Looking Ahead 2020 PROPERTY & CASUALTY CONSIDERATIONS FOR THE COMING YEAR - Woodruff Sawyer
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Looking Ahead 2020 PROPERTY & CASUALTY CONSIDERATIONS FOR THE COMING YEAR
TABLE OF CONTENTS
4 Introduction: Challenging Market Conditions Ahead
6 US Insurance Market Update: What Happened?
11 Property Update: Industry Losses Are Not Driving Your Premium
19 Casualty Market Update: Managing Risk Creatively
26 Am I Good Candidate for a Loss-Sensitive Program?
31 Cyber and Errors & Omissions: Do I Need to Cover Both?
36 Environmental Liability: A Dynamic Marketplace in 2020
41 Real Estate Development Trends: Tread Cautiously in 2020
47 US Healthcare Professional Liability Update—A Market Finally in Transition?
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 3
INTRODUCTION:
CHALLENGING MARKET
CONDITIONS AHEAD
Carolyn Polikoff
Senior Vice President,
National Commercial Lines Practice Leader
415.402.6513 | cpolikoff@woodruffsawyer.com
View Bio
Most companies did not escape the tide insurance partners can create a sustainable
of rising premiums in 2019, leaving many insurance program that is relevant, no
executive teams and risk managers matter what the insurance pricing cycle may
wondering how to budget insurance costs be. In our Casualty Market Update we offer
for 2020. The common statement we hear alternative ideas to consider as you plan for
from our clients is: "Please tell me it's over." your 2020 insurance renewal. We also provide
specific advice around migrating to a loss
We have good news and bad news. The bad sensitive program.
news is that we do not expect rate relief in
the near future; but the good news is that Healthcare is one of the fastest growing
there are proactive measures insurance segments of our economy, so we've provided
buyers can take to lessen the impact of this some specific guidance to companies in
increasing rate environment. This Property & this sector. Furthermore, the construction
Casualty Looking Ahead Guide is full of tips to boom over the last several years has led to
help you plan for what lies ahead in 2020. increased insurance costs for developers,
so we've included advice on preparing for a
Starting early is a common theme you'll development project.
encounter in these pages. We know that
preparing for an insurance renewal does not Although we can't tell you the pain of
bring a lot of joy to the average insurance increasing rates will end in 2020, we assure
buyer and that can lead to procrastination. you that this is a cycle and it will pass. An
In decreasing rate environments, the experienced insurance broker will help
procrastinator can still get a good result you navigate all insurance cycles. Good
because underwriters are hungry for new preparation, effective loss control, and creative
business and eager to keep their renewals. In solutions are the elements of success in risk
increasing rate environments, underwriters management and insurance program design.
are more cautious. They focus on good loss We at Woodruff Sawyer look forward to being
control and submissions with inadequate a partner in your growth in 2020 and beyond.
information are often declined immediately.
Challenging market conditions also bring
an opportunity to control costs through
creativity. Insurance buyers who are open
to a collaborative conversation with their TABLE OF CONTENTS
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 5
US INSURANCE MARKET UPDATE:
WHAT HAPPENED?
Carolyn Polikoff
Senior Vice President,
National Commercial Lines Practice Leader
415.402.6513 | cpolikoff@woodruffsawyer.com
View Bio
The increase in rates that started slowly
in 2018 and gained momentum in 2019 Average Commercial Pricing Increased
Every Quarter in Past Year
is expected to continue into 2020. The
5.2%
question on everyone's mind is: "When will
this end?"
3.5%
In our 2019 Property & Casualty Looking
Ahead Guide for commercial lines, published 2.4%
in November 2018, we predicted that
1.5% 1.6%
overcapitalization in the insurance sector
would likely result in soft market conditions
in most parts of the industry, except for
property, auto, and cyber. Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019
Policyholder surplus—which is the capital Source: The Council of Insurance Agents & Brokers. Chart prepared by
Barclays Research.
buffer an insurance company has after it puts
aside money to pay claims—is an indicator
of insurance market capitalization, and it
continues to increase this year as it has
A Culmination of
the past several years. According to Verisk,
Costly Dynamics
policyholder surplus increased by $37.4 billion
in the first quarter of 2019. The year 2019 will likely be remembered
in the insurance industry as the year that
The following chart shows a decidedly
premiums caught up with reality. In the
upward movement in commercial lines' rates
property market, both 2017 and 2018 were
across all account sizes over the past five
two of the costliest years in terms of natural
quarters. The industry appears relatively
catastrophes, and by the end of 2018, many
healthy as measured by policyholder surplus,
were surprised that property premiums were
but rate increases seem to be accelerating
not increasing at a faster rate.
and are expected to continue doing so.
The casualty market experienced its own
reckoning in 2019 as loss trends across
multiple casualty sectors deteriorated.
Commercial auto has been problematic for
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 7
the industry for years. According to a Fitch Impact on the Insurance
Ratings report, commercial auto premiums
Buyer—Is This a Hard Market?
have increased over 31 consecutive quarters,
but insurers still face underwriting losses. The CIAB chart provided confirms what most
insurance buyers already know: Premiums
The general liability/excess casualty space is are increasing at an accelerating rate.
best characterized by the phrase "frequency However, there are additional factors other
of severity." Historically, mega verdicts would than rate increases driving up premiums.
catch the public's attention, mainly because
they did not occur often. First, reinsurance premiums are up. Most
insurers use their balance sheet to pay a
This year alone, Johnson & Johnson was certain portion of a loss; the remainder
hit with a $572 million verdict in Oklahoma of the loss is passed to the reinsurance
related to its marketing of opioids, and the market. After the 2017 natural catastrophes,
manufacturer of Roundup weed killer (now reinsurance premiums rose slightly, but most
owned by Bayer) initially faced a $2 billion insurance companies absorbed the increase.
