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The past year was defined by an unprecedented number of varied natural catastrophes, political and social unrest, COVID-19 variant concerns, supply chain crisis, and surging ransomware attacks. As we enter 2022 and look to the future, the cost of risk in our dynamic environment will be determined by how insurance carriers underwrite these risks and how businesses evolve and manage their risks.
The following factors and events are driving market transformation and they will continue to fuel change in the insurance industry for the foreseeable future.
Severe Weather Events: Severe weather events are now occurring almost every year, creating a frequency of severity situation. Unanticipated events such as the Texas freeze last January, and the unexpected tornado event ravaging the Kentucky plains in December, are becoming all too common. These natural catastrophes are hitting carriers hard, with billions in insured losses estimated due to the Kentucky tornado alone. Events such as the aforementioned Ida, Uri, the European floods, and others have all affected end-of-the-year reinsurance renewals and will carry over to property insurance premiums in the new year. 2021 CAT loss estimates are over $100 billion.
Shock Loss, Such as in Habitational Real Estate: Whenever a tragic and terrible event occurs, underwriters tend to narrow terms, raise rates, and in some cases withdraw from similar exposures. When the Surfside condominium collapsed in June 2021, insurers tightened their underwriting for habitational real estate even further than they had previously. More scrutiny will be given to underwriting these types of exposures and well-engineered, well-protected risks will fare better than the rest.
Cyber Liability: The increase in frequency and severity of ransomware attacks over the last two years has impacted profitability for insurers across the marketplace. As a result, carriers have taken corrective action by increasing rates, increasing self-insured retentions, reducing capacity, and carving back coverage. Carriers remain concerned about the potential for ransomware attacks and systemic events that could impact their entire portfolios.
After significant losses due to the above concerns and others, carriers continue to adjust to remain profitable. They are managing capacity, being more judicious about the limits offered, tightening underwriting requirements, raising rates, and in some cases declining renewals.
Combining these issues with the ever-increasing jury awards, aka “social inflation”, the predictive modeling that has historically been used by carriers may be, in some cases, less credible, so underwriters are looking to alternative ways to set rates. Their research and analytics have become more sophisticated and more applicable to our uncertain time, using tools such as updated, more stringent flood maps to reduce coverage where possible.
For cyber liability, risk management and prior-to-loss education has become a key focus for underwriters. They are raising awareness of the problem and refusing coverage to companies who cannot demonstrate proper cyber risk management protocols.
Higher premiums, increased deductibles, attachment points, use of co-insurance and adjusted terms and conditions driven by the prolonged hard market environment have recently attracted new capital to select insurance markets. Most notably, we are seeing this in management liability, directors & officers (D&O) and property. The new entrants have fewer legacy issues and see opportunity to enter where others may have exited or continue to raise pricing. They can therefore withstand taking on more risk.
This is creating more competition, which is beginning to have a stabilizing effect on premiums. Incumbent carriers will need to maintain underwriting discipline while attempting to retain “good business”.
In many lines of business, given the events mentioned above, the traditional admitted market structure has become stressed for those underwriters in the space. Tough risks continue to shift to the excess and surplus (E&S) lines market. Habitational Real Estate, CAT Property/Western Wildfire, Sexual Molestation Liability (SML) exposed risk and others continue to find their way to the E&S Market. This shift helps alleviate the availability and capacity issue, but the affordability aspect is still quite stressed and coverage terms can be considerably narrower.
With many commercial markets remaining hard, businesses across industries are turning to captives as an alternative risk management strategy. Within Risk Strategies, the Captives group is one of our fastest growing practices.
We have seen captives grow in popularity in other hard market periods, as businesses see them as a way to reduce their overall insurance spend and take better control of managing their risk. However, captives are not a one-year solution that an organization can enter and exit as rates fluctuate. Captives are a long-term risk management strategy that offers insureds a way to control their own destiny. While we’ve historically seen interest in captives wane when markets soften, it’s possible in these unprecedented times that captives will sustain their popularity well into the future.
Cyber and climate change concerns are unlikely to disappear or stabilize anytime soon, but we have seen hard market cycles before. We know that we will collectively emerge through ingenuity and flexibility. The future cost of risk will be driven by major predictable and unpredictable events that challenge our clients, carriers and brokers. It will also be marked by expertise, relationships, adaptation, creativity and resilience.
In the coming months, Risk Strategies experts will explore the evolving nature of risk in-depth, exploring predictions and considerations across industries. Follow along as The Future of Risk series continues.