Clients and partners joined Aon’s broking leaders in a live webinar on the 28 January 2021 to hear what’s driving the hardening insurance market, how specific lines are being impacted, the likely trends for 2021, and what commercial insurance buyers can do to mitigate the impact of increasing premiums.
“2020 has been the fifth costliest catastrophic year in the last 20 years,” said Hugo Wegbrans, Aon’s Global Chief Broking Officer, as he pointed to “unprecedented loss levels” as one of the main drivers for the current hard market conditions.
Even though capital coming into the market has been sufficient – global reinsurer capital, a good indicator of capital in the market more generally, was back up to record levels of US$625 billion by 2020 – it hasn’t offset both the losses and the poor investment climate.
An increase in manmade losses
One of the driving factors for the poor claims performance is a gradual increase in manmade losses, said Wegbrans, which are becoming more frequent and more severe. “We’ve seen individual manmade losses go up to US$2 billion – it’s incredible.” In addition, he added, social inflation has also impacted losses drastically. The consequence for insurers is that, despite corrective actions over the last two to three years, results from 2020 will show that they still didn’t make money, as these are also affected by COVID-19 related claims.
With management changes in most insurers, the market is seeing a new range of underwriting strategy adjustments as insurers seek to return to profitability by pulling on levers like policy conditions, said Wegbrans. “We’ll see pressure on the amount of coverage insurers are willing to provide, as well as a focus on deductibles/retentions and rates.” But more importantly, he added, “insurers are looking at systemic and unknown risks and putting exclusionary language around them…with a lot of activity around silent coverage and blind exposures.” This, he added, includes areas like cyber and contingent business interruption.
“For every part of their portfolio, insurers will look to make profit and if it can’t be done, they’ll take measures,” said Wegbrans, such as increasing information demands on clients, reducing local empowerment of underwriters, and an even more centralised approach on claims. Despite this, 2021 is likely to see some insurers push for growth, argued Wegbrans, and the end of Q2 could be a “tipping point” where carriers “start to get more focused on top line and with that, a dampening of premium increases.”
Recognise the ‘nuance’
Against this backdrop, Wegbrans urged carriers to recognise the nuance of clients’ risks. “We want carriers to look at the individual characteristics of a client …and make sure they differentiate the good from the bad.” As well, he added, of providing “predictability, clarity and transparency around their strategies”, and relevance in terms of solutions and limits, and help to innovate in areas such as supply chain, cyber and intellectual property.
D&O – ‘extraordinary increases’
How have these market conditions impacted specific lines? Drilling down into directors’ and officers’ (D&O) cover and financial lines, Tracy-Lee Kus, Head of Financial & Professional Services Group, described 2020 as a volatile year with “extraordinary” rate increases as big D&O players reduced lines. “As recently as the 4th quarter 2020, average D&O premium increases for FTSE companies were still going up by 250%,” said Kus.
Has that adjustment in D&O been completed? “Most markets have now ‘right sized’ and we expect them to keep line sizes in a similar area…and we are seeing a number of new carriers entering the market,” said Kus, “but there are still significant rate increases across international portfolios.” Although these won’t be at the same level as 2020, she added, the impact of insolvencies, COVID-19, and difficulties in some specific sectors will mean “rates remain difficult.” In terms of coverage, ‘any one claim’ limits are disappearing, with increased pressure on extended reporting period, and even at times insolvency clauses (where clients financials are distressed).
Clients are asking ‘is the cover worth it?’
Cover is available on options like six year run offs, “but there has been a significant change in pricing…and it comes down to how much the client wants to spend,” said Kus, who added that some clients are beginning to question the cost effectiveness of their D&O cover. “We have seen some clients look at their D&O pricing and say it isn’t worth it anymore and we’re going to change the structure.”
One of the difficulties of financial lines, said Kus, is that any kind of economic impact globally tends to impact rates. “Looking at crime, we see an increase in losses when we go into a recession, and market capacity in London has reduced dramatically, while there has also been large increases in deductibles.” For employment practices liability, Kus added, there has been an “extreme market retreat because of COVID-19 and none of the London markets will write it as a standalone cover.”
Cyber the difficult class of 2021
“Cyber is likely to be the challenging class of 2021,” said Kus, as silent cyber increases the demand for the purchase of standalone cyber, added to that is the impact of ransomware claims. “Ransomware attacks have impacted clients of all levels, especially the middle market – and in recent weeks both AIG and Chubb have changed appetite.” Insurers have increased their focus on risk management and demand for information, added Kus, so clients should “start early” and expect the underwriting process to take longer although “taking the time out to answer those questions makes a huge difference in getting the right coverage.”
Return of the three-year deals in property
For property risks, said Nick Gillett, Chief Broking Officer, Global Broking Centre, “rate increases, inflexibility of carriers, notifiable disease coverage, and non-affirmative cyber, are still front and centre as client concerns, with evidence of reduced line sizes and capacity. In specific industries such as food and beverage, waste, and recycling, we’re constantly looking at ways to see how clients in those more difficult classes can benefit from capacity solutions such as using Aon’s protected cell captive, White Rock.” There is also a returning appetite for carriers to lock in cover for longer terms such as three-year deals, added Gillett.
Property is also seeing large risk losses as opposed to property damage due to the business interruption element, said Wegbrans. “Supply chains and production processes are getting more complex and efficient, but a more efficient way of working doesn’t always mean a better risk profile. So, as the property damage losses get relatively smaller, the BI element is exploding.”
Social inflation hits casualty
In casualty, rate increases are anything from 7.5% to 30% said Gillett. “With US concern around social inflation still influencing casualty pricing in other areas of the world, there is adequate capacity at a price, but time taken to underwrite has increased, once again emphasising the need to approach renewals much earlier than clients may have been used to.”
Helping clients manage the volatility
To help manage this market volatility across lines, Gillett emphasised that Aon is utilising all its broking capabilities around the world to help clients secure the best coverage available. “We are using our Global Broking Centres in London, Bermuda and Singapore to ensure the maximum level of capacity a Client needs is accessed, whilst also working to keep pricing to a manageable level.” One increasingly relevant innovation is the Aon Client Treaty (ACT) which provides a 15% line share, utilising four carriers up to a limit for each class of business placed within the Global Broking Centre. “It’s five years old,” said Gillett, “but it’s now that we are in a difficult market environment that ACT has come into its own. It adds real value to clients to have that 15% share preplaced following a group of recognised lead markets. We’ve increased the overall premium limit in 2021 to ensure we can give greater levels of support to clients when they most need it.”
In addition, the Global Broking Centre is working hard to try and structure solutions alongside carriers to address unmet risks, added Gillett. “We’re working on products around areas like patent infringement, collateralised protection insurance and we currently have a global Aon initiative exploring agricultural and food product recall insurance.”
Renewals: get in early
Given the tough market conditions, how can clients best negotiate the next 12 months? “We’d encourage clients to work with us throughout the year and go into their renewal discussions very early,” said Helene Madell – Chief Broking Officer, UK Retail. “One trend evident from 2020 was that cover was taking longer to finalise. Market presentations become much more important and are key for getting the best outcomes for clients. Be collaborative and recognise the importance of having good relationships with insurer partners.”
In addition, said Wegbrans, Aon is working hard to ensure carriers recognise not all risks are the same. “We’re trying to fight one dimensional underwriting strategies and pushing carriers so, when results get better, there’ll be more discussion possible on individual accounts.”
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