As reinsurance premiums continued to rise in
verdict involving allegations that the product
2019, insurers began to pass these increases
causes cancer. The verdict has since been
on to buyers.
reduced to $86.7 million, but other cases
against Roundup with the same allegations Second, capacity has decreased in certain
are ongoing. sectors. Capacity is the supply of capital that
an insurer will deploy to a given product or
Finally, the combination of an increasing
sector. Several Lloyd's of London syndicates
number of securities class actions and exited the property market in early 2019.
the Cyan, Inc. v. Beaver County Employees Furthermore, several US insurers drastically
Retirement Fund decision in 2018 have pushed cut limits in property and excess casualty
directors & officers liability premiums placements. Simple economics is in play—
upward. For a more detailed discussion of decreased supply of capital leads to
the D&O market, see our 2020 D&O Looking increased prices.
Ahead Guide.
ADDITIONAL FACTORS CONTRIBUTING
TO HIGHER PREMIUMS
Rising Decreasing
Reinsurance Capacity
Premiums (supply of capital)
8
We would be remiss if we did not attempt to Our opinion is that this is an optimistic view
address the initial question we posed: Why do (from the insurers' standpoint) that ignores
premiums continue to increase if the industry basic economic principles. That's true for a
appears relatively healthy as measured by number of reasons.
policyholder surplus?
First, the insurers we spoke with believe that
To answer this question, we spoke to many rates will continue to increase in the three-to-
of our top insurer partners and read their five year time period they cite. If that occurs,
comments in their public financial filings. We it will surely attract additional capital to the
discovered that there is uniform consensus industry because a capital provider will be
among US insurers: If the trends of costly paid more for the risk they take. Insurers
catastrophes and frequent and severe casualty sometimes forget that pesky economic
losses continue, insurer balance sheets will principle of supply and demand. More supply
weaken and thus jeopardize the industry's of capital will drive down premiums.
ability to pay large losses over time.
The impact on the buyer could be insolvency Although we differ with insurers on
of weaker insurers and/or a "hard market." the prediction that this environment
Technically, one cannot consider the will continue for another three to
insurance market of 2019 "hard" because five years, 2020 is not likely to bring
the vast majority of buyers can still get the premium decreases. In fact, the two
coverage they want, albeit more expensively. remaining sectors of the commercial
In a hard market, coverage is not available. market that seemed immune to
premium increases in 2019—workers’
compensation and cyber—may be
When Will This End?
joining the increasing-rates club.
Again, we regularly ask our insurance
company partners for their opinions on when
they expect this rising premium environment Furthermore, there is already a healthy
to end. Their responses range from three to supply of capital on the balance sheets of
five years, which is likely to cause many an most US insurers. A year or two of low natural
insurance buyer to gasp. catastrophes could lead to complacency,
which is likely to lead to loosened underwriting
standards and lower premiums.
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 9
Workers' compensation premiums have been In 2020, expect to see premiums increasing
decreasing steadily over the past several across most commercial lines sectors.
years because the combined ratio—the The level of increases will be based on the
amount of losses an insurer pays out per quality of risk, i.e., good loss history and
premium dollar collected—has steadily risk management procedures will mitigate
decreased every year since 2011. Most increases. Be prepared to start your renewal
insurers have reported increased workers' process early to allow adequate time to fully
comp losses and many are forecasting the market your risk.
combined ratio to hit 100% in 2020.
Cyber is another area where trouble is
brewing. Most insurers have viewed this as
a growth product and therefore have
allocated big chunks of capital here. The
supply of capital has kept premiums down,
even in the wake of highly public breaches like
that of Equifax.
What changed in 2019 was the proliferation
of ransomware attacks, where a bad actor
threatens to release a company's information
or blocks access until a ransom is paid. That
ransom is insurable under most cyber
policies and insurers report increasing losses
in this area.
TABLE OF CONTENTS
10PROPERTY UPDATE:
INDUSTRY LOSSES ARE NOT
DRIVING YOUR PREMIUM
Casey Soares
Senior Vice President, Property Specialist
415.399.6458 | csoares@woodruffsawyer.com
View BioYes, the past two years saw the highest Hurricane Andrew in 1992, the World Trade
insured catastrophe losses on record and Center attacks in 2001, and Hurricanes
an ongoing stream of single-risk large Katrina, Rita, and Wilma in 2005 rendered
losses. And yes, carriers are increasing rates many companies insolvent or devoid of
and reducing coverage. But this is not your capital on which to write future business.
grandma's hard market.
This gave rise to the discrete "classes"
Perhaps this firming market is more akin to of companies providing much of today's
your grandma's tough love—the correction is traditional reinsurance, originally formed to
purportedly for your long-term benefit, but it provide much-needed capacity at high returns
still hurts. in those hard markets.
Until now, the cyclical nature of property Then followed a decade of below-average
pricing has been the result of market-changing catastrophe losses and steady influx of non-
events draining industry capital. It began in traditional (or "alternative") capital (see more
the reinsurance and retrocession markets and on this in our blog post).
trickled down to primary carriers.
Historical cycles of Rate-on-Line (pricing for reinsurance, premium/limit)
have been driven by market-turning loss events draining industry capital.
Source: Data from Guy Carpenter, presented by Artemis.bm
12Alternative capital drastically changed market dynamics by flooding
the industry with capacity over the last decade
Source: Aon Securities Inc.
And so it seemed the wheel had been broken, In 2017, global reinsurance capital (traditional
that the volume of capacity in the market and alternative) reached $605 billion. The
could never allow for a market-turning event. consensus among industry pundits pre-2017
was that a market-turning event would have
to be $200 billion. Then 2017–2018 losses
2017 was the highest insured catastrophe surpassed that on a combined basis, without
loss year on record, mostly due to Hurricanes
affecting the capitalization of the market.
