Property & Casualty Update—USIncreased Competition Creates Favorable Environment for Buyers

L O C K T O N C O M P A N I E S

Market Update December 2014

We move into 2015 with a commercial insurance

market that is becoming more competitive according to

Vince Gaffigan, Executive Vice President and Director of 

Risk Consulting at Lockton in St. Louis.

Although much depends on each client’s individual risk characteristics and loss history, capacity remains plentiful. As carriers fight to retain renewals and secure new business, the advantage goes to the buyer. Markets are more willing to negotiate on terms and conditions as an added point of differentiation.

“As long as no large event occurs to diminish the appetite of a large group of key carriers, the bottom won’t occur until they draw a line in the sand on further rate reductions,” said Greg DiPrato, Senior Vice President of Lockton’s Global Property Practice in New York.

Property Market Appetites Expand

The key to making the most of the current market is to create competition within the account. As DiPrato explained, commercial insurance buyers can achieve this through a program restructure in which the layers are realigned to take advantage of expanding market appetites.

MARKET COMPETITIVENESS

Favorable to the Insured

Insurer Capacity New Entrants

PremiumsUnderwriting

Appetite

Underwriting Performance

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Many large multicarrier placements are seeing double-digit rate decreases. Meanwhile, most single-carrier—and to some extent, smaller multicarrier—placements are seeing single-digit rate decreases. However, much depends on the nature of the exposure, the loss history, and the structure of a program during the past couple of years.

Risks with an unfavorable loss experience and/or significant natural catastrophe exposure will see less favorable renewal results, but a rate decrease is still likely.

Casualty Insurance Capacity Remains Strong

The softening trend continues in commercial casualty, as well.

“We’re seeing the market soften not only in some of the lines that insurers have been more apt to write during the last year or two, but we’re also seeing movement into a variety of areas once considered more difficult to place,” explained Eric Silverstein, Senior Vice President at Lockton in Dallas.

Mark Zwickel, Executive Vice President and Commercial Insurance Department Manager at Lockton in Los Angeles, noted the continued push by standard markets to enter into casualty insurance lines that traditionally belonged in the surplus market.

Debbie Goldstine, Senior Vice President and Excess Casualty Practice Lead at Lockton in Chicago, explained further:

“Capacity remains plentiful, with the marketplace actively engaged in new business growth initiatives. Some of this capacity results from new market entrants of recent years who have established themselves and are now ramping up more strategically.

“You might say the door has blown open. Markets are eager to differentiate themselves in light of the competitive environment, with increased consideration around their terms and conditions.”

Goldstine and Gaffigan agree, however, that limitations may persist for clients with challenging loss experience or with program attachment points that are more aggressive than the general market will support.

In the excess casualty market, for insureds not already at minimum

premiums, there is speculation that favorable reinsurance treaty renewals will support continued pricing tension well into 2015.

Despite Medical Inflation, Workers’ Compensation Rates Expected to Decrease

In workers’ compensation, markets are generally still pushing for a point or two to keep up with medical inflation. Yet we have seen rate decreases in a majority of the states. That tells us we can expect additional momentum toward rate decreases for workers’ compensation.

“There are filed rate decreases right now or rate decreases that have recently gone through in about 25 of the states,” Silverstein said.

In California, the pendulum swings widely with workers’ compensation and has for a couple of years. After the severe correction in 2009, when loss development was bad, rates increased.

“ You might say the door 

has blown open. Markets 

are eager to differentiate

themselves in light of the

competitive environment.

CAPACITY

The amount of insurance or reinsurance 

available from a company or from the 

market in general.

SURPLUS

The amount by which an insurer’s 

assets exceed its liabilities.

December 2014

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According to Zwickel, carriers are now starting to report better results, so we expect to see some softening in the next year or two.

In the nearer term, California Senate Bill 863 takes effect on January 1, 2015, no longer allowing temporary staffing firms and professional employer organizations (PEOs) to self-insure. As a result, many of them are looking to change their programs.

