Around the one-year mark since the start of the pandemic, markets began to experience the lasting effects of the challenges presented to them in 2020. While I’m hopeful that there is light at the end of the COVID-19 tunnel, we’ll likely see hardening market conditions persist throughout 2021.
Below, I explore in-depth some of the key trends and factors that marked the insurance industry over the past year or so and assess what each means for insurance professionals this year:
No. 1: Unpredictable natural disasters lead to a choppy property market in 2021.
Last year (2020) was the most active hurricane season on record, meaning losses were generally below reinsurance retentions and primary markets were left to bear the brunt of claims. Carriers also took a hit in profitability from wildfires, convective storms and attritional losses, with several reporting combined ratios over 100%.
The onset of 2021 saw single-digit rate increases, a significant drop from preceding years when rates were increasing by 15% to 20%. This meant high capacity and peaking rates, driving property markets to build larger budgets. With the industry already set up for plateaus, when Winter Storm Uri hit Texas in February of 2021 and caused nearly $15 billion in impact, it took the market by storm. The impact was significant, giving markets low expectations for profitability before even considering the impact of a quake or the approaching storm and wildfire season among other seasonal events. The market remains competitive as carriers remain selective in the risks that they write while trying to retain their current portfolio. However, they continue to push rates, which contributes to a choppy property market.
No. 2: Lifestyle changes and emerging threats lead to dramatic shifts in cyber.
Over the past year, drastic lifestyle changes have had a direct impact on the cybersecurity market — leading to an uptick in ransomware and targeted attacks. For example, the shift to a remote workforce has significantly heightened the risk of network security threats for businesses. As a result, we’ve seen rates skyrocket for more complex classes of businesses like municipalities and manufacturing, up to 20% to 40%. Even the insurance space has been significantly affected by ransomware attacks.
For insurance professionals, loss ratios on cyberattacks are running high due to an increase in severity and claims. This is primarily driven by ransomware attacks and generally, losses from network security or privacy failures. The magnitude of its impact on profitability means insurers cannot afford to ignore it. Not only are carriers increasing rates, but they also are more careful about managing capacity by layering programs and increasing retentions, while tightening up the underwriting guidelines and shortening quote expiration dates on cyber insurance proposals.
No. 3: The ever-evolving cannabis/CBD industry means growing risks.
The product development and broad regulatory landscape for CBD and hemp are in a constant state of change, which translates to limited insurance market capacity and very strict underwriting guidelines as well as higher premiums and retentions for start-up businesses compared to other sectors.
The leading coverage issues facing the CBD insurance industries include:
- Unsubstantiated, deceptive health claims for CBD products;
- Complex and complicated understandings of delta-8, a variant of the more widely known delta-9 THC and its federal status;
- Inadvertent exclusion of minor cannabinoids when referring to insureds’ products as “CBD products”; and
- Hemp businesses that have pivoted to manufacturing or selling Personal Protective Equipment (PPE) as a revenue stream amid the pandemic and failed to notify their insurance companies.
With 15 additional states approved for recreational marijuana sales during the November 2020 elections and New York legalizing in April 2021, insurance for this class of business will only increase in demand. So, what does this mean for insurance professionals? Keeping abreast of changes in regulation and product development in the cannabis, CBD and hemp spaces is key to ensuring proper protection for insureds. Retailers should be as diligent as possible with these accounts when gathering information.
No. 4: Excessive fee litigation is changing the fiduciary insurance market.
In total, nearly 225 Employee Retirement Income Security Act (ERISA) class action lawsuits have been filed. More than 85 of them took place in 2020. These lawsuits can lead to significant damage for plan sponsors, as carriers have paid an estimated $1 billion or more in settlements and more than $250 million in attorney fees since 2015.