Harvey, Irma, and Maria, and California wildfires
Despite record losses, rates remained stable
through YE 2018—confounding many of us
in the industry. For five years we reported
on unsustainable insurer practices of chasing
Source: Munich Re, III
business with double-digit rate decreases,
expanding terms, and reserve harvesting
(when insurers release funds they had set
aside to pay future losses).
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 13At the lowest point of the soft market,
Morgan Stanley estimated 30% of insurer Property results are driving carrier
earnings over the prior five years were from combined ratios well north of 100, producing
multiple years of underwriting losses
reserve harvesting alone. Still we pushed, and
the market continued to give way.
Until it didn′t.
Starting in 2017 and continuing today were
a remarkable number of severe single-risk
losses, each in the hundreds of millions, in
addition to the published natural catastrophe
industry loss figures. Each loss draws the
attention of management to see what was
being offered versus what was being charged,
shedding light on the Maserati-for-the-price-
of-a-minivan that had become commonplace
in the industry. (You're welcome.)
For property carriers across the board,
the catastrophe losses may have been the
weakening force, but the single-risk losses
delivered the knockout punch.
Source: Individual Company Results
With no foreseeable boost from investment
portfolios (mostly bonds, by regulation) and
worries of more reserve harvesting leading to This graph shows the combined ratio (loss
famine, insurers had to take the performance ratio + expense ratio) of some top property
of their businesses at face value. insurers and 100% is break-even. Some
carriers were collecting $1 and outlaying $1.30
for multiple years. When the ultimate goal for
all of us is a fulfillment of promises, insurer
solvency has to be a priority.
14A Market of Mass Disruption
In the ultra-competitive soft market,
Q1 2019 brought sweeping changes.
underwriters had to relax standards
At YE 2018, Lloyd's of London led the charge to keep and grow their books. No
by mandating syndicate plans to return sprinklers? "We can live with that."
More contingent time element?
to profitability, limiting stamp capacity for
"Ok, just show us some resiliency
some and prompting complete exits for
planning." HPR buildings in high-
others. Lloyd's controls the stock throughput
hazard cat zones? "Please, sir, I want
market, which is digging itself out of a worse
some more."
financial position than standard property, and
renewals reflect this with increases from 20%
up to 200%.
As carriers execute plans to ensure solvency,
AIG replaced its global property leadership and they willingly lose business that would
implemented a 40% RIF (reduction in force) threaten it. Carriers are reducing participation
of engineering staff. FM Global/AFM began across their books—single-carrier placements
an overhaul of its book of business to meet may need two to three participants to renew
strict underwriting standards. Zurich, AXA/XL, the same program, and long-standing shared-
Swiss RE Group, and others made the harsh and-layered placements may need additional
adjustments on price and coverage needed to or replacement markets.
reflect true exposures across their books and
Even so, carriers are beating budget with the
ensure preparedness for future losses.
increases achieved on the fewer accounts
Adding to the disruption is discontinuity that did renew at their terms. Many hit their
among client-broker-underwriter teams, budgeted written premium figures in the first
due to significant personnel turnover from part of 2019, leaving little incentive to write
broker consolidation and underwriters anything else unless it promises some serious
disenfranchised by new corporate mandates. return on capital.
Further, the industry's aging workforce has
positioned less experienced professionals at
BOTTOM LINE
Your account will be underwritten
the helm in this perfect storm. We felt those
anew and the market will support
effects managing through the catastrophe corrections towards actuarially
losses of 2017, and they're even more sound rates and coverage.
pronounced now.
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 15Every Rose Has Its Thorn others. Canvassing the market for alternatives
is a must, though working with incumbents
When industry losses are behind market usually produces the most palatable result.
turns, rate increases feel arbitrarily punitive.
Thankfully, this is a horse of a different And yes, those improvements garnered
color. Renewal outcomes are extremely over years of positive renewals are toggles
individualized from insured to insured. Every that could offset an increasing premium.
account has its challenges, and the degrees But making those decisions only reinforces
of difficulty will determine approach and the need to truly know your risk and risk
outcome. By knowing your risk, you take tolerances, which goes far beyond output
control of your renewal. from computer models.
Each challenge has a commensurate course
of action, but some are more immediate than
Renewal outcomes are extremely individualized, depending
Renewal on
outcomes are extremely individualized, depending on the specific challenges of the account.
the specific challenges of the account
Renewal outcomes are extremely individualized, depending
on the specific challenges of the account
Rate Increases
Coverage Reductions: Limits,
Deductibles, Breadth
0 20 40 60 80 100 Low Coverage Reductions: Limits,High
Rate Increases Deductibles, Breadth
1
0 20 40 60 80 100 Low High
2
1
3
2
4
3
5
4
6
5
7
6
7 Note: For accounts with
1 Underreporting: ValuesExamples
to reflect current replacement costs 5
of Specific Challenges
have not increased No demonstrated commitment to carrier
recommendations for risk improvement
multiple challenges,
rate increases
Note: and with
For accounts
21 65
coverage
multiplereductions
challenges,
Underreporting:
Unconvincing Values
or lack have not increased
of Business No demonstrated commitment to carrier
to reflect current replacement costs Loss ratios over 100%for
recommendations in risk
last improvement
3 years are additive
rate increases and
Interruption modeling
but not necessarily
coverage 1:1
reductions
32 76
Unconvincing or lack of Business Difficult class:over
Loss ratios Ex. hazardous
100% in last 3 years are additive
High Maximummodeling
Interruption Foreseeable Loss (MFLs): manufacturing operations or frame
Inadequate protections for key locations construction real estate
but not necessarily 1:1
43 7
Difficult class: Ex. hazardous
High Maximum Foreseeable Loss (MFLs): manufacturing operations or frame Note: For accounts with
Inadequatecatastrophe
High-hazard protectionsexposure
for key locations construction real estate multiple challenges, rate
4
increases and coverage
High-hazard catastrophe exposure reductions are additive
but not necessarily 1:1
16So, What Did You Do on Your Looking Ahead
Soft Market Break?