Directors & Officers Primary Rates Are Up, Excess Down

For directors and officers (D&O) insurance, we are seeing low- to mid-single-digit rate increases on primary—both public and private.

“However, excess pricing is down between 7 and 12 percent,” said David Britton, Vice President and Account Executive at Lockton in Kansas City. “We do not expect much change in the primary, where underwriters perceive exposure increases, but we anticipate a leveling off in the excess layer.”

In the private/emerging market, primary pricing for the middle

market has steadied for financially stable accounts with a clean loss history. However, large private companies continue to see higher increases. Rates may increase moderately (5 to 10 percent) during the next 12 months.

“Carriers continue to struggle with employment practices loss ratios, as well as increased activity under D&O regarding regulatory investigations and actions,” said Jed Shea, Senior Vice President and Team Leader of Lockton Financial Services in Kansas City.

Overall, capacity is relatively stable, with a few markets adjusting their stance on private equity companies. Some markets continue to pay close attention to their capacity, especially on large private enterprises.

Regulatory actions sustain an increased scrutiny of underwriting. Many carriers continue to strengthen exclusionary language,

especially under the “entity” coverage. Watch for further language restrictions in the next 12 to 18 months.

Primary Pricing for Financial Institutions Is Mostly Stable

Primary pricing for depository institutions in both the larger ($10B+ asset) bank and community bank sectors has stabilized in all areas except large bank bankers professional liability (BPL).

“Rates should increase moderately (low- to mid-single digits) over the next 12 months,” said Shea. “BPL for larger institutions will continue to seek to correct for deficits suffered over the last four years, and we expect rate growth of 10 to 20 percent, especially for institutions buying the full suite of BPL coverages (lender liability, broker dealer, investment adviser E&O, and trust liability).”

UNDERWRITING

The process by which a carrier decides if it is going to take on the risk, how 

much coverage to provide, and at what price.

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Primary pricing on funds and advisers should remain competitive for the next 12 months. Excess pricing remains competitive.

Capacity

A few markets have adjusted their stance on large depository financial institutions. Some carriers have essentially stopped writing large fidelity risks and have proven to be uncompetitive on large professional. Others are reserving large BPL capacity for insureds where they already have a large share of risk or premium. Markets generally seem to open up capacity on a risk-by-risk basis. If they like certain risks, especially when it comes to new business, they’ll get approval for higher limits.

Underwriting

Regulatory scrutiny in the 40 Act space has many markets taking conservative approaches. Some carriers are reluctant when it comes to 40 Act Funds (and fund trusts), but we have had good success with others. Many markets are saying they want to grow in the adviser, asset manager, and fund space, but many seem fairly selective when it comes to risks. Primary broker-dealer (BD) cover is heavily

reviewed by the underwriter, and almost none will write BD errors and omissions (E&O) on a stand-alone basis. Healthy community banks are desirable risks.

Overall, those handling the underwriting are looking at this stand-alone coverage with a critical eye. They may consider it a difficult risk to place due to concern about the claims that will come with it.

Sectors Firming/Softening

Healthy community banks have softened a fair amount. Professional liability for certain financial services firms and large depository institutions has hardened to the tune of double-digit rates. More of the same is expected in 2015.

“In general, underwriters are being highly selective when it comes to new business in this sector,” said Shea. “When they like a risk and it hits their sweet spot, they’ll do practically anything to compete.”

Surety  (Commercial)

According to Patrick Pribyl, Senior Vice President and Surety Team Leader at Lockton in Kansas City, the commercial surety market

remains aggressive, but not necessarily soft, as companies try to expand their books of business and seize market share from the leading sureties. They are getting more aggressive on exposures that are typically harder to place, such as workers’ compensation and traditional financial guarantee bonds. There continues to be a market for virtually any commercial surety or bond.

“It’s also worth noting that there have been 12 new entrants in the commercial surety space since 2012,” added Pribyl. “Obviously, this adds to the aggressiveness as carriers try to maintain the business they have.”

