...while capacity for primary risks in some cases has expanded.
Market-wide average rate rises, said by industry sources and data to be in the 20-30% range, mask both the degree of hardening within higher layers – which can be 500%+ for businesses with exposures like trucking or sexual abuse – and the lingering softness of the primary casualty market.
According to broking and underwriting executives, there are distinct dynamics at play within four swaths of the market: primary GL, lead excess business, and layers attaching above $50mn and $300mn.
Higher attaching layers have been under the most pressure, as underwriters re-evaluate their view of risk following a steadily increasing trend of social inflation, while rate rises for primary business have more muted, benefiting from a combination of stronger historical pricing as well as the drop-off in claims frequency during the pandemic.
Perhaps the best way to describe the state of the US casualty market overall is to compare it to climbing a mountain, where the tranquillity and gentle ascent of filling out the lower layers gradually gives way to more perilous terrain higher up the tower.
Primary GL: Gentle climb
In the primary space, buyers of policies worth $1mn to $5mn of limit are finding rates trickling up in the mid-single digits and more capacity coming in, but oftentimes coming up against more frequent demands for higher deductibles.
Nationwide E&S/Specialty senior vice president Tom Jurgen notes that insureds are facing rate rises of between 3% and 6% on renewal, while also explaining that during the soft market, primary layers had remained “pretty well priced,” meaning there was less correcting to do now that the market is firming.
Capacity remains abundant in the primary market, with one senior underwriting source saying that the larger admitted lines players had been “slower moving” at implementing rate rises. In some cases, appetite has actually expanded, with some of the largest writers, including AIG and Chubb, increasingly only willing to offer excess capacity on a supported basis.
Rate increases in the primary market have also been tempered by rising deductibles, which have leapt upwards in the last two years.
According to Aon’s chief broking officer for national casualty, Stephen Hackenburg, primary insurers are more frequently demanding that big ticket clients take deductibles in the region of $2mn.
“That takes away a substantial amount of the risk and is one reason why the pricing is not moving as much,” he noted.
Within casualty more broadly, price increases in primary commercial auto have been higher, where nearly a third of Aon’s book had increases above 10% in Q3.
Lead excess: Out of the treeline
If primary casualty is a tranquil stroll through a wooded valley, the lead excess market is more of a boulder-strewn scramble.
Shrinking limits have continued to squeeze all areas on excess towers, but lead layers have become more fragmented than ever before, leaving brokers rushing from carrier to carrier just to place a lead layer.
“Customers that might have been able to put together their $100mn tower with four or five carriers are having a lot more difficult difficulty doing that, they might be using three or four carriers to put together the first $50mn,” Lajuanda Johnson, head of wholesale umbrella/excess at Zurich North America, explained.
While many large carriers still advertise $25mn of capacity, tighter underwriting criteria and internal mandates have generally capped the size of lead limits at far lower levels.
As previously reported, the days of a single $25mn block of capacity acting as a lead layer have all but become a relic of the pre-Covid world.
“You might see it rarely,” said Johnson. “But for the most part I think those days are gone. Will they come back? Never say never, but I think it'll be a while before we see that.”
While limits compress, attachment points are rising, especially for tough accounts with meaningful auto exposure, where in many cases they are said to have doubled. Ben Ramundt, who is co-president of RT Specialty’s Dallas office, said carriers are much more commonly requiring a $2mn attachment point for auto and GL policies.
“The whole marketplace has shifted upward from an attachment point standpoint depending on the classes business,” Ramundt explained.
Zurich’s Johnson said that with the rising size of frequency losses, $5mn might be a “more appropriate lead umbrella attachment point. “The lead umbrella should not be responding to frequency,” she said.
Zurich is among a cadre of companies retreating from low attaching business in its US division. Johnson points to the rise in the frequency of claims in the $5mn to $10mn range as a reason for excess attachment points rising well above their traditional $1mn starting point.
As Denis Brady, the president of wholesaler Burns & Wilcox puts it: “It doesn't take much, when one of those 15- or 18-wheelers runs off the road or runs somebody over, to render a $10mn settlement”.
Still, changing structures have done little to hold back continued upward rate momentum.
According to Brady, price increases across the excess market have recently averaged between 30%-60%, depending on the account type, size of client, industry vertical and the location of a layer in a program. As layers are increasingly carved up and become more broadly syndicated, underwriters are refining their appetites.
Zurich’s Johnson said: “Folks are trying to find a niche where they think they can make money, based on their company's philosophy and strategy.”
She continued: “For some that's going to be writing those buffer layers, for others it's going to be writing certain classes of business.”
The Zurich excess umbrella head said a “sweet spot” for her team is now “flex layers” attaching excess $10mn to $15mn.
The slope steepens
For clients trying to buy larger limits, market conditions are extremely tough, with rate increases increasing by 50-60% on renewal. Aon’s Hackenburg told Inside P&C that the average rate rise on his company’s book of business in increased to 57% from 52%, quarter on quarter.
As a result of the higher costs, as well as capacity constraints, large corporates are in many cases buying meaningfully less limit, in some cases by hundreds of millions of dollars, often with the same total premium outlay as the year before.
Trying to place limits in excess of $50mn has become especially arduous, with Ramundt pointing out that umbrella claims frequency is “definitely up”.
“Most of the accounts that we come across have had an excess claim in the last five years, and that's becoming more and more commonplace,” he added. “We’re also seeing [claims] from prior years increasing as well,” he continued.
Ramundt described the rising severity of current accident year losses along with the higher cost of prior-year claims as a “double whammy” for insurers.
Touching the void
The largest limit policies have faced the biggest challenges on renewal. To extend the mountaineering analogy, the high excess layers are the broking equivalent of a rock climb with ropes.
Hackenburg notes that before 2018, the top limits a client could buy stretched to around $1.2bn - a level which met the liability insurance needs of major railroads and a handful of industrial companies.
Now the maximum limit is probably in the $700mn range, the Aon executive said.
Beyond a few exceptions in the energy space, getting a buyer more than $600mn to $700mn is “not impossible” but it is “quite the challenge.
Buyers are still having to pay roughly the same amount in premium as they were in other years, even if the market can only provide half the capacity.
A source said that rates in excess $200mn layers are touching plus 60%, price increases that are more frequently forcing companies to effectively self-insure to the tune of hundreds of millions of dollars.
Some buyers are now deploying captives to fill in “corridor layers” high up in excess casualty towers, a way of demonstrating they have skin in the game in the event of a claim.
Marsh JLT president Lucy Clarke noted last month that the broking house had started up more than twice as many captives in 2020 than it did in the same period last year.
Wholesale broking goldrush
More and more, retail brokers are calling on wholesalers to place business that has been non-renewed, making the fall of 2020 a golden era for specialist E&S intermediaries.
Certain lines of business are a particularly tough for brokers to place, including habitational risk, excess construction liability and commercial auto.
Terms and conditions are tightening, beyond communicable disease exclusions, which have become much more widespread in a variety of iterations.
As Burns & Wilcox’s Brady explains, many insures are stripping defence costs out of policy wordings on renewal. Low sub-limits are being added for incidents of sexual assault or battery in an apartment complex, or these perils are being excluded altogether.
“There's a real push for expertise in this marketplace because of the constraints that insurance companies have on them right now,” says RT Specialty’s Ramundt.
“Retail brokers are flocking to the wholesale brokers that display that expertise and market relationships,” he noted.
“There's been a tremendous flow of new business into our marketplace, as company combined ratios are rising and carriers are looking to shed less profitable business and that's all flowing into our channel.”
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