Bernard Goyder and Adam McNestrie
Market sources have talked about a clustering of rate rises in the range 10-25 percent although, as with other markets, a high degree of differentiation is evident between different industry verticals, client sizes and loss experiences, which makes generalisation challenging.
As well as meaningful increases in premiums, the stress on the market has allowed insurers to push through higher retentions and tighter terms and conditions. Brokers are also increasingly being obliged to restructure programmes as insurers stop putting out big layers and ventilate their participations, with deals also being placed on a subscription basis.
The rapid transition in the market since the first quarter reflects a number of factors:
Crucially, there is substantial market uncertainty and real fear around the way recent accident years will develop, with concern that the true impact will only become clear after a number of years of deterioration on the back book.
With social and cultural factors, the key driver of increased awards from juries and a more accommodating attitude of courts toward these awards, it is impossible to judge the magnitude or longevity of the change at this stage.
Mounting severity
Severity is mounting sharply within general casualty, heavily impacting the excess casualty market.
As Swiss Re CUO Edi Schmid said at a recent press conference: “Juries are trying to get the most out of corporates as possible.”
Schmid pointed to figures from law firm Shaub Ahmuty Citrin & Spratt compiled for AIG that show that the median average of the 50 largest verdicts in the US doubled from $27.7mn to $54.3mn between 2014 and 2018.
“Litigation funding is increasing. Rates are going up, but for large US corporates rates are not up enough to make this sustainable,” Schmid said last month.
The impact has been unevenly felt across the market, with the “national accounts” market hardest hit.
Companies operating in areas such as pharmaceuticals, chemical manufacturing and utilities, where litigation levels are rising steeply, have been hardest hit.
Major events to impact the market over the past two years, include the 2017 Mandalay Bay shooting in Las Vegas which underwriters are now expecting will lead to a total loss on MGM International’s $751mn excess casualty tower after a $730mn to $800mn settlement was agreed with victims.
Mass shootings in the US are increasingly at the forefront of underwriters’ minds. The recent mass shooting at a Walmart in El Paso, Texas, has led some underwriters to reconsider writing coverage for large retailers.
It is understood that some underwriters declined to write Walmart at its latest renewal – before the tragic El Paso murders – unless shootings were excluded from their coverage.
The involvement of the pharmaceutical industry in litigation spawned by the opioid crisis is also a cause of concern.
Another standout award saw a California court award janitor Dewayne Johnson $80mn after it found weed killer Roundup was the cause of his cancer. That decision wiped billions of dollars off the share price of Roundup manufacturer Monsanto’s new German owner, Bayer.
Vaping manufacturer Juul is also facing an avalanche of product liability litigation. And losses are now landing from the litany of historic sexual abuse cases being filed in jurisdictions like New York, which has just put a hiatus on the statute of limitations for sex abuse cases.
Another vertical that has seen rate rises is liability for retirement homes, where pricing for medium-risk, non-loss hit accounts has increased by between 15 and 20 percent. Senior living facilities are experiencing the highest level of litigation for a decade, said Tim Halisky, Mid-Atlantic president of RLA Intermediaries, prompting a range of drawbacks.
“There is still capacity there, but [at] higher rates, higher deductibles and lower limits,” Halisky explains.
While the pharmaceutical and retail sectors are finding the going tough when it comes to securing casualty coverage, the utilities market remains the hardest segment, especially those operating in wildfire-exposed areas.
PG&E has suffered two full-limits losses in two years resulting from the role it played in causing the 2017 and 2018 wildfires in California.
And it was obliged to walk away from the market with only limited cover in place in the summer after it was unable to find cover that made economic sense.
Middle market stability
Amid the major settlements and surging rates, there is a stable section of North American casualty business that is facing only modest rate increases and little change in terms.
For middle market insureds with clean loss records, policies are renewing with single digit rises, or in some cases flat.
As one source put it, a furniture manufacturer in Ohio will not face the same rate rises as a public sector body or a pharmaceutical firm at renewal.
Consequently, the casualty market in late 2019 is split between two very different types of insured.
Complex risks with exposure to social inflation, public health concerns and personal injury litigation are facing large rate increases. But insureds with a clean loss history in less troubled areas of the market are able to escape with small rate increases, or flat renewals.
As Aon casualty practice leader Tony DeFelice explained, casualty is such a diverse market that some sub-sections are avoiding the pricing correction.
“Certain classes of business are seeing less severe changes to their rates, capacity or coverage due to insurer perception of their risk and exposure being less hazardous than others,” DeFelice said.
Commercial auto emergencies
Companies with commercial auto exposure have had rates increase of around 25 percent, sources said.
Jury awards for individuals injured by pickup trucks, vans or trucks have increased substantially in recent years.
Typically, a primary commercial auto policy will provide $1mn of coverage, with an umbrella or excess policy sitting above that.
Huge jury awards are wiping out an insured’s primary coverage, triggering the protection offered by the umbrella or excess policy.
“Excess cover is there for emergencies, but the emergencies are happening a lot more often now,” one source explained.
Claims frequency has also been rising. Since 2010, trucks have been involved in 59 percent more accidents per mile, according to data from the American Trucking Association. Moreover, deaths in trucking accidents have risen a third since 2009, as wholesaler CRC has pointed out.
In dozens of cases over the past year, juries have awarded those injured in trucking accidents far larger than expected awards.
In July 2018, Texan oil services company FTS International was found guilty of negligence after a crash injured a man’s back. The truck driver was on drugs and had driving violations. The victim’s family sued, arguing FTS should not have let him work for them, and a jury awarded $101mn to the victim.
There have been dozens of other cases, with verdicts ranging from $1mn to $20mn across the US.
Kirstin Marr, president of Insurity Valen Analytics, a company that pools property and casualty loss data, told The Insurance Insider that "commercial auto continues to be responsible for massive underwriting losses due to the high frequency and severity of claims”.
Despite stringent road safety measures, driver training and technology, commercial auto loss severity is being aggravated by “the rising costs of medical treatments and vehicle repairs, along with large jury settlements”, Marr explains.
Limit control
There has been a major shift in the way that excess casualty business is being written in the US.
Carriers across the spectrum have rethought their commitment to clients and their insurance towers. Major players such as Swiss Re Corporate Solutions have withdrawn from the sector, while others such as AIG, Chubb and various Lloyd’s players are no longer willing to commit sizeable chunks of capacity to single layers.
Instead, the $25mn, $50mn and $100mn layers they would put down in the past are being split into smaller pieces and staggered throughout the tower. Known as “ventilation”, this approach limits their exposure to losses that attach lower down in towers.
AIG is a leading exponent of this approach, and has cut the maximum line it will put out on a casualty placement from $250mn to $100mn, with this limit typically ventilated.
In Bermuda, a host of the island’s carriers are drawing in their horns. Chubb Bermuda, Liberty Mutual’s Ironshore Bermuda outfit and Axa XL are all understood to have cut their limits for US national accounts excess casualty business.
The structure of excess casualty towers is consequently changing. Whereas once a $25mn or $50mn layer would have been entirely taken by one carrier, that’s no longer the case, with small stretches placed on a 100 percent basis, or a number of carriers sharing that layer.
It is far more common now than even a year ago for a broker to come to a carrier to see if they can fill in a $2mn or $3mn gap in a placement just to finalise a placement.
There are also understood to be instances whereby towers aren’t being completed at all, with buyers choosing to self-insure portions of their placements.
The Insurance Insider delivers global wholesale, specialty, and (re)insurance intelligence that enables you to act first. Redeem you complimentary 14-day trial for more premium content from The Insurance Insider.
Scan here to download the app