North American commercial insurance buyers will continue facing upward pricing pressure across most lines of business compounded by a newfound scrutiny of their coverage terms and conditions. These top-line observations emanate from Willis Towers Watson’s Insurance Marketplace Realities 2020 Spring Update. Notably, the report expects that the decline in economic activity will lead to large reductions in insurable values, yet not a single line of business predicts overall rate decreases; however, in many lines, the ultimate impact of COVID-19 and the economic downturn remains to be seen.
“The pandemic and economic downturn will very likely extend the hard market through 2021, with market discipline continuing as insurers’ losses materialize and their investment income deteriorates,” said Joe Peiser, global head of Broking, Willis Towers Watson. “While we expect pressure on coverage to last for the foreseeable future, mainly due to significant policy language disparities brought into focus by the inconsistent language addressing pandemics, the good news is the insurance industry is solvent, well capitalized and positioned to deliver.” Favorably, according to the report, despite all the stress and pressure of the pandemic, business is being conducted with a strong degree of civility, underscored by considerations granted by underwriters, especially in extenuating circumstances of which there are plenty. “We are seeing accommodations. This spirit is something we hope will last,” noted Peiser.
Another positive development amid the crisis centers on the discussion of a public/private partnership to address the threats posed by future pandemics. This could potentially take the form of a federal backstop like the Terrorism Risk Insurance Act that followed 9/11 or the model of the National Flood Insurance Program, which is funded by the government and mostly administered by the private insurance industry.
“Pandemic risk is different, and the exploration of solutions should be robust and involve all stakeholders, public and private. But let’s go one step further and include other systemic global challenges and priorities, such as climate change and cyber terrorism. We must learn from recent events and combine our collective experience to be better prepared for the next systemic global challenge,” said Peiser.
The report serves as a guide for North American insurance buyers preparing for upcoming program renewals.
Business interruption/Property: This is the first place most insureds look when assessing the applicability of their policies. For those few who have non-physical damage business interruption extensions, coverage will apply; for most others, coverage will be very limited and highly dependent on specifics of the insured’s policy language, the insured’s situation and, in some cases, jurisdiction governing the insurance contract.
Property: Steep rate increases continue and may accelerate; what is already accelerating is carrier scrutiny of policy forms to limit or reduce coverage. Underwriters continue to take a more critical look at exposures, restricting many coverage terms previously offered. Buyers may struggle to obtain multiple options as underwriter bandwidth is low. Loss control is still being heavily scrutinized, and buyers should be prepared to address open recommendations prior to renewal. Buyers should also be proactive and get ahead of the timeline delays that can be expected to grow with the length of the pandemic crisis.
Casualty: Commercial liability, particularly umbrella/excess liability, has become more challenging since our fall 2019 report, as deteriorating loss trends continue to hurt profitability. The marketplace continues to be impacted by significant catastrophic liability losses, stemming from many sources, e.g., wildfire, active shooter events, concussion/traumatic brain injury litigation, auto accidents, opioids, and sexual assault and molestation claims. The result is unsustainable loss ratios, a driver of hardening rates. Underwriting and pricing guidelines remain fluid, with carriers reacting to market conditions and, at times, changing positions over the course of the renewal process. Because of COVID-19, buyers should revisit policies and address issues, e.g., minimum premium provisions, before inception of a new program.
Workers compensation: Workers compensation rates remain stable, but development of presumptive legislation could pose material profitability issues. Significant questions — including the consideration of COVID-19 as an occupational disease — will present themselves, and the answers will be determined not only in the policy language but also in the rules and regulations of each state.
Directors’ and officers’ (D&O): An intense hard market was in play before COVID-19 struck, and it is worsening. Underwriters are laser-focused on liquidity, industry and disclosures specific to COVID-19. Renewals are challenging with the environment heightened by underwriting scrutiny of D&O exposures, all in addition to the continuing firming of primary and excess rates.
Employment practices liability: There is a societal shift in focus on workplace culture. The massive layoffs taking place are likely to lead to claims of unfair treatment in determining who stays and who goes. Claims relating to privacy issues and retaliation could also spike. A workplace culture that promotes inclusion and diversity may minimize exposure to employment-related claims.
“To the frustration and disappointment of some, for the most part, a pandemic is not an insured event,” concluded Peiser. “Nonetheless, this will no doubt be a reputational moment for the insurance industry, to be judged by the extent of which it was perceived to help organizations weather this storm. So, what can risk managers do? Review exposure data. Comply with governmental directives to reduce potential harm and mitigate liability. Gather policies and have an expert review, as they will be the likely sole factor in determining coverage.”
The Insurance Marketplace Realities series is published in the fall and updated every spring. A copy of the full report can be accessed on the Willis Towers Watson website, along with a video message from Joe Peiser.