Tag Archives: hard market

State of the Insurance Marketplace

The insurance marketplace has been changing rapidly, with the economy having a significant impact on both carriers and businesses, including employers, public entities and the middle market. So, what are the implications for the industry? And what risks should organizations be prepared for?

At the recent Out Front Ideas with Kimberly and Mark virtual conference, Elevate, an executive panel discussed the state of the commercial insurance marketplace across multiple lines of coverage and their outlook for the future. Panelists included:

  • Cynthia Beveridge – president, AON Broking
  • Patrick Gallagher – CEO, GGB-Americas, Gallagher
  • John Glomb – CEO, Philadelphia Insurance
  • Mark Wilhelm – chairman & CEO, Safety National

Economic Impact

The combined impact of an aging workforce and the pandemic in the insurance industry is causing significant challenges in recruiting and retaining talent. COVID-19 accelerated retirements with the inherent risks it created for baby boomers in a physical workplace. Beyond just retirements, all industries feel the effects of the Great Resignation due to employees questioning their career choices and priorities, seeking more money, flexibility and happiness. The shortage of trained talent has meant overhauling previously successful recruiting efforts. With talent requirements unrelenting, tactics like higher offers, new training and development and incentives to draft a much younger workforce have all been employed. 

Looming economic uncertainties have left employers realigning their discretionary spending on insurance purchasing due to higher premiums across the market. Employers are also facing their own issues with staff shortages across the U.S., leaving many to rethink their operational security, cash flow and real estate. Government and insurance regulations, model improvements and consolidations are all considerations in how these businesses will continue to stay profitable.

The pandemic has forced carriers to reconsider their customer-focused ease of use by encouraging smaller insureds to carry cash reserves, ensuring access to lines of credit and offering flexibility in billing plans. Displaying this empathy throughout uncertain times builds trust and may even lead to a longer-term relationship. 

See also: The Evolution of Marketplaces

Insurance Marketplace

Prior to the effects of COVID-19, the industry was looking at a standard hard market with a spike in premium increases, but the pandemic moderated the rates and premiums that carriers needed. Typically, corrective actions at the carrier level, including growth and repricing, would lead to a softer market. However, more accessible data has provided insight into inflation, interest rates and industry demographics, making carriers more selective, leading to a fluctuating market. Carriers with specialty niches can use this data to provide a truly customizable experience that clients expect.

With the exception of cyber and E&O, rate increases are decelerating, showing signs of equilibrium. Now that there is more demand for valuable return on investing, carriers are reviewing the profitability within their books of business and looking for opportunistic strategies. Clients are demanding more collaboration and solutions to their risks, not just an insurance product making alternative risk mechanisms, like captives or different deductibles, more popular. Contract wording and certainty will continue to be a necessity to clarify coverage for all stakeholders.

As the courts reopen, carriers are preparing for lawsuits to abound. The rise of litigation funding, social inflation and the effects of COVID-19 will continue to create major challenges for employers. Rising medical costs could increase workers’ compensation rates, creating uncertainty for underwriters and actuaries trying to set rates and predict profitability. The severity of claims and advances in medical technology could also drive rate increases. 

Emerging Issues

The challenges presented by cyber policies create an opportunity for new solutions, especially with ransomware on the rise. New solutions for supply chain clients, like aggregation and vendor management, are also in demand. Environment, social and governance (ESG) principles have become a key point of discussion within the industry and beyond as climate change risks continue. Additionally, addressing the underserved and the gaps in coverage through better access to capital have required the industry to rethink these solutions.

High-profile sexual abuse cases have resulted in states introducing reviver laws, allowing the opportunity for victims to reopen cases where the statute of limitations had been exhausted. These laws have created pressure on the pricing for abuse coverage, whether the industry is carrying appropriate reserves for those losses and if future reinsurance will be available. 

See also: The Perils of the Purchasing Process

COVID-19 continues to pose a great risk, with death claims still occurring and additional presumption laws being created. New legislation around vaccine mandates is also creating an increased responsibility for the industry as employees consider litigation. Additionally, public entities face risks from sexual abuse, police excess of force and cyber immunities under attack. Other lines of business, including business interruption, event cancellation, cyber, E&O and D&O, are contending with the risks of increased tort reform. 

To watch the recording of this Out Front Ideas virtual conference session, click here.