We expect disciplined risk selection to
Some light-hearted commiserating with continue and prolong the sellers' market
underwriters one evening led to the characterized by increasing rates and
question, "For whom is this market most contracting coverage.
difficult, underwriter or broker?" to which all
the underwriters answered, "Definitely the Carriers will continue to refine appetites
broker!" We've since seen enough renewals and underwriting guidelines as leadership
in this environment to know it's actually evaluates the changes achieved by YE 2019.
answer C: client.
If your renewal is underway, this is the first
What did we do with the savings in both you're experiencing this market and results
money and time garnered over a decade will follow those outlined earlier. The million-
of soft market renewals? Did we address dollar question is whether accounts gearing
existing challenges via risk engineering, up for their second renewal, in March or later,
employee training, supply chain resiliency, will receive increases of similar magnitude a
business continuity plans, data capture, second time.
submission quality, and incumbent and
prospective carrier meetings? We predict the answer lies within measures
you've taken since that first wake-up call.
Clients ultimately make the tough calls on Renewals to date have focused on corrections
where to spend those premium dollars. Let's for pre-existing rate and coverage, but going
not forget the simultaneous hard market in forward there will be a more pronounced
directors and officers insurance, the growing flight to quality.
need for cyber, and other lines with their own
challenges requiring attention and premium. Accounts able to show efforts made to
address underwriter concerns will face
additional increases, but roughly 50% of the
Clients are making enterprise first, with a floor of 10% increase overall.
decisions and property is one piece Accounts showing up unprepared for their
of that puzzle. It may be the most second renewal will face another round of
labor-intensive line, but it is the harsh outcomes, and worse if they need to
most controllable. replace carriers.
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 17Fallout from broker consolidation and
restructuring at key carriers will prompt
personnel movement across the industry
for the foreseeable future, prolonging the
disruption and adding to challenging renewals.
Specific trends in coverage changes include
increasing deductibles for accounts with
heavy Tier 1 wind, tornado/hail, and wildfire,
and reduced limits for flood and contingent
time element.
"It's a Relationship Business."
A closing thought on our industry adage: It is
truest in difficult losses and difficult markets.
Some lost sight of this in the soft market,
and it quickly went from cliché to karma
catalyst. Insurer capacity is not the limiting
commodity, but insurer attention is. With
submission flows up 50%-plus, underwriters
and management devote their efforts to
respected, collaborative partners—brokers
and clients alike.
We wish you the hard-fought satisfaction of
weathering this "hard" market in 2020.
TABLE OF CONTENTS
18CASUALTY MARKET UPDATE:
MANAGING RISK
CREATIVELY
Evan Hessel
Casualty Practice Leader, Property & Casualty
949.435.7387 | ehessel@woodruffsawyer.com
View BioWith great challenges come great policies every year since 2010, estimates SNL
opportunities. The broad hardening of the Financial. Insurers are forecast to pay out
market that casualty insurance experienced $1.12 in claims for every $1.00 of premium
over 2019 has stressed corporate insurance collected in the 2018 policy year.
budgets and jeopardized renewal outcomes
It is difficult to pinpoint the factors behind
for even the most prepared policyholders.
the rise in the number of auto liability claims,
The market shift also presents an
but analysts cite the increased number of
unprecedented opportunity for creative risk
highway miles logged by US commercial and
managers in 2020. The time to reimagine
personal drivers (as a result of a generally
insurance and risk financing programs for the
strong economy) as well as distracted driving
future is now.
behaviors as key factors in boosting the
In this article, I will detail the economic frequency of auto accidents.
forces driving current casualty underwriting
While the increased number of auto accidents
dynamics and dig into key strategies for
is concerning, it is the recent boom in claims
building a sustainable, cost-efficient
severity that has shaken underwriters and
insurance program.
policyholders. Between 2016 and 2019, the
number of catastrophic auto liability claims
Casualty Market Loss Trends (characterized as having a reported cost of
$15 million or greater) has increased 87%,
"Frequency of severity" is the term
according to data collected by Advisen.
underwriters and brokers use to describe
the casualty insurance industry's recent
loss experience. Rather than an increase
in the number of claims or an increase
in the average size of claims, the current
environment is marked by an unprecedented
number of massive claims.
Auto liability is the line of coverage (rather
than general/products liability or workers'
compensation) that has predominantly cut
into insurers' profitability. The US insurance
industry has lost money on commercial auto
20Catastrophic Auto Liability Claim Counts & Settlements
“Catastrophic” equates to a cost of $15 million or greater
The number of catastrophic auto liability claims has
increased 87% since 2016.
Source: Advisen
Due to the confidential nature of settlements, Finally, while auto liability claims have garnered
it is difficult to obtain facts and circumstances an outsized portion of headlines lately, general
for claims and ascertain a pattern across cases. liability loss results have also deteriorated.
Still, underwriting executives and insurance The industry combined ratio has run over
industry analysts point to two recurring 100% since 2014, according to the Conning
themes in liability litigation: an empowered, Insurance Segment Report. Medical cost
well-financed plaintiff's bar and juries that are inflation, an increase in allegations of traumatic
increasingly willing to punish corporations with brain injuries, investor litigation funding, and
huge punitive damages judgments. In 2020, increased trial verdicts have dragged down
look for the insurance industry to intensify insurer profitability for general liability, explains
lobbying efforts in support of tort liability caps Liberty Mutual.
for personal injury cases (along the lines of the
non-economic damage caps that many states
have for medical malpractice claims).
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 21Market Response: Decreased Making the hunt for aggressively priced
excess insurance capacity even tougher is
Capacity and Increased Rates
the wave of insurer consolidation over the
The casualty market's response to the past several years (for example, AXA and XL,
explosion of huge liability claims has been Liberty Mutual and Ironshore, Hartford and
a new focus on underwriting discipline and Navigators, among others).
rate adequacy.
