Hard Markets - A Three-Part Story

Due to a number of factors, we are currently experiencing a hard market.

Though the pandemic has caused additional challenges, there have been several compounding events that occurred even  prior to the pandemic. Commercial coverage lines have been tightening for the past 10 consecutive quarters. Fall of 2019 is when we began to see a true start to the hard market.

To understand present market conditions, it is helpful to look at a few specific factors:


Natural Catastrophes and Risk Losses

Underlying conditions:

Industry perspective

Catastrophic events, such as the severe storms striking the Midwest, are often partially insured by re-insurers. Primary insurance carriers look to transfer or offset a percentage of their risk to  reinsurers,  and  depending  on  the conditions, a reinsurer will either absorb losses  incurred over a certain threshold or will share a portion of the financial consequences with the primary insurance carrier. This relationship is why when reinsurance rates increase, insurance carriers raise their premium rates. Prior to COVID-19, years of catastrophic events heightened the need for reinsurers to address capacity and tighten their underwriting guidelines.

Munich Re, an international reinsurer, noted that over the first half of 2020, natural catastrophes resulted in estimated losses of $68B, with $27B covered by reinsurance. At June-July renewals, reinsurance pricing was up between 5-35%. Reinsurers are working to stabilize performance and address capacity—directly impacting the cost to transfer risk for primary carriers and the end consumer. The cost of doing business has increased dramatically for many insurance carriers and those increased costs are being passed along to clients in the form of higher premiums, lower limits and tighter terms.

Insurance carriers generate revenue through underwriting profit and investment income. Insurers were reviewing investment outcomes and underwriting return on equity (ROE), stipulating the need to restructure profitability leading into 2020 causing the hard market. Negative economic impacts from COVID-19 has magnified these efforts.


Social Inflation

Underlying conditions:

Industry perspective: Social inflation is the result of a number of societal changes (generational shifts, litigation funding and social movements), resulting in more cases going to trial and the multiplication of the average award size. A review of U.S. cases by VerdictSearch, saw a 300% increase in the frequency of verdicts over $20M in 2019 from the annual average from 2001 to 2010. The increasing costs to settle a claim translates to carriers raising premiums to manage profitability, or return on equity. Many have noted commercial auto, umbrella and excess policies being offered for 2x the price at half of the limits, with “$5M is the new $25M,” a reference to excess layers. The Transportation and Logistics industry is one example where limits and relative costs for coverage lines are being directly affected by the litigation trends and impacting the overall market.

Transportation and logistics is one of the most challenging classes of business to insure and some carriers are exiting the market entirely, which puts additional pressure on the remaining carrier’s capacity. Accidents in the transportation sector are experiencing in escalating verdict award amounts, with many considered nuclear verdicts (verdicts over $10M). The American Transportation Research Institute (ATRI) studied national transportation litigations, reviewing quantitative data on verdict sizes and types. Between 2007 and 2011, the cases with verdict sizes of $1M rose to a count of 79. From 2012 to 2019, the number of cases with verdicts over $1M increased 235%, with 265 cases identified. Their study noted the average verdict size from 2010-2018 increased from $2.3M to $22.2M—a 967% increase. Nuclear verdicts within transportation are stemming from severe accidents, often involving passengers. Accidents with children injured or killed on average increases the verdict $27M. Children have no negligence in the event of a crash, the truck or motor carrier will pay regardless of fault in the accident.


Though there is much to comment on management, employment practices and social movements (#MeToo, Black Lives Matter), a significant portion of carrier’s tightening risk appetite and capacity is stemming from the transportation and logistics sector. Insurance carrier’s capacity in the transportation industry reaches into commercial auto, umbrella and excess coverage lines—carriers are cautiously deploying capacity as the impacts of social inflation leave concerns with the overall cost of risk.


Portfolio Remediations

Underlying conditions:

Industry perspective: Historical changes in material costs and labor costs are influencing underwriter’s review of their current book of business, in addition to new business submissions. Described as portfolio remediation, underwriters are evaluating their current books of business and making adjustments to exposures. Carriers are being very conservative with employing limits—and adjusting actual replacement cost appraisals. Since March 2020, lumber prices have hit record highs, with copper and steel in shorter supply with the onset of the pandemic. The replacement cost of these materials and others—brick, cement, etc.,—has increased, so the replacement cost of buildings is higher. When reviewing new business submissions, mandatory property evaluations and appraisals are common. Technological advancement is also equipping carriers with the ability to better perform risk assessments, as they have greater access to meaningful information.


What does this mean for you?

Insurance carriers need to restructure is causing the hard market. The market tightening is a market correction by insurance carriers to improve profitability. When insurance companies are unable to profit at the price they are charging for coverage, they attempt to improve profitability by thoroughly reviewing current and new risks, raising premiums, lowering limits, tightening underwriting guidelines and restricting coverage through exclusions. In some cases, carriers are exiting the market entirely, for example, in the transportation sector. Not all lines of business are tightening, workers’ compensation for example, remains relatively soft.

Commercial Auto, General Liability, Umbrella and Excess, Commercial Property and Directors and Officers are the lines of business underwriters are taking a more responsible and thorough approach.

Since we are midway through 2020, and have not even approached one complete market cycle, the challenges of the hard market are likely to stay for the remainder of 2020. There seems to be mixed perspectives on when the market will begin to soften, however most are indicating well into 2021, with the more pessimistic, or best practices outlook suggesting a 2-3 year trend.