10 Ways to Prepare for the Hard Market

When we think about how to prepare for a hard market, we immediately think of our end customers – the policyholders paying the premiums. While it’s true that we need to prepare them, the first step in doing so involves comprehensive training of our teams. It’s easy to forget that many of our employees have never lived through a hard market. They don’t know just how painful it’s going to be … for them and their customers.

Getting employees prepared and their messaging fully on point is like training for a battle. It requires conditioning, endurance and a tough dose of reality. Here are my top 10 tips:

  1. Name the Training. When you put a name on something, you place a stake in the ground. People know it matters, and it’s going to involve a process. This isn’t a one-and-done. It counts. Call it whatever you want – Hard Market Bootcamp, Rate & Capacity Awareness or 2021 Reality Check – just give it a title and make it official.
  2. Plan a Kickoff. Get everyone in your company on a call and introduce the topic. Show rate trends for your lines of business and have agents give firsthand accounts of situations they’re encountering. If you have veteran team members who were selling in the last hard market, have them tell the team what they remember about the last cycle. Share your historical retention rates and set a retention rate goal for the hard market. Use an infographic like this to paint the picture for your team.
  3. Convey the Urgency. When customers are hit with rate increases, they shop, which means a massive amount of shopping is happening right now. How your team navigates the hard market will influence your success for the next decade. You can be the agency that uses it to capture new customers, or you can be the agency that loses customers and scrambles to stay even. Team members’ raises, bonuses and advancement opportunities will be affected by what they do right now. Do they know what’s at stake?
  4. Bring the Numbers to Life. Use rate trends to illustrate the average financial impact on your customers. If a commercial auto client paid X to insure their fleet in 2019 and they have weathered two years of rate increases, how much premium will they pay at their 2021 renewal? How much will that affect their bottom line? 
  5. Make Scarcity Real. It’s hard to envision something you’ve never experienced. We’ve all grown to expect an on-demand environment, where you buy anything, any time. Team members won’t comprehend that, in some cases, customers will simply not be able to buy the coverage they want and need. Capacity will not exist. Use the very timely and relatable metaphor of COVID to make it real. Just 18 months ago, we could not conceive of a time when you could not go to a restaurant or attend school in person. Lack of insurance capacity is like that. Access will be cut off in some cases.
  6. Help Team Members Step Into Customers’ Shoes. It may seem obvious, but empathy is on the decline. Some people on your team won’t intuitively think about the hard market from your customers’ perspectives. Help them imagine it.
  7. Give Them the Words. Don’t assume your employees know what to say. Strategically consider the best way to frame your hard market conversations and write down scripts for common scenarios that arise. Make sure everyone on your team is sticking to the script and communicating the same message. Have your account teams practice and role play.
  8. Allow Time for Best Practice Sharing. Establish time each week for account teams to share what they encountered, talk about how they overcame challenges and support one another. This is a battle for coverage, and your team must be mentally focused and supported.
  9. Challenge Your Team to Set Up Preemptive Communication Processes. The absolute worst thing we can do is surprise our customers. Our job is to help them navigate risk, and a big spike in expenses is a major risk. We need to let them know what to expect and let them know that we’re shopping the market and advocating on their behalf. If they know we’re on their side, they will be less likely to shop. Talk about the hardening market in your blog and in your customer newsletter. Start sending emails and letters six months in advance of renewal, letting clients know what’s happening in the market and what you’re doing about it. Call them 90 days in advance. Spending the extra time up front could raise your renewal rate a few percentage points.
  10. Revise Your Game Plan Every Month. Hold a monthly training meeting for your entire team to compare notes, share best practices and review procedures. In every meeting, ask your front-line workers to share their experiences. Give key people notice that they will be asked to speak, so they come prepared. After a couple of months, people will know the drill and it will happen automatically, but you might need to engineer the experience the first couple of times. This should be collaborative and engaging – not a call where you talk and they listen. Track your monthly retention rates and compare them with the same month last year on each call, so your team has metrics to gauge their success.

See also: The Cost of Uncivil Discourse

As an industry, we always say that insurance is not a commodity, but in soft markets differentiation can be challenging. On the other hand, hard markets present an opportunity for the best insurance professionals to stand apart. This is our chance to demonstrate our value, make a difference and earn customers for life. Let’s do this!