With fewer insurers competing for
Whereas non-auto liability insurance lines business and a terrifying loss trend forcing
(such as umbrella/excess liability and general/ underwriters to strengthen their pricing
products liability) have experienced single- discipline, the job of a corporate insurance
digit average rate reductions over the past few manager building a cost-effective liability
years, insurers are seeking to hold rates flat program has become incredibly stressful.
for general liability (GL) coverage and obtain
modest rate increases for excess placements.
Creative Insurance Program
Underwriters have generally succeeded Design in a Hardening Liability
in their efforts to bump up rates. Among Market
participants in the Council of Insurance
Agents & Brokers' Commercial Property/ The current underwriting environment is
Casualty Market Report Q2 2019, 73% dangerous for insurance buyers who want
of policyholders experienced umbrella to maintain the status quo and rollover
rate increases, with 20% of respondents liability renewals using the same terms and
experiencing rate increases of 10%. conditions as in prior years. For creative
risk managers, the current market presents
Another challenging dynamic is that
a great opportunity for building insurance
underwriters are almost universally seeking
programs that can withstand large losses and
to reduce their capacity for umbrella policies.
insurance market gyrations.
(According to the CIAB study, some 53% of
policyholders had their umbrella limits cut at
their last renewal.)
Insurers’ newfound discipline in reducing their exposure to severe liability claims can best
be summed up in a cliché uttered by brokers and clients when discussing their lead umbrella
policies in 2019: “$10 million is the new $25 million.”
22Comprehensive Actuarial Increase Primary Retentions,
Evaluation: Initiate Renewal Primary Limits, and Umbrella
Planning Early Attachments
The first step towards building a For many corporations, liability program
new insurance program is to have a structures have remained the same for
comprehensive understanding of your own decades: Typically a $1 million or $2 million
loss experience, your peer group's loss primary liability (auto liability and general
histories, and underwriting performance for liability) limit with the umbrella attaching
the insurance industry in general. above that primary layer.
It is critical to conduct a detailed actuarial Given the increasing average severity
analysis forecasting losses at various of liability claims, particularly for auto
retention levels and back-test the costs and accidents, few insurers are willing to provide
benefits of different program structures. This aggressively priced umbrella policies at the
analysis should also quantify your firm's total historical attachments.
exposure to potential claims cost volatility
(as in, the total potential claims cost at worse A sensible alternative structure would involve
than expected outcomes for the entire increasing the deductible or self-insured
insurance program). retentions on the primary liability policies
to achieve premium savings on the primary
Additionally, insurance program managers
program. The savings could be deployed
should collaborate with their corporate
to fund the purchase of increased primary
finance team colleagues to evaluate different
general liability and auto liability limits. The
retention and limit structures alongside the
increased primary limits allow for a higher
corporation's capital structure, operational
umbrella attachment, which will increase
strategy, and tax structure.
insurer competition for the lead umbrella and
minimize premiums.
Understand your company’s loss experience
By absorbing more of the "working" layers of
Understand your peer group’s loss histories risk and relying less on the external insurance
Understand the current state of the general market, clients can make their programs
insurance market more sustainable and capable of weathering
market pricing fluctuations and large claims.
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 23Of course, clients deploying this strategy Review Unconventional
must be confident they have the safety and
Insurance Arrangements
claims management controls in place to take
on additional retained risk. Several global insurers have created divisions
focused on "alternative risk" or "integrated
risk" underwriting. Among the products
Slice the Umbrella/Excess
offered by these groups are excess insurance
Layers programs that combine uncorrelated
As previously discussed, insurers are risks (such as excess auto/general liability,
increasingly uncomfortable providing a full property, management liability, and cyber)
$25 million umbrella liability policy. Embrace into single blocks of coverage with annual or
this market reality and break the first $25 multi-year aggregate limits.
million into different layer configurations
By combining multiple unrelated coverages
(such as five layers of $5 million each) as a
into a single contract over three years, clients
means for attracting the most aggressive
can achieve reduced overall pricing as well
insurers to the best layer for their
as cost certainty beyond a single policy
underwriting model.
year. A cautionary word, however: These
program structures often incorporate some
Consider Captives additional element of loss sensitivity and
require considerable underwriting and pricing
Captives are insurance company subsidiaries
efforts. It is recommended that clients begin
formed to underwrite the risks of their
designing and vetting these arrangements
parent company (and in some cases, the
earlier in the renewal cycle than with
risks of third parties). While a captive is not
conventional programs.
required to increase retained risk—and to
reduce a client's reliance on the commercial
insurance market—they can facilitate certain
useful underwriting strategies otherwise A CAUTIONARY WORD ON
unavailable. Examples of potentially useful ALTERNATIVE PROGRAM
captive strategies include using the captive STRUCTURES:
These structures may have
to take on risk in non-traditional structures
additional loss sensitivities. Begin
(such as quota sharing with an external
your design and evaluation of
insurer) and engaging reinsurers unwilling to
them earlier than you would with
write direct insurance policies to obtain hard- conventional programs.
to-place coverage.
24A Final Word on Punitive Damages Only 23 states allow for punitive damages claims to be legally covered by an insurance policy. The other states, including California, New York, and Florida, have statutes preventing insurers from covering punitive damages judgments assessed by courts against policyholders, regardless of policy language. These jurisdictional variances have the potential to create unexpected coverage gaps. Given the massive increases in the number of claims involving punitive damages awards, clients should review affirmative punitive damages coverage options with their broker. Many insurers' Bermuda subsidiaries can provide punitive wrap policies that provide for affirmative punitive coverage. While punitive wraps do add new cost items to insurance programs, they are increasingly valuable. In short, today's market is one that begs for a reimagining of insurance and risk financing programs. Risk managers need to be comfortable looking at alternative program structures that will be capable of withstanding whatever instability 2020 may bring. TABLE OF CONTENTS LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 25
AM I GOOD CANDIDATE
FOR A LOSS-SENSITIVE
PROGRAM?