As a result, fiduciary insurers have started to re-underwrite books of business by raising premiums, increasing deductibles, limiting excessive fee retentions and adding limits or sub-limits to the amount of excess fee or class action exposure. That said, the key change in the market is increased policyholder retentions. Many large plans are having trouble finding adequate and affordable fiduciary coverage, whereas it was once a more routine renewal process.
What does this mean? Ultimately, today’s plan sponsors cannot rely exclusively on fiduciary insurance to fund and absorb these losses. Instead, plan committees need to learn from this loss trend and take steps to mitigate risk. To ensure plan fees are as low as possible, plan fiduciaries can go into planning meetings with the following checklist:
- Document fee and performance reviews and ensure that fees are reasonable.
- Make sure that recordkeeping fees are offered at a low, flat rate, and are not tied to a percentage of assets.
- Make engaging in a formal RFP process with plan vendors routine to ensure your fees are not higher than peer plans.
- Ensure your plan includes low-cost index funds.
- Work with your investment manager to certify you have the lowest-cost share fees available.
- Remove any revenue sharing or recordkeeping expenses.
No. 5: Opportunity in offshore wind infrastructure spurs a shift in energy.
The growth of wind farms is on the rise with millions of acres already developed over the last five years. The growth of the industry is bringing business sectors together to make offshore wind farms a reality. More workers are needed to maintain and repair these facilities along with loading and moving, transportation hubs and construction. Even shipbuilding is seeing an uptick in demand for crew and services as laws require specialized ships for crew, supply, maintenance, service, installation and construction of wind farms. Collectively, the growth of offshore wind farms is expected to bring 83,000 new jobs to the shipbuilding industry alone by 2030.
The growth of the industry translates into a growing need for infrastructure and liability protection as a result of the Longshore and Harbor Workers Compensation Act (USL&H), including taking into account new occupational liability exposures that didn’t exist before and providing adequate coverage for any associated risks. For insureds, coverage is widely available. The challenge is making sure the right insurance is in place for the unique exposures that exist.
No. 6: Markets rely on telematics and loss control to determine risk.
For the transportation industry, buyers are seeing up to 15% rate increases for best-in-class risks as well as premium jumps and scrutiny for distressed risks. On the other hand, capacity to write this insurance continues to grow as more carriers enter the market.
The auto space as a whole is heavily composed of distressed risks that can be attributed to a variety of factors including loss history, subpar driver pools, unsatisfactory CABs and sharp industry growth. For companies investing in safety programs and trucking technology, brokers are more receptive to offering significant underwriting consideration, but many markets turn away from high-risk markets like the Northeast, Southeast and Gulf. Ultimately, these factors play a role in leading markets to rely on their loss control arm and telematics to determine whether to partner with a potential insured.
No. 7: Risks grow for Florida’s condo market while willingness to write coverage tightens.
Florida’s condo market faces unique challenges – which has caused the marketplace to tighten in response to major carriers exiting the space. While some players have exited completely, others are contracting capacity or tightening their underwriting standards. Those that do continue to play in the space are adjusting accordingly with increased rates and deductibles and/or underwriting guidelines, while simultaneously limiting the line size they are comfortable dedicating to any single placement.
This change could present significant issues for insureds and brokers alike as Florida is in the midst of a thriving real estate marketplace.
Insurance professionals must stay sharp
Reflecting back, 2020 has made a lasting impact on the insurance space. Emerging industries, dramatic and rapid lifestyle changes and even more unpredictable weather changes have all contributed to the hardening market conditions. Looking ahead, careful attention to detail and keeping abreast of challenges faced by insureds will help insurance professionals navigate the evolving marketplace.
James C. Drinkwater is president of Amwins, the largest independent wholesale distributor of specialty insurance products in the United States. He formerly served as president of the firm’s Brokerage Division. With more than 30 years in the industry, James has extensive experience in E&S casualty, wholesale, and specialty brokering. Prior to joining Amwins in 2004, James held executive positions with both Stewart Smith Group and Willis Group. He began his career in the London marketplace.
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