Posted in News on 10 Feb 2019
The Management Liability market continues to harden, with much more speed and ferocity than predicted. In the past three months we have seen a more pronounced move upwards for rates.
The volatility of the market is more pronounced now than it has been in the past 17 years. Capacity has been cut dramatically; there is around one third of the limit available on any given risk versus the levels of available capacity in 2015-16. Pricing and retentions have materially increased. There is now a very real threat of programmes not being renewed, or clients being required to self-insure some layers. Given these current trends, we do not expect these conditions to improve for the better in 2019.
Virtually every aspect of the Directors’ and Officers’ (D&O) market has been affected, from private companies through to the largest multinational, publically listed companies. The Crime market has suffered even more; further withdrawals of markets means that there now only remains about GBP20m of available capacity for full Social Engineering cover.
At the time of writing, management liability underwriters are going through a torrid time.
The deterioration of past claims continues unabated, withunderwriters posting higher and higher reserves on old claims that were previously assumed to be contained within primary layers.
- Constant elevated levels of securities filings all put pressure on the primary carriers. One bright spot is the level of dismissals of these class actions.
- Lloyd’s of London’s increased regulatory focus and scrutiny of the profitability of specialist classes , has led to underwriter constraints and in extreme cases, insurers refusing to renew business for period of time.
- The number of crime losses continues unabated. As a result, we are seeing some insurers refusing to pay claims for losses that previously would have been covered.
Unfortunately, during this hardening of the market we have seen some pockets of unfavourable insurer behaviour and as such, market selection will need to be even more strategic and forward thinking at renewal.
|As the above diagram shows, 2016 will mark the high point in losses for the D&O market.Whilst during 2018 heavy remedial action was taken by insurers, it is doubtful that despite this action, insurer behaviour will not readjust until the market is more profitable.
So what can be done in 2019 to mitigate this environment?
- Insurer arbitrage: Not all insurer offices or individual underwriters behave in the same way. It is important that clients choose to work with the most appropriate underwriters for their risk profile, so that at renewal, the optimal terms can be achieved. Your broker will guide on this.
- Game theory: In order to build significant programmes with the most favourable terms and conditions, brokers must employ game theory strategies to leverage insurers whilst maximising competition and capacity.
- Programme design: Design of programmes in 2019 must be creative; retentions, side-A layers, ventilation, and changing the overarching structure can help. In addition, the use of small lines of GBP1m-2m has become increasingly useful for very difficult placements.
- Worldwide marketing: The utilisation of the full gamut of international insurers will be vital at renewal. European markets, plus those in the US and Bermuda can all provide options for clients as those markets have not hardened as quickly as London
What does this mean for renewals?
Buyers in 2019 are now likely to observe the harsh reality of a hard market; rate rises upon renewal, restrictions on coverage, additional exclusions, and potentially challenging claims experiences. Insurers are undoubtedly being more selective of the risks that they are choosing to write, preferring to decline a risk entirely if it falls outside of their underwriting appetite, as opposed to writing risks to maintain a portion of market share.
Clients must work closely with their brokers, particularly for those renewals falling in the first alf of 2019, to prepare as far as possible for what will inevitably be a difficult renewal period.
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 Just like any industry, the insurance market goes through peaks and troughs. A buoyant market, also known as a ‘soft’ market, is an ideal buyer’s market – plenty of capacity, insurer choice, broader coverage. Insurers compete on price and cover to maintain market share, which impacts margins and profitability if a soft market persists for several years.
A tipping point will eventually see insurers reducing capacity or exiting insurance classes, causing a drop in capacity and a decrease in competition. We tend then to observe rate increases, and a narrowing of coverage the tell-tell signs of a ‘hard’ market. As profitability returns over several years, soft market conditions begin to return.
 These losses have coincided with greater insurer scrutiny as a whole on the profitability of specialist classes in the London market and widespread insurance market natural catastrophe losses from 2017, particularly those losses from hurricanes in the Gulf of Mexico and forest fires in California.