Market Update 2020 with Aon's Broking Leaders
Aon 2020 market update: pricing and coverage under pressure
Aon’s broking leaders were joined by clients and partners in a live webinar on 8 July 2020, to explore the key challenges in the insurance market, the impact on individual lines of business and what insurance buyers should be doing to help mitigate the impact of a hardening market.
In ‘normal’ hard insurance markets, the capital available to insurers drives supply and if supply exceeds demand then prices drop and vice versa. In this current market, there is still plenty of capital available so why the hardening? That was the question posed by Aon’s Global Chief Broking Officer Hugo Wegbrans as he opened Aon’s Market Update 2020 live webinar, indicating the answer lay in carriers’ renewed focus on profitability.
“Losses both manmade and from natural catastrophes remain very high. 2019 was the fourth costliest year in history, bringing the profitability of carriers into the danger zone,” said Wegbrans. Social inflation around the world is continuing to drive loss severity, he added, and COVID-19, while not having a huge impact on losses so far is “making carriers nervous” particularly given the legal moves in the UK and the US around business interruption.
“Carriers are looking for profit over growth,” said Wegbrans, giving an overview on the larger markets globally which told a story of poor results leading to many carriers cutting back on capacity and exiting lines, although some insurers like QBE, Zurich, Chubb and Aviva were bucking the trend with good results and continuing to look for growth opportunities.
‘The most difficult renewal period I have ever experienced’
How is the difficult trading environment impacting individual lines of business? In financial lines, Aon’s Head of Financial & Professional Services within Aon’s Global Broking Centre, Tracy-Lee Kus, described the most recent renewal period leading up to the 1 July as, “the most difficult renewal period I have ever experienced, even compared to 2002 and what happened after 9/11. I think what we’re dealing with this year is a lot more complicated and a lot more difficult.”
Rates for D&O, for example, on the commercial side saw significant rate hardening at the beginning of 2019, with increases of as much as 50% depending on the client and the geography. And that has continued to climb higher, said Kus. Some sectors such as pharmaceutical and the travel industry have been particularly hit, as markets pull out and capacity has been harder to find.
“We’re also seeing some strange coverage restrictions, which seem ad-hoc and dependent on the insurers and their appetite,” Kus added. “There are the first signs of insolvency exclusions being brought in for example, meaning we’re spending a lot of time pushing back or placing the business with new insurers rather than accepting those terms.”
Class action costs spiral upwards
Again, much of this approach by underwriters can be explained by the claims experience. “If you look at the settlement amounts from the 10 largest class actions of 2020 so far, they equal around US$3.8 billion; whereas the entire 2019 figure was US$3.1 billion, which illustrates the severity going on in the market overall,” said Kus. This is leading to pricing increases on big FTSE 100 accounts of 250% or more. Carriers are also very nervous about the systemic impact of COVID-19 across their business, Kus added, leading to a more aggressive approach to coverage. “We’re pushing back. D&O should be there to defend directors across the board.”
Cyber is hardening
Other classes within financial lines such as cyber have been flat up until this year, said Kus, but ransomware is having a big impact on the middle market clients, and exclusions are increasing, but it’s also possible to get increased line sizes and limits, “as long as we have the time to approach a larger number of markets.” This is likely to be the next market to harden, she added, with rate increases on primary cover of 5-10% and on excess layers of 20%+. Insurers are also concerned with employees working from home and security not being as robust as in an office environment, and how this will still be a vulnerability even when employees move back to a blend of agile home/office working.
Commercial crime cover has been difficult too, said Kus, with decreases in the capacity insurers are putting out and rate increases – the largest of which Aon has seen was 800%. Pension trustee liability cover has been tough for a few years, while employment practices liability is suffering from the fallout of COVID-19 as insurers voice concerns about staff going back to the office too early, or how employers have handled the furlough process.
