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Understanding our current market cycle & preparing for what’s next

Donnacha Smyth, President, Global Excess Casualty


President, Global Excess Casualty

The average general liability loss ratio in 2019 was 104% -- the sixth straight year of underwriting losses, according to Conning. Persistent unprofitability was already driving firming market conditions, but the trend took off in the second half of 2019 with the explosion of large losses due to nuclear verdicts, impacting policy years from 2015 onward.

Hardening of the Excess Casualty market has been accelerating ever since, forcing carriers to refine their underwriting approach.

All told, roughly $500 million of capacity has left the market in recent years. Some legacy insurers exited the space entirely, while remaining carriers dramatically reduced limits. Where large carriers used to offer lead layers of $50 million, insureds can now find no more than $10 million. Limited capacity in turn drove pricing pressure, leading to rate increases of anywhere from 50% to 300%.

Clients had not planned for such a significant spike. Heading into 2020, filling out excess towers without blowing the budget became a tall order. Most were forced to accept lower limits, buying $150M to $200M where they need $400M, thus exposing themselves to greater risk at the top of the tower.

As the year progressed, clients, brokers and carriers alike experienced a marketplace in turmoil. No one knew how losses would take shape. And many carriers were changing their appetite. Uncertainty dominated.

How we got here, and what that could mean for the future
Examining the conditions that led to today’s persistent hard market can keep all stakeholders from repeating past mistakes, ultimately bringing stability and sustainability to Excess Casualty.

We experienced a relatively benign litigation environment between 2011 and 2015. Many carriers underestimated the impact of claim inflation and had convinced themselves that the trend was not progressing as expected. Lulled into a false sense of security, some carriers under pressure grew at the wrong part of the market cycle. The capacity, rates and terms and conditions being offered may have provided a competitive edge at the time but proved unsustainable.

There was a false sense of profitability amongst some carriers even though they were offering rate reductions year after year and chasing the price down.

Today, the litigation environment once again looks benign, but for different reasons. COVID-19-related shutdowns and business closures slashed exposure and lead to reduced claim activity. Closed courtrooms meant months without jury verdicts. But these factors are transient.

The underlying currents of socioeconomic inequality, political polarization and anti-corporate sentiment still run strong. Social inflation has not died down. Juries will still seek to punish big business, and to date there has been no meaningful tort reform to prevent recurrence of nuclear verdicts. As courts reopen, we can expect a rush of backlogged cases and rapid increase in large losses.

What does this mean for carriers, clients and brokers? If we learn from the past, it means carriers will exercise underwriting discipline and adjust rates in accordance with projected claim inflation, rather than react prematurely to the favorable loss trends of 2020. Clients and brokers likewise should prepare for continued rate increases.

Influx of entrants
New players in the E&S space do provide more options for insureds – and about $150 million of new, authorized capacity. They also add competitive pressure, which brokers can utilize to find solutions for harder-to-place risks. But new entrants also come with additional risk. Younger carriers may lack the big balance sheet needed to withstand large losses. Excess Casualty is a long-tail business; brokers going to market should be evaluating not just pricing, terms and conditions, but also longevity.

A policy represents a promise. The time to make good on that promise may not materialize until 5, 7 or 10 years after it was issued. You want to be confident that your carrier will be around to write the check. If not, that affordable policy suddenly becomes very expensive.

Clients may benefit most by using that new capacity in addition to legacy carriers, not in place of them.

Now, brokers are engaging with our underwriting teams 120 to 150 days in advance of renewal trying not necessarily to get a commitment, but to get a sense of how the market is taking shape, what sort of rate environment we’re in, and what amount of capacity we’re comfortable deploying on specific risks.

Anticipating the next market phase
In the midst of a changing environment, clients should look for two key characteristics in their excess carrier: transparency and sustainability.

As 2020 progressed and all parties adapted to the rapidly shifting environment, good communication became paramount. Brokers got more adept at early communication with underwriters, trying to glean their expectations for particular industries or risks.

Now, brokers are engaging with our underwriting teams 120 to 150 days in advance of renewal trying not necessarily to get a commitment, but to get a sense of how the market is taking shape, what sort of rate environment we’re in, and what amount of capacity we’re comfortable deploying on specific risks.

It’s critical for that proactive communication to continue to minimize the risk of unpleasant surprises. The full impact of COVID-19 may take years to play out in the marketplace. Transparency and frequent check-ins will go a long way in getting all stakeholders on the same page.

One of our keys to success has been fostering open communication via multiple access points. We have very talented underwriters spread out regionally, all empowered with authority to make decisions. Being easily accessible helps to build stronger relationships, even in our virtual communication environment.

But we also had a strong foundation to build on. AXA XL has been in the Excess Casualty space for 35 years. We’ve been through tumultuous market cycles before and have learned from our experiences –sometimes the hard way.

For example, I don’t think I will ever believe that claim inflation is not taking place. Even if business is priced adequately and exposures don’t budge an inch, rates will still need a 5% to 10% increase year over year to keep pace with rising litigation costs.

If portfolios are priced adequately and reasonable rate increases are implemented – with plenty of proactive communication – customers gain the peace of mind that their business is protected no matter what crisis unfolds next.

About the Author
Donnacha Smyth is President of Excess Casualty, Americas for AXA XL, a division of AXA. He joined XL Catlin in 2007, where he was chief excess casualty officer until 2016, when he took on another international excess casualty leadership role at a global insurer. He returned to AXA XL in 2018 and oversees global teams in the Americas. To learn more about our Excess Casualty solutions. visit our web page HERE.   

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