SURETY

A contract among at least three parties:

The Obligee—the party who is the 

recipient of the bond

The Principal—the primary party who will 

perform the contractual obligation

The Surety—who assures the Obligee that 

the Principal can perform the task

December 2014

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Surety (Contract)

On the contract surety side, we’ve seen a couple of new entrants, which boosts competition across this sector.

“Difficult credit poses a challenge, but there are plenty of nonstandard markets ready to solve it,” said Pribyl. “Overall, this market isn’t soft, but it’s very competitive for good business and the results have been favorable.”

See more in our Construction section.

SPECIAL UPDATES

Cyber

In 2014, much of the focus has been on the risks of handling payment card data, especially given the huge breaches several large companies have experienced.

“Capacity is rapidly contracting for retail industry risks,” explained Ben Beeson, Vice President, Cybersecurity and Privacy at Lockton in Washington, DC. “As insurers start to appreciate that prevention is impossible, buyers are increasingly held to a much higher

standard of security than six months ago. In 2015, some enterprises may find themselves uninsurable.”

Outside of retail, market capacity remains at approximately $300 million-$350 million, and pricing flat. There are more than 50 insurance companies concentrated mainly between the US and London markets.

Cyber risk isn’t just about information breaches

The focus of cyber risk has long been on information assets, but there is an emerging debate about risk to physical assets. The market is responding with solutions that address property damage, business interruption, and bodily injury from a cyber attack.

“All of this is breaking new ground and a symptom of the market trying to address a much broader spectrum of cyber risk than just data breach,” Beeson explained.

Healthcare

When the Ebola virus landed on US soil, it sent shock waves through the entire healthcare industry.

“Risk managers realized that the challenges of managing a scenario like treating an Ebola outbreak extended far beyond anything they might have anticipated in their plans,” said Kevin Junod, Executive Vice President, Northeast Healthcare Industry Practice at Lockton in Philadelphia. One of the largest unexpected consequences for the Dallas hospital was the business interruption loss, estimated at more than $8 million, resulting from a drop in emergency room visits and surgeries1.

“The Ebola outbreak brought to light how a hospital’s risk profile goes far beyond the typical claims such as medical malpractice, property, and ambulance accidents,” said Junod. “Health systems need to consider all potential business exposures, including incidents that would be contemplated under business interruption, pollution, reputation risks, and crisis response.”

December 2014

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Healthcare Mergers & Acquisitions

Merger and acquisition (M&A) activity in the healthcare industry slowed in 2014, due largely to the uncertainty caused by the Affordable Care Act (ACA) and its mandatory reforms.

“Although it has lessened, the overall trend of consolidations in the healthcare space continued in 2014,” explained Junod. “As organizations become more comfortable with the workings of the ACA, we expect M&A activity to pick up again in 2015.”

In addition to influencing M&As, the ACA created new reimbursement opportunities for certain healthcare providers. Those who experimented with the new reimbursement models will reap the rewards.

“As the industry becomes more accustomed to new payment models, health systems continue to focus efforts on enhancing revenue models to maximize profitability,” said Junod.

California upholds medical injury cap

Limiting medical malpractice awards is a divisive issue that the federal government has left to the states. Recently, Californians voted to uphold the state’s noneconomic damages cap of $250,000, one of the lowest caps in the country. A proposed bill would have raised the cap to $1.1 million, with a provision for inflationary adjustments. Earlier this year, the Florida Supreme Court voted against a measure that would have instituted a cap on noneconomic damages in that state.

Medical professional liability has ample capacity

In the medical professional liability sector, a soft market persists. Rates continue to push downward, with carriers left to differentiate themselves through services such as risk management, claims, and clinical risk services.

“The number of new carriers entering the market has slowed, and no existing carriers have vacated the space. This continues to promote ample capacity and favorable pricing for buyers,” said Junod.

International Property & Casualty

Small- and middle-market international package rates remain soft in a highly competitive environment.