Matthew Parsons
Account Executive, Construction
415.399.6348 | mparsons@woodruffsawyer.com
View BioAs we look ahead to 2020, insurance retention amount. The carrier will then pay
buyers may want to consider alternatives for all loss amounts that exceed the
to their insurance financing and risk retention amount.
management approach by making use
of loss sensitive programs. For the right
The insuring agreements, coverage
customer, these programs can help mitigate
terms, and exclusions typically
rate fluctuations, improve risk management
remain the same, regardless of
culture, and reduce costs. whether you choose a guaranteed
cost or loss sensitive program.
As your business grows, a risk
What is a Loss-Sensitive
versus reward analysis should be
Program? conducted to determine which
program is right for your firm.
Traditional or guaranteed-cost insurance is
"first dollar" insurance, where the insured
pays a fixed cost in the form of a premium
and the insurance carrier pays for all What Are My Options? Four
claims and administrative costs thereafter Types of Loss Sensitive
(beginning at "first" dollar). A loss sensitive Programs
insurance program is a plan where the
insurance cost will vary based upon the
1. Large Deductible Plans
insured's own loss experience.
These are most commonly used for a loss
For organizations with favorable loss sensitive plan where the insured pays
experiences, a loss sensitive program a reduced premium in exchange for a
provides an opportunity for significant large deductible. The insurer pays for all
premium savings and lower total cost of risk. claims within the deductible and seeks
But with that comes a risk of higher costs if reimbursement from the insured for losses
the experience is worse than expected. within the deductible plus claims-handling
fees. Collateral is used by the insurer as
In a loss sensitive program, the insured will
security for the unpaid losses.
pay a discounted fixed premium amount
in exchange for a higher retention, and will
be responsible for all losses up to a certain
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 272. Retrospective Rating Plans insured retention. If the insured cannot or will
This is a formulaic approach to loss sensitive not meet their financial responsibility to pay
programs, similar to a large deductible the claim, the excess carrier is not expected
program, except in addition to the premium to pay the claims on a primary or first dollar
payment at inception, the insured will also basis. The insurer has no responsibility to pay
pay the insurer for the expected loss amount any claims until the SIR has been satisfied by
within the retention. the insured.
After the policy term, usually six months In an excess over SIR plan, there is no
after expiration, the premium and losses are collateral requirement. For workers’
adjusted based on actual experience, with compensations, because of the significant
excess loss funding returned to the insured. financial responsibility for all claims,
Adjustments then take place every 12 months companies are required to be approved by
until a "close out date." Some programs can the state as a "qualified self insurer." General
be closed as early as five years but the insurer liability is not a state-required coverage,
may leave a retro program open longer if so there isn't formal qualification for this
there are open claims. coverage. Carriers are reluctant to offer
excess over SIR plans and reserve these for
the most financially stable companies with
3. Excess Over Self-Insured Retention Plans
sophisticated claims-handling practices.
Sophisticated risk management and
insurance buyers are potential candidates
4. Captives
for excess over self-insured retentions (SIR).
Excess over SIR plans are very similar to In its simplest form, a captive is an insurance
large deductible plans given that the insurer company set up by the insureds themselves
provides coverage over the selected loss level for financing the risks of its owners and
of retention by the insured. participants. For more information on
captives, please see the Woodruff Sawyer
However, contrary to a deductible plan, where 2019 P&C Looking Ahead Guide for an article
the insurer pays for the claims and seeks on captives by Chris Kakel.
reimbursement within the retention, an excess
over SIR plan means the insured must fully pay
for the claims and seek reimbursement from
the carrier for the amount above the self-
28Factors That Determine a characteristics are imperative for loss
sensitive candidates since your company now
Good Loss Sensitive Candidate
has "skin in the game" and is paying part or
Before graduating your insurance program all of a claim (up to the retention).
from guaranteed cost to loss sensitive, assess
the following four areas: Predictable Loss History
Losses are not predictable, hence the reason
Premium Size for insurance. However, if your company
Loss sensitive programs are predicated on tracks claim frequency and severity, past
saving insureds the fixed dollar costs of claims history can be an excellent predictor of
guaranteed-cost programs in exchange for future loss exposure.
larger retentions. In order to be a candidate
for a loss sensitive program, a prerequisite is
to have enough guaranteed-cost premium to By working with your broker to
make a loss sensitive program feasible. understand trends and volatility,
you may discover that you can
Many insurance carriers have specific predict an annual average range
minimum premiums in order to be for expected losses with a relative
considered, but as a general rule, $350,000 degree of certainty.
of premium or more per line of business
(guaranteed-cost basis) could make a loss
sensitive option feasible from the carrier's This is extremely important in evaluating
perspective. A solid premium base allows the the expected total cost of risk (discounted
carrier to offer a material premium discount premiums for taking large retentions plus
to offset the retention of the insured. expected losses) and comparing them to your
guaranteed cost premium.
Company Culture and Sophistication of
Risk Management
Loss sensitive programs are built on the
concept of incentivizing good behavior, safe
work practices, and a proactive approach
to risk management and claims. These
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 29Financial Stability • Taxes: There are tax implications to
If you are entering into a loss-sensitive participating in a loss-sensitive plan. Under
agreement with a carrier, this can have a long- both guaranteed-cost plans and loss
term impact on your company's financials. sensitive plans, premiums are deductible
It is important to understand the financial in the year they are paid. So, with a loss
position of your company and the impact a sensitive program you will pay less in
loss sensitive program can have on cash flow, premium due to the retention credit. Losses
credit lines, and taxes. paid within the retention are only tax
deductible when paid.