New Paradigm for Reinsurance

The global reinsurance industry has been battered by several years of underperformance. It has been hit by natural catastrophe losses, both modeled and unmodeled, social inflation, declining investment returns and diminished reserve releases and is now facing an unprecedented globally systemic loss in COVID-19. Have we now reached the point where the global reinsurance market can morph into a new paradigm, allowing a more responsible and sustainable market to emerge? Or are we seeing a reworking of old approaches that have failed to deliver the sustainable, efficient solutions that primary insurers, policyholders and increasingly society seek?

Moments like this do not come often. Arguably, the last opportunity for a reset was 20 years ago in the aftermath of the 9/11 tragedy. So, what has gone wrong, and how can we build back better?

The harsh fact is that, with a consistent weighted cost of capital in the 7% to 8% range, the global reinsurance industry has not covered its cost of capital for the last six years. A prolonged soft market has led to under-reserving on many long-tail lines, a problem that is being exacerbated by social inflationary pressures. Overreliance on pricing models that have proved unreliable has led to unsustainably low pricing, which eventually requires disruptive correction.

Despite the unsatisfactory performance, capital has continued to flow into the global reinsurance market, most notably in the very significant expansion in insurance-linked securities (ILS) over the last 10 years but also through retained earnings on existing reinsurers, which have been bolstered by investment returns. Without the constraints of capital limitation to control excessive competition, the inevitable result has been underperformance as reinsurers chased top-line growth at the expense of profit.

Fortunately, the reinsurance industry remains well-capitalized, with capital levels above the end of 2018 and only slightly reduced on the capital levels at the end of 2019. Because capital constraint is clearly not going to limit pricing competition, we must look elsewhere for drivers that will help to put discipline and structure around achieving sustainable, adequate returns.

Investment income offers a potential solution. Unlike previous hard markets, when investment rates were much higher, current investment rates remain pitifully low, and are likely to remain so for years because nearly all governments are pursuing fiscal expansion as a result of COVID-19. Most reinsurers’ investment holding periods are four to six years, and they have to face the reality that low investment returns will continue.

Faced with the loss of the investment crutch, reinsurers have no option but to concentrate on improving underwriting results to generate enough margin to reward their capital. With a 7% to 8% cost of capital and return-on-equity (ROE) targets of 9% to 10%, reinsurers now need to run combined ratios in the low 90s, something the industry has not achieved for many years. This requires a back-to-basics underwriting approach to ensure that each unit of risk accepted is appropriately priced within a reinsurer’s overall portfolio. This approach inevitably means rate increases, along with changes to terms and conditions, neither of which will be easy to achieve in a global environment where many policyholders are under significant financial stress.

Reinsurers have a delicate path to navigate, but the strong capital position should let the industry ensure that risk is appropriately differentiated, and that pricing corrections are applied on a case-by-case basis in a sustainable fashion that clients can manage.

See also: 4 Post-COVID-19 Trends for Insurers

More important than addressing the short-term issues is to avoid the mistakes of the past and build a better future. Reinsurers must enhance their value to society and build long-term demand. Here, the COVID-19 situation helps, as it has moved the discussions about uncorrelated tail risk from theory to practice, and with it the demand for reinsurance. At the same time, the increased reliance on underwriting profitability is emphasizing volatility management, where again reinsurance plays a major role. Risks such as cyber and climate change also fall into the uncorrelated tail risk category, and again reinsurers have a pivotal role to play. Finally, there is the enormous opportunity represented by the uninsured economic gap. Finding innovative solutions to help society narrow the gap will lead to a complete reframing of the reinsurance market.

Achieving this will require dedication, long-term vision and the ability to build partnerships with organizations that the reinsurance market has never interacted with before, many in innovative public-private partnerships.

The opportunity to build back a better reinsurance market is clearly before us. The test will be whether reinsurers can develop transparent solutions that bridge the gap between capital that requires reasonable sustainable returns and new risks that threaten society. If the reinsurance industry fails to grasp this opportunity, it will be doomed to suffer the fate of so many, with the current generation repeating the mistakes of predecessors.

You can find this article originally published here.

Panic Pricing May Be a Bad Idea

In a season of unprecedented change and hyperbolic rhetoric, we want to sound a word of caution and suggest the U.S. property/casualty insurance industry think critically about the possible adverse consequences of a headlong rush to impose steep rate increases to cover anticipated loss exposures.

