles and retention levels are even higher; and there are few, if any, standard insurers writing this class of business.

New York State Labor (Scaffolding Law) places absolute liability on the employer as well as the owner and general contractor, allowing construction workers to sue for negligence in the event of an injury resulting from a fall or due to a falling object striking them.

Getting ahead of the renewal and discussing an account early helps us and the broker be creative while not blindsiding an insured.

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Many of these labor law claims take years to settle, racking up significant legal defense costs for insurers and driving up reserves before a settlement is reached.

There is a small pool of carriers in the New York excess market with capacity limited for contractors doing any type of exterior work or any work involving height—from masonry to window installation, for example.

“Some carriers are providing attachment points on the excess at $5 million, while others may put up only $2 million or even as little as $1 million,” said Antoinette Sacchi, RPS area vice president, Brokerage. “General contractors that subcontract 100% of the work with strong contracts in place that transfer liability to their subcontractors may find it easier to get the desired excess limits, versus a trade contractor with all direct labor.”

Underwriting practices in this area are stringent, with carriers looking for best-in-class accounts and restricting risk selection. Carriers rely on the relationship between the wholesaler, retailer and insured to receive accurate submission information for the account to be priced according to its exposure.

“The amount of information we collect and provide to underwriters is extensive, supplying them with what they need to obtain quick turnaround times, and the limits and terms clients require,” Sacchi explained.

This includes providing a complete application and supplemental, the work in progress/work in hand, loss runs, workers’ comp loss runs, and executed contractors with subcontractors to ensure there is proper risk-transfer wording, among other information.

General contractors that subcontract 100% of the work with strong contracts in place that transfer liability to their subcontractors may find it easier to get the desired excess limits.

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We are speaking with carriers to make sure they are still happy with the account. Things may change as we get closer to the renewal, but we’re getting out early to gain commitments from carriers and their underwriters.

ENERGY

The energy casualty market continues to be challenging and is no different from the rest of the marketplace, with auto exposures driving rates and creating a firming excess/umbrella market.

Many accounts are experiencing 5% to 10% general liability rate increases, with energy accounts that have wheel-driven exposures looking at double the rate. “On the excess side, we’re seeing a minimum 25% hike year- on-year,” noted Burdine.

In addition, more creativity is needed in developing an excess tower as some carriers exit the space while others request additional automobile buffer layers as they attach limits at different points.

It’s important to note that, although there have been fewer vehicles on the road during the pandemic, there is less premium volume to cover losses. Carriers are taking this opportunity to pull back on excess limits for every sector within the energy market, excluding the downstream space, which doesn’t have the big auto exposure that the upstream and midstream markets do.

“Insurers are curbing their appetite and reducing the amount of limits they are willing to write in the upstream and midstream markets,” said Burdine.

Additionally, retailers can expect to continue to see auto rates firming with general liability and excess lines in the energy sector following the same trend.

“Many oil and gas risks look like trucking accounts,” explained Burdine.” They are moving some type of equipment, some type of chemical, putting another automobile on the road.”

With many admitted carriers unable or unwilling to write accounts, the E&S market is gaining market share. “We are seeing opportunities we didn’t see in the past because of underwriting restrictions and capacity reduction in the standard markets,” said Burdine.

“While admitted markets are still writing primary lines, in lieu of putting up $25 million on the excess policy, they are offering a $5 million lead or none at all,” Burdine continued. “We are able to replace this layer of capacity, albeit at higher rates.”

Some firms in fact have accepted a 40% to 50% insurance increase in order to meet their master service agreement (MSA) contracts and remain on a project, while others are not purchasing the same limits as before, or are asking for limit changes in their MSAs.

During this challenging market, wholesalers like RPS are conducting many midterm reviews for larger accounts, bringing in the retail broker, insured and underwriters involved in the placement.

“This helps convey to the insured ahead of time what the marketplace looks like and further establishes good-faith relationships,” said Burdine. “We are trying to set realistic expectations so the insured is not upset with the retailer over price increases.

“At the same time, we are speaking with carriers to make sure they are still happy with the account. Things may change as we get closer to the renewal, but we’re getting out early to gain commitments from carriers and their underwriters.”

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SPORTS/ENTERTAINMENT AND BARS/RESTAURANTS

The excess liability market in the sports and entertainment sector is characterized by double-digit increases of 20%-plus and diminished capacity, while the primary casualty side for the most part is experiencing single-digit hikes. Expectations are that the market in this sector will continue to firm over the next six to 12 months.

The principal driver for the rate increases comes from personal injury losses and liquor exposures. “Carriers are also coming in at higher attachment points,” said Christian Enwright, RPS area president, Boston, “and tightening their appetite for this type of business. The state of the market is unlike anything I have seen.”

Liquor liability losses, including assault and battery and fatal drunk driving incidents, are driving rate increases and capacity reduction in the bar and restaurant industry. “We’re seeing much larger judgments and settlements in an environment in which plaintiff bars are funded by litigation financiers, and juries are looking to hold someone responsible when there’s damage or injury sustained, regardless of negligence,” explained Enwright.

Both the sports and entertainment and bar and restaurant industries have been hard hit by the pandemic, with one of the biggest challenges going forward being economic uncertainty.

Many venues have been shuttered, from NFL stadiums to amusement parks. Additionally, many entertainment venues are seasonal and may see little traffic as the effect of the pandemic continues.

Bars and restaurants in many states were closed for months and reopened briefly, only to see restrictions put in place once again due to a surge in COVID-19 cases.

Both the sports and entertainment and bar and restaurant industries have been hard hit by the pandemic, with one of the biggest challenges going forward being economic uncertainty.