• Cash flow: Loss sensitive programs can
Determining whether your company is a good
offer a cash flow advantage because your
candidate for a loss sensitive option requires
initial premium is lower due to the retention
working with your broker to honestly evaluate
credit and the losses are paid out slowly
your firm's approach to risk management,
over time.
your appetite for risk, and your financial
• Credit risk: In large deductible programs, stability. Many insureds graduate from
the carrier will pay all losses and then guaranteed-cost options to loss sensitive
seek reimbursement for losses within options with the mindset of retaining risk
the retention, therefore creating a credit and reducing insurance costs through a
risk for the carriers. Due to this credit performance-driven risk management
risk, carriers will require some form of culture, all the while staying within a
security or collateral for the risk of not comfortable range of risk tolerance.
being reimbursed. As you renew your loss
sensitive program, the collateral position
will grow, but some credit may be applied
to the previous years' collateral position.
Carriers base their collateral decision on the
financial stability of your company and your
loss history.
TABLE OF CONTENTS
30CYBER AND ERRORS & OMISSIONS:
DO I NEED TO COVER BOTH?
Matthew Gauen
Senior Vice President, Property & Casualty
949.435.7357 | mgauen@woodruffsawyer.com
View BioThe terms "cyber" and "errors and security failure (virus/malware) and system
omissions" (E&O) are frequently used, failure (failed upgrade/patch or human error).
but often conflated. Going into 2020, it's
Cyber Liability: Media (third party) protects
more important than ever to understand the
difference between cyber liability and E&O, you from claims that you infringed someone
the intent of each coverage, and the circular else’s intellectual property (other than patent)
nature that can occur in an actual claim, not and advertising and personal injury (commonly
only for your own understanding, but to be excluded under a general liability policy for
able to explain these nuances to the board. companies that have an online presence).
The C-Suite has taken notice of the Errors and Omissions (third party) is
inescapable cyber threats companies face. separate from cyber liability coverage, and
Hearing about massive breaches or extortion protects from financial loss due to failure of
attacks will often draw their immediate your product/service to perform as designed.
attention. It is essential to know how to
address these concerns and make sure your Think of the above as broad coverage grants.
organization is prepared. It is equally, if not more, important to capture
what these policies don't cover. Typically,
there is no coverage for:
Cyber and E&O Coverage
Terms Defined • False/deceptive advertising
Let's make things clear by defining the terms • Antitrust/unfair trade
and understanding the intent of each coverage.
• Trade secrets
Cyber Liability: Network Security &
• Patent infringement
Privacy (first and third party) protects
against unauthorized access, transmission of • Product recall
a virus or malicious code, theft/destruction of
• License fees/royalties
data, cyber extortion, or exposing Personally
Identifiable Information (PII) or Personal • Lost value of own IP
Health Information (PHI).
• Loss of future profits
Cyber Liability: Network Business
• Business interruption caused by a
Interruption (first party) protects your
utility/ISP failure
company from an income loss due to a
32Although not all companies have an E&O as awareness of cyber risk increases. It is
exposure, all companies do have cyber recommended that organizations utilize both
liability exposure. There's an adage to internal and external information technology
describe the pervasiveness of cyber threats: services to manage a network.
companies fall into two categories: those that
have had a security breach and those that Cyber threats that are gaining momentum
don't know they've had a security breach.
Are your employees trained on cyber
security issues? Does it include:
Password management?
STILL HAVE QUESTIONS? Public wifi use?
Check out our post, Cyber Social engineering?
Insurance 101: What Does
Cyber Insurance Cover?
include cryptomining (hijacking computing
processing power) and ransomware attacks
And if you want to know how Woodruff Sawyer (targeted attacks seeking high ransom sums
can help you manage your cyber liability, in exchange for unlocking computer systems).
explore our cyber services, beyond insurance.
The message is clear: Place a higher value
on security over convenience and on "doing
Cyber Crimes Trends to Watch things safely" versus doing them quickly.
for 2020
Reports from various watchdogs indicate Common Board-Level Cyber
financial loss to organizations is on the
Do you have an incident response plan?
rise due to cyber crime. According to IBM's
Has it been tested?
Ponemon Institute's 2018 Cost of a Data Have you identified vendors to assist with
Breach study, the cost of the average data cyber security incident?
breach to a US company is a whopping $7.91
million, and the average time it takes to
identify a data breach is 196 days.
The combined impact of human error and
targeted phishing campaigns mean that
more organizations are being affected even
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 33Questions the financial loss to your customer, i.e., their
cyber policy would seek reimbursement for
In the spirit of being prepared, the following their expenses from your E&O.
are six areas of concern we see most often:
Which Would Respond—Cyber or E&O?
States require employers to comply
There is nothing like a claim to prompt an
with notification laws whenever
understanding of how the coverage(s) work.
there has been a cyber security
The following scenarios are designed to breach. Clients can manage that on
identify what coverage would respond and their own or, if they have a cyber
illustrate what types of organizations might policy, the carrier will do it for them
need coverage for similar risks. once they learn which state(s) the
client had customers or employees.