While raising rates might be how the industry has responded to uncertainty in the past, there are a number of reasons why doing so now might be ill-advised: First, the industry risks alienating its customers and inviting more regulatory scrutiny if it pursues onerous rate increases before the full scope of 2020 exposures are known. Second, the past several years have seen a rise in technologies to capture and analyze more precise data, improve efficiencies and develop products, all offering insurers an opportunity to innovate how they manage risk—if they successfully integrate those in their operations. Third, many insurers routinely posting combined ratios in excess of 100% need to first put their house in order and look at their expense structure and underwriting performance before seeking blanket relief by raising rates that do not address underlying problems.

The drivers behind today’s sharply harder rates are a combination of capital markets uncertainty, assumptions about prospective insurance exposures to COVID-19 losses, assumptions about insurance regulatory positions, natural catastrophe forecasts and, last but not least, reliance on historical experience. Based on discussions with regulators, reinsurers, primary insurers and new entrants to the industry, the sharp rate filings now in the pipeline began with reinsurers, followed by primary carriers. The greatest hardening of rates is occurring in commercial lines, especially for small business, as well as in homeowners, general liability and workers compensation.

Filing rate increases based on market or capital uncertainty has historically been an accepted industry practice, managed on a state-by-state basis. However, given the beneficial impacts of COVID-19 stay-at-home orders and business closures on routine insurance expenses, including claims volume, should these filings for extreme rate increases be approved, as if business as usual? We think not.

Back in 2019, the signs of a firming property/casualty insurance market were apparent, due to rising primary, reinsurance and retrocessional rates after years of losses from catastrophic weather and wildfires plus continued low investment yields. Throw in a little 2020 volatility from COVID-19 and social unrest, and the market has grown even harder across both personal (except auto) and commercial lines.

We acknowledge there are valid reasons why incremental rate increases may be needed, but not at the across-the-board and exponential levels we are seeing. We frequently hear of premium increases in the mid- to high double digits, and in many cases the increases are measured in multiples. We have spoken with insureds being quoted premium increases as high as 400%, with most increases falling in the 50% to 200% range.

Among the problems with a business-as-usual approach is uncertainty about the future. In particular, there is uncertainty about the relevancy of historic data sets to actual loss exposures in a rapidly changing risk environment, such as we are experiencing now.

One consequence of these extreme rate increases could be a policyholder backlash. At what point do higher prices cause economic harm to policyholders, driving them to limit or abandon because it is not affordable? Or drive commercial policyholders to captives and other alternative risk financing options? Or drive them to seek relief from insurance regulators—perhaps even federal regulators? What would those consumer and regulatory reactions mean for the future health of the insurance industry?

If we accept that the world shifted on a societal scale within a six-month period, should we not expect that insurers also change how they operate?

While many insurers in recent years have experimented with innovation, unfortunately they appear slow to fully incorporate real-time data and analytics technologies into their operations. These tools, the focus of much innovation activity in recent years, could help to better understand evolving risks and improve loss forecasting capabilities, as well as the ability to mitigate loss frequency and severity.

See also: COVID-19 Highlights Gaps, Opportunities

One of the promises of insurtech is that it would enable insurers to apply the right data sets to the right circumstance to more accurately underwrite a risk—and perhaps identify opportunities to prevent certain losses altogether. As it turns out, the impact of insurtech on incumbent insurers has not yet resulted in a simplification of the supply chain, a reduction in costs, an acceleration of growth or a more accurate predictive view of the future. Rather, the sophistication of actuarial calculations and the application of technologies used to perform historic functions with greater precision have increased the complexity and deepened specialization within the existing supply chain. Silos within organizations are deeper and more restrictive, all of which create challenges to working innovative solutions through an organization, achieving new insights and efficiencies.

Any argument for extreme rate increases should also ask questions about the validity and relevance of the insurance industry’s historic benchmark of profitability: the combined ratio. A ratio below 100% indicates a company is making an underwriting profit, while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.

Fundamentally, why would a regulator approve a rate increase for an insurer with a combined ratio well above 100%? Wouldn’t this be a misplaced reward for bad management? That may sound harsh, and some may accuse us of being uninformed or naïve, but think about it: What other industry routinely allows businesses to operate at a loss? And now, when investment returns are assuredly lower and no longer offer cover for losses, insurers turning to policyholders to make up the difference seem to ignore fundamental problems.

