Despite the hard market, there are signs of rate moderation throughout the rest of 2021 and into 2022. That was one of the conclusions from Aon’s Market Update Q3 2021, as clients and partners joined Aon’s broking leaders in a live webinar on the 12 July to share the latest thinking on where the market is going generally and for specific lines of business; while also taking a closer look at the rapidly evolving but challenged cyber market; and, how ESG factors are increasingly being used by insurers to assess risk.
With insurers “truly focused on profitability” said Cynthia Beveridge – President of Aon Global Broking, opening the Aon Market Update Q3 2021, the first half of the year has been characterised by volatility and prolonged uncertainty. “We’re experiencing rate rises for most property and casualty lines, and this is expected to continue for the remainder of 2021 and into 2022.” That said, there are signs, Beveridge added, that rate rises are moderating rather than accelerating and, even though insurers are withdrawing capacity in areas, some niche sectors are seeing new entrants emerging.
Interest rates hit losses
Market drivers include several factors from a prolonged soft market, to high catastrophe losses, as well as low interest rates. “Declining interest rates have worsened the industry’s loss ratio by 5% during 2020 and into 2021,” said Beveridge. “This means the price increases we’ve seen have been offset by the further decline in interest rates.” And a look at insurer combined ratios shows that these are still not at profitable levels; a factor that will be addressed in the remaining renewals in 2021 and ahead into 2022.
Many insurers are looking to aggressively capitalise on the pricing environment with seven out of ten UK and EMEA insurers tracked by Aon, showing GWP increases to the year April 2021 and taking advantage of rate rises across most regions up from 11%-30%, said Beveridge, while “capacity is constrained but sufficient”. In addition, terms and conditions are restricted, underwriting is rigorous – “we’re experiencing last minute surprises” – while “relationships matter but are less amicable” and the “claims process is onerous” and worsened by COVID-19.
Cyber insurance market grows
Turning to the cyber insurance market, Duane Folkard – Head of Retail, Cyber & Commercial E&O, Aon Global Broking Centre, explained the global cyber insurance market was estimated to be worth US$9bn in 2020 but is expected to grow to US$20bn by 2025. But, he added, as organisations’ reliance on technology has increased, so has the efficiency of criminals looking to capitalise, and the impact is being felt by insurers.
It’s estimated that the total cost of cybercrime in 2018 to the world’s economy was around US$600bn, with predictions that this will grow to between US$2trn and US$6trn in 2022. A key driver of this growth has been the use of ransomware and its associated business interruption. Global ransomware damage costs are predicted to reach EU€17bn this year, an increase of EU€57m from five years ago. And the situation is being made worse by the growth of aggregation events – ransomware attacks that target technology service providers able to efficiently spread the attack to the service provider’s customers.
“Ransoms are getting more complicated as criminals carry out more due diligence before the attacks and when they are getting in, that attack is a lot more focused and is taking longer to remediate,” said Folkard. Years of rapid growth and a soft cyber insurance market, he added, have led to some cyber insurer portfolios having to remediate to make sure that risks contained within have a minimum baseline of cyber maturity, and this is what we are seeing now in regards to increased underwriting scrutiny, even on renewal business.
Difficult risk to price in the current environment.
As a consequence of this heightened ransomware activity, insurers are experiencing increasing losses and have responded with “sharp pricing increases towards the end of last year and rising steadily through 2021,” said Folkard, adding that it is difficult to model the correct sustainable price for cyber cover given the uncertain risk landscape at this current time.” Insurers are working towards the goal of better risk selection, which means “those clients who can articulate their Cyber governance and give insight on their security controls and internal processes should experience a warmer reception from underwriters,” said Folkard.
Many carriers are using extra tools to help them with their underwriting and also to help insureds gain more insight into current trends. “You might find some of your existing carriers are issuing reports where a third party has scanned [your IT perimeter] looking for open ports or unpatched software,” said Folkard, and there is more underwriting emphasis on multi-factor authentication, privileged access, tested and segregated back-ups, and endpoint protection.
ESG – a new lens for investors
Cyber isn’t of course, the only new and emerging risk that organisations need to manage.