“Several markets that had withdrawn from this space due to significant historical property losses are beginning to reenter with revised offerings and new products, and many other carriers are following,” said Michael Lombardi, Senior Vice President and International Practice Leader at Lockton in New York. “Where we previously saw a small gap in the market, competition among several carriers has increased significantly for international package business.”

Large international casualty business has continued to see steady rate decline as this segment remains one

December 2014

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of the most profitable for insurance carriers. Large insureds, however, are less likely to move business for modest price relief as carrier service and execution remain top priorities.

“The complexity of designing and implementing a large global program, along with the increased need for contract certainty, often proves more important than price,” said Lombardi. “As a result, carriers focus on improving product offerings, services, limits, and expanding terms and conditions on local policies.”

Energy

The energy insurance marketplace is best characterized as “overcapacity with favorable operations,” according to Mark Mullervy, Vice President of Lockton’s Marine & Energy Practice in

Houston. The past year brought a continued influx of capital chasing returns in the energy space. Investors are deploying capital in all the traditional insurance access points (London, Bermuda, and domestically) in order to capture or grow market share.

The growth of capacity has been twofold: new start-ups chasing business and established players like Lloyd’s Syndicates increasing their maximum lines. It is not uncommon to hear of Lloyd’s Syndicates that had a $50 million stamp in 2012 telling brokers they have capacity to write $75 million or more in 2014-2015.

What does all this capacity mean for energy firms?

“Ultimately, it means 2015 will be a good year to buy insurance,” said Mullervy. “Across the entire energy value chain, the insurance product will improve, with premiums that continue to decrease.”

For energy property insurers, both onshore and offshore, rate reductions in the 10 to 20 percent range are entirely commonplace. On the casualty side of the house,

reductions are perhaps not of the same magnitude as property, but there is quantifiable rate pressure on underwriters. The breadth of coverage discussions that were off the table only 18 months ago are coming back to the forefront.

Beyond overcapacity, the other crucial consideration for the soft market conditions is the exemplary results across the energy industry. This year (2014) marks the sixth consecutive year without a Gulf of Mexico windstorm, which is typically an enormous driver of natural catastrophe exposure.

“Operationally speaking, the results for on- and offshore well control and the contractor book have performed extremely well, with many sizeable energy insurers reporting loss ratios across their energy book of less than 80 percent,” Mullervy said.

As always, there are exceptions to the wider trend, and we’re seeing pockets of resistance to the overall theme of overcapacity and a softening market. The casualty space for midstream, especially pollution coverage for crude/natural gas liquids pipelines, continues

December 2014

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to pose challenges. The same is true of auto liability for oil field service companies with large vehicle fleets. However, these are isolated areas bucking a much stronger overall trend.

Brokers and underwriters await the singular event or series of events that flips the switch and hardens the market. It could be a massive natural catastrophe, increasing interest rates, a global slowdown in the energy industry—or perhaps some event nobody has considered.

“It’s a cyclical market and it will change; it’s just uncertain whether that change will come in 2015,” Mullervy said.

Construction

The economy is creating opportunities for construction in most sectors, and we expect increases again in 2015. However, the market is not treating all sectors equally, particularly when it comes to general liability.

“Capacity is plentiful for all lines, keeping rates pretty predictable,” explained Mary Ann Krautheim, Senior Vice President and Senior Account Executive at Lockton in Kansas City. “Those insurers with large market share in the construction sector have spent the last couple of years correcting pricing by line of business and type of construction. Specific to general liability and excess, contractors with New York exposures continue to adjust to higher retentions and rates due to insurer experience with over action claims.”

General contractors looking to take advantage of the robust market for apartment and condominium projects are facing higher rates and lack of capacity due to construction defect issues, particularly in California, Florida, and a handful of other jurisdictions. These same jurisdictions find underwriters also placing condominium conversion exclusions on policies covering the construction of apartment buildings.

“Contractors in this arena will begin to see a change in ALAE treatment for residential risk as insurers see these costs increase,” said Krautheim.

See more in our Surety section.