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“We are seeing a decrease in exposures for 2020, with some businesses 25%–50% down in revenue,” said Enwright. “Premiums may go down due to lower exposures, however rates may still increase.”

Wholesalers are effectively working with carriers to offer solutions for impacted businesses in the form of return premiums to reflect lower revenue or reductions to the minimum deposit midterm.

“The nightclub industry may not open in certain locations until Phase 4 or until a vaccine is available. We have transitioned coverage for some of these insureds as their locations may be vacant and they may not feel the need to carry coverage like liquor liability due to their closing,” commented Enwright.

RELIGIOUS SECTOR

The excess market in the religious sector was firming even before the pandemic, beginning in late 2019, after years of declining rates in the commercial insurance sector.

Market firming accelerated each quarter into 2020. As July 1 renewals approached, we experienced continuous changes with carrier appetites, new communicable disease policy exclusions in response to COVID-19 and a dramatically increased rate environment. excess rates in the sector have increased 30% and above.

There are fewer carriers providing coverages and limits for Catholic dioceses, for example, with insurers more selective in the capital they are willing to deploy. “There is a limited number of carriers ready to put up $25 million in excess limits,” said McCall, “while at the same time they are pushing up attachment points.”

Other market changes in the religious sector include a new $100,000 minimum; carriers reluctant to provide older retroactive dates on claims-made coverages; the inclusion of additional policy exclusions such as concussion and communicable diseases; and a smaller pool of insurers offering sexual abuse and misconduct coverage.

“Social inflation is responsible for pushing excess liability rates up,” explained McCall, “with a better funded plaintiff bar and sharply rising punitive awards by juries. Additionally, COVID-19 may have an effect on carriers’ investment income, causing insurers to look even more closely at their underwriting margins and push rates even further or walk away from an account.”

As a result of decreased competition, greater underwriting discipline, a shortage of available limits and a focus on rate adequacy, brokers need to work diligently to restructure excess programs, including getting more carriers on a single tower to achieve the limits required.

There are fewer carriers providing coverages and limits, with insurers more selective in the capital they are willing to deploy.

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MOVING FORWARD: RELATIONSHIPS MATTER

The renewal and new business process, already challenged due to underwriter turnover and individuals retiring, has been further complicated by COVID-19.

Remote work and the influx of submissions have underwriters taking on multiple roles. Greater underwriting scrutiny also requires additional management oversight, which serves to lengthen the entire process.

This unprecedented time, however, also offers opportunities for retail agents and brokers.

“Open communication and transparency are key right now,” stressed Wilkinson. “This involves educating clients about the state of the market and setting realistic expectations. It also means sharing with us the markets to which you have already reached out, and the status of an insured’s excess program so we can let you know if and how we can do better.”

“Equally important is making sure Acord apps, supplemental apps, five-year loss runs, loss-control procedures, technology utilization such as driver cameras, etc., are all part of the submission, so underwriters have what they need to accurately rate and quote an account.”

“Starting the renewal process early, supported by a complete submission, allows us to begin talks with the incumbent and new markets to assess their position on

capacity, pricing, coverage terms and exclusions that can potentially impact an insured’s insurance program,” added Wirtz.

The casualty market can expect challenging conditions to continue throughout 2020 and 2021. The impact of nuclear verdicts, changing liability exposures and rising claim frequency will persist as the impacts of the pandemic exacerbate the situation.

The true extent to which COVID-19 will impact the market remains to be seen. As carriers continue to experience stress on their financial results from their investment performance, they will likely turn to stricter underwriting appetites and guidelines for optimal risk selection, and adjust their rates to secure their own profitability. This should continue to push more accounts into the E&S market, where insurers are able to adjust coverage terms and conditions with more flexibility.

To better navigate the casualty E&S market, retail brokers should partner with a wholesale broker with a solid track record and longtime relationships with underwriters who have experienced the market’s historical ups and downs. Seasoned wholesale brokers know how to negotiate with underwriters to restructure placements to make them more affordable. They also have a deep understanding of how to assemble a coverage program and obtain desired coverage limits.

Working with a trusted partner and controlling the market also helps the insured. “Having multiple brokers bidding on an account is no longer productive or effective,” explained Burdine. “It makes a lot more sense for insureds to partner with a retailer they trust who can access markets directly and work with a wholesaler like us to help complete the program. Controlling the market helps the customer.”

Open communication and transparency are key right now.

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The information contained herein is offered as insurance Industry guidance and provided as an overview of current market risks and available coverages and is intended for discussion purposes only. This publication is not intended to offer legal advice or client-specific risk management advice. Any description of insurance coverages is not meant to interpret specific coverages that your company may already have in place or that may be generally available. General insurance descriptions contained herein do not include complete Insurance policy definitions, terms, and/or conditions, and should not be relied on for coverage interpretation. Actual insurance policies must always be consulted for full coverage details and analysis.

Copyright © 2020 Risk Placement Services, Inc.

CONTRIBUTORS

Bill Wilkinson, President, National Casualty Brokerage

Adam Mazan, Area President, Southern California

Zach Burdine, Area President, Texas

Shawn McCall, CPCU, ARM, Area Senior Vice President

Sarah M. Wirtz, Area Senior Vice President/Casualty Manager, National Environmental Practice Leader

Antoinette Sacchi, RPS Area Vice President—Brokerage

Christian Enwright, RPS Area President, Boston

ABOUT RISK PLACEMENT SERVICES:

Risk Placement Services (RPS) is one of the nation’s largest specialty insurance products distributors, offering valuable solutions in wholesale brokerage, binding authority, programs and standard lines, plus specialized auto through its Pronto Insurance brand. Headquartered in Rolling Meadows, Illinois, RPS has more than 80 offices nationwide.

For more information, visit RPSins.com.

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