Environmental, social and governance (ESG) factors are rising in prominence, particularly given the role that ESG is playing around investment. “Investors used to make decisions based on a firm’s tangible assets,” said Grant Foster – Managing Director UK for Aon Global Risk Consulting, “but ESG is a new lens through which to see investments” which has more focus on ESG related intangible assets.
As this emphasis grows, all businesses are faced with the challenge of managing and measuring their ESG performance. “At the present time there is no single standard for ESG metrics,” said Foster, “but there are some becoming more prevalent such as the UN Sustainable Development Goals and we are seeing rating agencies put ESG into their financial assessments.”
Many of these metrics look at areas like pollution and waste, corporate behaviour, stakeholder opposition and climate change but it’s not just about how the company itself performs in these areas. A critical aspect of a company’s ESG performance is scrutiny on its supply chain and what activities it might be enabling within its customer base, said Foster.
ESG needs new insurance solutions
From an insurance perspective, there are areas where traditional coverage addresses ESG “event based” incidents like pollution or public and product liability. But, “many of the trend-based risks within ESG are areas where the industry needs to become more creative about solutions to satisfy unmet needs and a growing protection gap” said Foster, for example with risks like climate change, community impacts, and business transparency and resilience.
“Insurers are interested in aligning their business with positive ESG outcomes,” said Foster, who added that the marketplace is moving quickly, particularly in carbon intensive industry sectors such as oil and gas where getting insurance can be quite difficult. “ESG performance is being scrutinised which is leading to capacity being withdrawn from the market” he added, although there are “slower movers” amongst carriers where ESG performance isn’t yet a material influence on cover.
For renewals, added Foster, “Having clear targets, measurable metrics and a clear purpose and timeline for future performance is very important but also the transition between now and the future is where there is a lot of focus. As with cyber, it’s important to build ESG into renewal schedules and provide a detailed picture for underwriters. “
PI concerns grow
Returning to the theme of market conditions, Tracy-Lee Kus – Aon’s Head of Financial & Professional Services Group warned that concerns are growing in the professional indemnity sector which has been seeing 10-15% rate increases in traditional sectors with increased claims as “nervousness amongst underwriters” grows that claims related to the economic situation will “come home to roost with accountants and/or solicitors”.
Commercial crime accounts have seen between 20-40% increases while, Kus added, anything related to employment practices and people going back to the office means employment practices liability is being “impacted quite heavily”. Pension trustee liability cover has also become increasingly harder to place over the last 18 months driven by increasing class action around excessive fee litigation.
In the directors’ and officers’ (D&O) space said Kus, “There are signs in the market for US exposed risks – who have taken rate increases for the last three to four years – that rates are beginning to reach sufficiency.” But, Kus added, some of the greatest corrections in the last 12 months have been seen with publicly listed clients with no US listing or no ADR exposures, where average rate increases have been between 250% to 300%. Q4 2020 showed increases of 150-200% and the latest data for Q1 2021 still shows an average rate increase of 125% to 150%. However, the outlook is more optimistic: “Capacity is starting to get better. There are signs that the market is starting to stabilise. New entrants are coming in and acting as follow-on capacity, but we’re not at a flat market yet.,” cautioned Kus.
Return to work concerns for liability cover
In the property, casualty and motor spheres, Raoul Staff – Aon’s Head of Broking Global & Specialty, referred to the situation as “consistently inconsistent in terms of rates and coverage” with lots of variation in relation to factors like industry, claims experience, geography, US exposures, and where each client is on their own market cycle.
On the property side, insurers may be wary about reduced levels of capital expenditure as a result of the lockdown disruption, said Staff, as well as “stalled risk engineering programmes”. Staff also warned that there are concerns around the return to work post-pandemic and how employers’ liability and public liability will be impacted.
For organisations struggling with the hard market, however, Staff ended the Market Update with a more positive outlook. “We are seeing some rate moderation”. Expectations are in the second half of 2021 and the first half of 2022 that pricing will begin to level off across all three lines of business.
i“GWP” represents premium within the Aon network year over year, rather than the insurers’ GWP overall