Hard Times, Hard Market

Lori Widmer


May 1, 2020

At the start of 2020, the biggest challenge for many risk professionals when it came to purchasing or renewing their insurance policies was navigating an increasingly hardening insurance market in which rates were increasing for almost all lines. And then the coronavirus pandemic hit.

For insurers and buyers alike, the impact of COVID-19 remains to be seen. Most policies include pandemic exclusions, but that will not spare the industry from feeling the aftershocks. Early industry outlooks indicated that the impact of the pandemic will be most acutely felt in the latter part of the year. “Rates in the first quarter of 2020 were mostly stable,” said MarketScout CEO Richard Kerr. “The pricing impact of COVID-19 will be borne out in the second, third and fourth quarter of 2020. Lower exposure base and the possibility of governmental intervention in coverage application will have a dramatic impact on the pricing for the rest of the year.”

Due to the rapidly developing nature of the pandemic, many experts are reluctant to discuss possible market changes. Yet many agree the market is in limbo. “We don’t know how it’s going to change,” said Jay Sarzen, senior analyst at Aite Group. He believes COVID-19 will impact the property/casualty insurance industry, but how deeply depends on what happens to small businesses. “That’s really where we’re going to see the most losses—in terms of businesses, not in terms of claims,” he said. “If these businesses don’t maintain viability, what does our economy look like after that?”

Insurers, he said, should be doing whatever they can to ensure “that when we all emerge from this, they’re going to have small businesses to actually insure.”

Yet how far insurers can or will go is up for debate. The Global Federation of Insurance Associations urged insurers to weigh carefully any move that expands coverage for pandemic loss. “Where coverage for pandemics and other causes of loss were not included in existing policies or reflected in premium payments, requiring insurers to cover those losses retroactively could seriously threaten the stability of the global insurance industry,” the organization said in a statement. Insurers should maintain financial strength “to meet the promises and guarantees made to customers,” the federation added, warning that not doing so could “exacerbate the negative impacts the economy is currently experiencing.”

For Now, Status Quo

With increasing pressure on the global economy and constant changes brought on by the pandemic, analysts are in a holding pattern, trying to determine the impact on insurance buying. Even with the pandemic, it has mostly been business as usual, according to B. Puckett, vice president and market relations leader at Gallagher. “There are some industries where we see carriers being more cautious, like the health care, hospitality, entertainment and restaurants industries,” he said. “For instance, an executive with one of our major carriers commented that they don’t want to walk into a claim when writing new business.”

Some carriers are also reassessing terms and conditions. “A large property carrier recently announced that they are reducing communicable disease sublimits offered on their policies to $10,000,” Puckett said. “We are also seeing carriers offer supplemental COVID-19 applications that clients must fill out as part of the submission process.”

Prior to the pandemic, AmWINS Group analysis showed that, while the market did not lack capacity, carriers were using conservative limit deployment and de-risking methods to alleviate their exposure, which was decreasing the amount of capacity available in the market.

This is partly because data and technology have changed the way insurers sell. Carriers are “using that data and real-time information to understand their books better, and to really target the non-performing areas of their book,” said Puckett.

This focus on insuring quality risks is keeping capacity constricted, according to USI analysis, and some carriers are either constricting what they offer or leaving the market. Even in the reinsurance market, capacity restrictions are in effect, and Willis Re analysts are reporting overall capacity reductions.

Conditions may not change for some time. Willis Towers Watson said that rate hikes and constrictions on capacity will be common in the market throughout 2020 and likely into 2021. Its March 2020 Global Markets Overview noted market implications from the COVID-19 “black swan” event will cause nearer-term “impactful shocks” but the “direct impact on the world and country GDP is likely to be minimal by the end of 2021.”

For a risk management professional trying to put together an insurance program, conditions could not be worse for locating affordable insurance program options. Yet experts believe that risk professionals can do quite a bit to make their insurance-buying process easier and more fruitful.

1. Make risks appealing to underwriters.

Since there is currently no modeling for this pandemic, reducing vulnerability to the risk will be difficult at best, Sarzen said. The best approach is to focus on the aspects of it that risk professionals can model. They can make their risks more appealing by showing their carriers they are taking mitigation seriously. Active risk management demonstrates an awareness of exposures and willingness to proactively manage those risks.

Sarzen likened it to cyber liability. “They make sure the people they’re underwriting are doing everything they can to ensure that they’re protecting data, training their employees, and so forth,” he explained.

However, risk professionals should not wait for underwriters to tell them how to make their risks more appetizing. “If I’m a risk manager, I would work with any potential carriers and ask them ‘What can we do to give you more comfort in underwriting this risk?’” he said.

Making insurers comfortable means identifying the problem areas that are probably increasing underwriter angst and finding ways around them. Sarzen suggested proposing potential solutions to the carrier that could help make the risk more palatable using the example of a business with a flat roof. “We have it inspected for leaks and damage every four years,” he said. “But if we did that every two years, would that make you feel better? Would that lower my premium in any way?”

2. Take advantage of free assistance.

Another way to reduce costs and mitigate losses is to “take advantage of value-added services offered by insurers,” said Mo Tooker, head of middle and large commercial insurance at The Hartford. “This includes risk engineering services as well as claim data, analytics and trend reporting.”