In the following examples, we'll use a fictional
This is a major benefit of having
software company whose software product cyber coverage.
is a platform for doctors' offices, hospitals,
and clinics. They employ 1,000 employees
and often source hardware as part of the
software sale. Scenario 2: The software company's
systems are compromised and employee
Scenario 1: A customer's systems are
and customer data is exposed.
compromised and their employee and
customer data is exposed. Claim: Again, the owner of the data (in
this scenario, the software company) is
Claim: The owner of the data (in this case,
legally responsible for notifying all exposed
the software company's customer) is legally
employees and customers, which is covered
obligated to notify all exposed employees and
by their cyber liability policy. However, if it is
customers. They would need cyber liability
discovered that a third-party's product was
coverage to cover the expense of notification
the cause, then the company's cyber liability
and to comply with state notification
carrier would seek reimbursement from
requirements. However, if the software is
their E&O.
deemed the "weak link" and the cause of
the breach, you would need E&O to cover
34Scenario 3: The software company Together, this data allows brokers to develop
sourced hardware for a customer. The an incident cost estimate. The last step is
company modified that hardware to work to determine your company and board's
with its software and there was a glitch tolerance for risk. These all factor into the
limit you choose and the retention/co-
(the software company's fault), causing
insurance you are willing to accept.
a clinic to shut down and forcing all
potential patients to visit other clinics or a
nearby hospital. A Board-Level Concern
Claim: The software company would need Cyber liability for security and errors and
E&O for the financial loss to its customer omissions has grown to be a board-level
(lost revenue due to patients having to be concern. While it is the board's job to ask
redirected) as a result of the product's failure about cyber coverage, it's management's
to perform. job to know. To be sure, a good defense is
the best offense when it comes to security.
Understanding the circular nature of a claim
BE PREPARED determines who is legally responsible for
with the Woodruff Sawyer Cyber
notification, and is critical to determining
Liability Insurance Buying Guide
which coverage(s) are necessary. Know your
business, model your exposures, understand
contractual obligations, and determine an
How Much Limit Do You Need for appropriate limit based on risk tolerance.
Cyber Coverage? Now that you're prepared, put this topic on
There are several tools available to model the agenda as a discussion point at your next
a cyber event and they all require data. board meeting.
Modeling a limit involves translating the
number and type of individual customer
records at risk, location of the data,
protection, use of outside vendors (payment
processors, cloud providers, and the
contractual limits of liability with each), and
lost profit estimates, should your organization
be associated with a security incident or an TABLE OF CONTENTS
error or omission.
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 35ENVIRONMENTAL LIABILITY:
A DYNAMIC MARKETPLACE
IN 2020
Parker Bunbury
Vice President, Construction
206.876.5383 | pbunbury@woodruffsawyer.com
View BioLooking ahead to 2020, there are a where we have seen a significant reduction
number of trends to keep an eye on in of market appetite and the addition of higher
the environmental liability sector. The deductibles, or "per door" deductibles.
environmental liability marketplace remains
Quite the opposite is true for properties with
dynamic with the vast majority of coverage
complex life histories or businesses looking
still being written on surplus lines paper.
for longer policy terms (seven to 10-years),
This allows for a tremendous amount of
which are common in transactional deals.
product customization, but also confuses
The appetite remains extremely small, but
clients with the lack of standardized forms
meaningful coverage is still available.
and endorsements.
We cannot stress enough that meaningful
It is common for businesses to obtain the
coverage is available. Many businesses fail
wrong coverage, so it's prudent to work with
to obtain environmental coverage for their
a knowledgeable insurance broker when
unique exposures and liabilities. It requires
purchasing environmental coverage. Each
intensive underwriting, recent data, and
market has its own unique coverage forms
property information (Phase 1, Phase 2,
and all coverage terms are fully negotiable.
testing and/or monitoring results, no further
It's important to know that subtle differences
action letters, remedial action plans, etc.)
in policy term language such as "sudden and
and working with an environmental specialist
accidental" rather than "sudden and gradual"
to obtain meaningful coverage terms and
significantly impact coverage terms. With that
reasonable pricing.
in mind, let's discuss what we are seeing with
some of the environmental products.
Contractors' Pollution Liability
Pollution Legal Liability (PLL) (CPL)
Market capacity and appetite remain strong The marketplace for contractors' pollution
for premises pollution legal liability (PLL) liability (CPL) coverage remains strong with
insurance, specifically for new conditions coverage terms continuing to broaden;
coverage on one to five-year policy terms for most markets are now offering incidental
properties with clean life histories. For now at professional coverage on all of their CPL
least, mold coverage is still widely available, policies. The market capacity is large and
with the exception of hospitality/hotel risks pricing is extremely competitive. It is worth
considering whether a practice policy or a
LOOKING AHEAD 2020 | WOODRUFF-SAWYER & CO. 37project policy make the most sense, and also If you are a tenant or lessee, the important
worth noting that many carriers will offer a thing is to avoid purchasing coverage that
per project aggregate on practice policies. only protects your landlord or lender. There
is meaningful coverage that will also comply
with your contractual obligation. We would
UNDERGROUND STORAGE typically recommend a PLL product to our
TANKS (UST) clients versus a secured creditor/lender
We continue to see businesses liability policy that only protects the lender,
have compliance issues with their for example.
underground storage tanks (UST) and
recommend reading, "The Problem On the flip side, if you are a lender or a
with Storage Tanks: What you Need landlord, in a perfect world you would have
to Know to Own or Operate."
a PLL or secured creditor policy for your
liability, and your tenant or lessee would have
a PLL policy for their operations.
Environmental Liability For quick clarification: A secured creditor
Coverage for Lessees and policy does one of two things in the event of a
Lenders default resulting from an environmental loss.
It will either pay off the remaining balance or
Lease and lender requirements for
pay to clean up the property, whichever costs
environmental liability coverage are
less. We all know that perfect world scenarios
continuing to trend and the frequency has
don't occur frequently and there are other
increased significantly. We believe this is due
options to consider.
to the nature of environmental claims, which
are typically very severe and costly when Require your tenant or lessee to carry PLL
they occur. coverage with a limit and deductible that
you feel adequately protects the asset in the
Lenders and landlords are ultimately looking event of an environmental claim. One million
to protect themselves and their assets dollars does not go very far with a significant
through the policies that tenants and lessees environmental claim given that legal
are required to carry. If your organization has expenses can typically run high, so you might
not come across this yet, you likely will in the consider $2 million or more depending on the
near future. unique circumstances of the property and
lessee. You should also require to be listed as
an additional insured.
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