New capacity not yet dampening property increases
Turning to property, Nick Gillett – Aon’s Chief Broking Officer, London, talked of a building momentum towards the end of 2019 and into 2020 that’s showing rate increases and retention increases. “In the last few months, we’ve seen some new entrants into the property space looking to put together algorithmically driven follow lines syndicates. Venture capital has also come in behind new start-ups. There are the shoots of new capacity coming into the market which over time we would perceive having a dampening effect on rate increases but at the moment, we’re seeing momentum build where a number of carriers are revaluating the capacity they’re putting down on certain classes.”
Insurers are taking an evolving stance in areas like silent cyber, and unoccupied buildings, said Gillett, and they are also looking to exclude cover around strike, riots and civil commotion cover in generic property policies. COVID-19 is also having an impact. “We’re seeing an enormous number of COVID-19 exclusionary wordings especially around first party property risks. In London, we’ve set up a technical COVID-19 unit which has been looking at the wordings and seen a coalescing around the LMA wordings. We have concerns around the discrepancy between insurers’ intent and how the wordings could be interpreted in the event of a loss and have articulated our concerns to the LMA to advise and work with them to achieve far more clarity as to what is and what isn’t covered.”
Casualty goes back to the future
For casualty, changes are, in effect, unpicking 15 years of the soft market both on coverage, scope, pricing and deductibles said Gillett. “General market increases of 10-25% are being seen across primary and first layer placements. Terms and conditions are being reviewed extensively, while manuscript wordings are under scrutiny and being replaced by standard wordings which need more work to preserve the scope of wording that clients have experienced in the past. Professional indemnity extensions in particular are very difficult as capacity has been lost.” Capacity reductions or even withdrawals are possible in certain sectors such as mining, wildfire, energy and public sector, added Gillett.
Be more United
To respond to the challenges in the market, one of Aon’s watchwords is ‘connectivity’, explained Gillett. “We aim to be more united as a group globally. Our Global Broking Centres, set up in 2010/11 in Bermuda, London and Singapore, serve as a funnel through which all our retail offices around the world can access the main markets set up for wholesale capacity. We’re one broking unit with the sole aim of ensuring the best client solution and trying to leverage off the size and complexity of the business with those carriers wherever they are.” Other tools to help clients include the Aon Client Treaty, a co-insurance capacity which follows the pricing, wording terms and conditions of a list of lead underwriters, across almost every class and every geography.
Claims advocacy is also critical added Gillett. “Within the Global Broking Centre, we have moved away from being solely claims handlers…to being far more advocacy led claims practitioners.” This involves providing more technical knowledge to clients around how a policy wording responds in the event of a claim, for example, assisting in RFPs and tenders, and effectively moving claims to the front of the process. It’s an approach that is already delivering client value. “Where we have seen claims escalated with carriers where they have been fully or partially declined, 65% have been successfully overturned.”
Safely navigating this challenging market
How then to get the best results in this market? “It takes a lot more planning and thought to place covers,” warned Kus. “It’s taking brokers two to three times as long to place the same limit as they did a year ago. Early engagement is critical. As is looking at all the different options and understanding from clients exactly what is important to the board: is it the price increase? Is it the limit increase? Is it coverage? And really understanding what it is the client would like to achieve from the renewal. We’re doing far more individual underwriter meetings with clients which is helpful both with claims and on renewals to get the best results. It still makes a difference when an insurer has been able to talk to senior management directly.”
Don’t wait to the last to secure your renewal
Being ready to defend or explain risks in your organisation, added Wegbrans, is important. Have documentation ready. Don’t wait for the last few days to fix your renewal because that’s when insurers become opportunistic. Also think out of the box around retentions, coverage and which markets to use. Don’t assume that your existing relationships with insurers will see you through these challenging times, Wegbrans warned. “It’s not a free card to get you through what is happening in the market. Yes, [relationships] are still very valuable but you need to make sure that you have a broad view of the market.”