Risk professionals should work with carriers that offer data specific to their industry to aid their understanding of industry trends, loss areas to be concerned about, and any sources of potential cost savings, he said.

3. Build and nurture a trusting relationship with brokers.

“Trust between risk managers and brokers is paramount when looking for insurance coverage, especially when navigating a challenging market,” Tooker said. Brokers and risk professionals should get together regularly to review their carriers and policies and start a dialogue with carriers well ahead of any renewal date. This will allow brokers to help with budgeting, he said.

Across the entire buying spectrum, Puckett said risk professionals “need to be prepared to work with carriers in new ways to maintain open lines of communications, build and maintain relationships and conduct business in a remote working environment.”

4. Be organized going into renewal.

With pricing and limited availability impacting the market, the more risk professionals prepare prior to renewal, the more likely their submission will be viewed favorably. Pandemic or not, “risk managers still need to be organized, have complete submissions, ensure outstanding loss control recommendations have been complied with and start the process early,” Puckett said. “Many carriers are now going to be focused on how companies are managing the COVID-19 environment. They’ll be asking things like, ‘How has their business operated during this crisis and what controls do they have in place?’ and ‘How have revenues or payrolls been impacted?’ and ‘Have operations shifted temporarily?’”

Even before COVID-19, underwriters were already inundated with submissions because many companies are looking to ensure their pricing and coverage are competitive or they are looking for other options. “Underwriters are swamped, and their time is going to be limited,” Puckett said. “When they’ve got a stack of submissions sitting on their desk, they’re going to immediately be attracted to the submission that has the most complete information and an easy story to read.”

That means tightening up every aspect of the submission. Red flags may include inadequate property values or loss control recommendations that have not been implemented. These could lead underwriters to set prices much higher or pass on the submission entirely. “Make sure your house is in order,” he said.

Puckett recommended that risk professionals use data and intelligence from the broker community, including benchmark data on carriers and current limits. Relying on the agent to provide information will not produce the deepest level of understanding. “We’ve put out a good quarterly communication on what’s going on in the market,” he said. “Other brokers are doing the same. There are a lot of resources out there that they can tap into to stay updated.”

In addition, discuss how your business has been impacted this year and how your company is addressing the risks brought on by such change. “I also suggest risk managers work with the carriers to understand what options are available to them during this time, including premium payment leniency options and addressing mid-term exposure changes,” he said.

5. Emphasize active safety and quality control.

“The best way to get optimal pricing is to have a robust, active safety and quality control program,” said Dan Conway, executive vice president and chief underwriting officer at Starr Insurance Companies. While that does plenty to help reduce rates and attract insurers, companies should be “willing to retain more risk with large deductibles and be your own insurer at a certain level,” he said. “If you’re managing the risk, you’ll get the rewards. This approach applies to all industries and risks.”

Conway said risk professionals can take advantage of available actuarial modeling and stratification of losses. This can determine what losses to mitigate through insurance and which to absorb.

Risk professionals must manage their expectations, however. “There’s really no way to get away from the adjustment,” Conway said. “You will pay more for the same coverage because these lines have been inadequately priced for so long. In a market characterized by massive, so-called ‘nuclear verdicts,’ responsible carriers have no appetite for cutting rates.”

Still, risk professionals should be working to appeal to insurers. “You need to show the insurer you understand the insurance industry, that you are an active, engaged participant, and not just a premium payer,” he said. “Be an informed buyer.”

6. Review your risk appetite.

It is an under-utilized step, according to Jay Sampson, executive managing director of Beecher Carlson’s risk optimization group, but a broker can help risk professionals determine the right amount of risk retention for their organization now that market conditions have changed. “In a soft market, they might be willing to buy $500 million of umbrella liability because it is cheap, but now it is not cheap anymore,” he said.

Too often, however, risk professionals only look at the trade-off between taking on more risk and the premium reduction associated with taking a higher retention. While that is a good place to start, Sampson said, “it does not fit into the context of helping the client really understand what their risk appetite is to begin with.” If the company has a strong balance sheet and good earnings, “the risk appetite is generally far greater than the way they go about purchasing insurance,” he added.

7. Nurture other carrier relationships.

Risk professionals can also develop relationships with carriers that do not currently cover their business. “Who’s your backup going to be?” Sampson said. “When a risk manager sends his or her risk to market (through a broker or not), getting the attention of markets is pretty hard to do now, because these insurers are inundated with submissions. Yet everyone is taking their insurance program out to market right now because they’re getting hit with such large increases.”

If the company has done the work to determine its risk appetite and has developed relationships with key carriers, “all of a sudden, the markets are going to view it as a better opportunity as opposed to just one of those other 38 submissions sitting on that underwriter’s desk,” he said.

“If you haven’t invested in the relationships with your incumbent markets and some of the key markets that might be an option for you, and if your incumbent gets too expensive or the relationship hits a speed bump, you need to have somebody waiting in the wings,” Sampson said. “Trying to develop that relationship one month before your renewal date is not very effective.”

Lori Widmer is a Philadelphia-based freelance writer and editor who specializes in risk management and insurance.