Conclusion

With carrier appetites broadening, greater flexibility with terms and conditions, and increased capacity, the market remains highly competitive for the foreseeable future.

1Advisen Risk Network (10/30/14) www.advisenrisknetwork.com/2014/10/30/hospital-recourse-losses-job/

Additional contributions provided by the following Lockton Associates: Melissa Klaus, Assistant Vice President and Account Executive in St. Louis; Brock Lewark, Assistant Vice President and Account Executive, Lockton Financial Services in Kansas City; Cody Fuchs, Surety Operations Account Executive in Kansas City; Adam Balentine, Assistant Vice President and Account Executive in Kansas City; and Kevin Boland, Account Executive, Northeast Healthcare Practice in Philadelphia.

December 2014

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12-18MONTHSEXPECTED FURTHER LANGUAGE RESTRICTION TO COME FROM CARRIERS UNDER “ENTITY” COVERAGE

12

6 YEARSWITHOUT A GULF OF MEXICO WINDSTORM; AIDING SOFT MARKET CONDITION IN EVERY INDUSTRY

$8 MILLIONESTIMATED BUSINESS INTERRUPTION LOSS OF THE DALLAS HOSPITAL WITH EBOLA OUTBREAK

CURRENT MARKET CAPACITY FOR THE CYBER SECTOR (EXCLUDING RETAIL)

25US STATES IN WHICH WORKERS’ COMPENSATION RATE DECREASES  HAVE BEEN FILED

NEW ENTRANTS IN THE COMMERCIAL SURETY SPACE SINCE 2012, ADDING TO COMMERCIAL SURETY AGGRESSIVENESS

$300-$350MILLION MILLION

MARKET UPDATE FAST FACTS

December 2014

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US PROPERTY & CASUALTY INDUSTRY AT A GLANCE

-40

-30

-20

-10

0

10

20

30

40

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014First 9Months

UNDERWRITING PERFORMANCE:  IMPROVING NET UNDERWRITING GAINS (LOSSES)—2004–2014

Source: Insurance Information Institute

The industry saw a gain 

of $4.3 billion in the first 

nine months of 2014.

3.90%

0.50%

4.2%

-0.6% -1.4%

-3.7%

0.9%

3.3% 4.3% 4.6%

3.9%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014First 9Months

Source: Insurance Information Institute

NET WRITTEN PREMIUM GROWTH:  MODEST YEAR-TO-YEAR CHANGE IN NWP—2004–2014

Net premium growth fell 

slightly to 3.9% in first nine 

months of 2014, compared to 

4.2% in the first nine months 

of 2013.

All charts include mortgage and financial guaranty insurers. 

$ Billions

December 2014

Market Update, Property & Casualty—US Lockton

© 2015 Lockton, Inc. All rights reserved.Images © 2015 Thinkstock. All rights reserved. 11

US PROPERTY & CASUALTY INDUSTRY AT A GLANCE

95.1%

105.1%

101.0% 102.4%

108.1%

102.9%

96.1% 97.7%

85%

90%

95%

100%

105%

110%

2007 2008 2009 2010 2011 2012 2013 2014First 9Months

COMBINED RATIO: IMPROVING U.S. 2007–2014

Source: Insurance Information Institute

The industry combined 

ratio, a measure of 

underwriting profit, rose 

to 97.7% in first nine 

months of 2014, up from 

95.8% in 2013.

INVESTMENT GAINS: MODEST IMPROVEMENT 2004–2014

$48.9

$59.4 $55.7

$63.6

$31.4

$38.9

$52.9 $56.2 $54.2

$58.8

$43.1

$0

$10

$20

$30

$40

$50

$60

$70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014First 9Months

Investment gains consist primarily of interest, stock dividends, and realized capital gains and losses. Sources: ISO; Insurance Information Institute

All charts include mortgage and financial guaranty insurers. 

Low interest rates

continue to challenge

insurers, although 

total investment

gains rose 6.7% to 

$43.1 billion, up from 

$40.3 billion in first 

nine months of 2013.

December 2014