The COVID-19 pandemic and resulting restrictions has caused enough of a shift in how everyone lives and works that it’s fair to raise fundamental questions about the role of the insurance industry in reacting to and recovering from this shift and in defining how emerging risks are appropriately managed. Simply raising rates cannot be the industry’s only response. Let’s examine some questions that the situation raises.

First, from an economic perspective:

  • Could a significant increase in premiums for nearly all non-auto insurance products hurt a national economic recovery or, worse, compound the current financial challenges consumers face? 
  • Will rate increases combined with the traditional U.S. insurance industry practice of operating with a combined ratio above 100% contribute to small business closures and job losses?
  • What happens if a number of people don’t/can’t procure the coverage they need due to prohibitive costs, and a hurricane or flood or other disaster comes along?  What happens if businesses cannot afford the new premiums and drop coverage, and a loss occurs for which they don’t have coverage? Or what if a business needs to cut jobs or other operating costs to stay in business and pay premiums?

From an operational perspective within an insurer:

  • Do remote working environments provide a greater opportunity to break down silos and create cross-functional working groups to capture key learning from our recent/current operating experiences? For example, one regulatory leader described multiple working groups within his organization that also highlight an issue that may be occurring within insurance companies. Two small teams were focused on solvency, while others worked on other operational questions. However, none of these working teams was asked to look at operational practices as they affect the combined ratio. The regulatory leader did agree with our hypothesis that, given the complexities of insurance and chaos of a COVID-19 “new normal,” the combined ratio is a solid “ground zero” number to use as the foundation for rate filing analysis.
  • What have carriers learned from operating through the past six months regarding full-time equivalent (FTE) count, efficiency gains, elimination of red tape, gains from new processes and procedures? Consider the savings alone from elimination of routine business travel, from conferences to Ritz-Carlton client lunches, being shut down for months, if not longer.
  • Have loss ratios worsened to such an extent that double-digit (or triple-digit) rate increases are necessary? Do these rate filings reflect a sort of day of reckoning for ratings agencies that also believe the present and future must be extensions of the past? Are current economic realities forcing insurers to reckon a loss of investment returns they have relied on to cover underpriced coverage?
  • The most recent sigma research report from Swiss Re seems to recognize the danger of unrestrained premium increases in the short term, without taking a longer view. The Swiss Re report noted that there will be challenges to industry profitability in 2020, but the industry’s capital position should be strong enough to handle COVID-19 shocks. Between non-life rates that were already showing signs of firming, and an anticipated increase in demand for risk protection amid heightened risk awareness, industry premiums should rebound in 2021. In other words, don’t overreact. (Swiss Re subsequently announced a $1.1 billion loss for the first half of 2020, after claims and reserves related to COVID-19 of $2.5 billion.)

From a regulatory perspective:

  • Are insurance regulators the most appropriate body to challenge the basis for combined ratios that exceed 100% before approving carrier rate filings?
  • In the event of a public outcry for federal legislators to “fix” a broken insurance system, questions will focus on the oversight applied by the dtate regulatory system. Were premium increases necessary and warranted for the protection of the customer and resiliency of the insurer?
  • Has the role of the insurance regulator changed with respect to prioritizing the viability of insurers, protecting consumers, contributing to state budgets? 
  • Will the election cycle increase the natural tendency to expand a federal solution within the construct of the Federal Insurance Office (FIO) created under Dodd Frank with expanded powers to respond to the market?  The long-term effect of this would be to essentially turn insurance into a federally regulated public utility – with all of the bad and very little good that would come from that scenario.

See also: COVID: How Carriers Can Recover

Innovation thrives on uncertainty, and has always been the engine that drives the most growth. The same will be true now. Whether innovation produces efficiencies that reduce combined ratios or generates new sources of revenue, innovation is the better and more sustainable course. Many insurers seem content to rely on rate increases as their strategy for resiliency through these uncertain times. Be assured, based on several advisory engagements from the past six months, others in insurance-related sectors have acted upon and are developing new models, accelerating pace and devoting resources toward their goal. Circumstances that are perceived as chaotic and threatening by any majority of incumbents are also perceived as “once-in-a-lifetime” opportunities to change business-as-usual by those who will lead in the future.

Our purpose is to urge the insurance industry to ask hard questions and examine the potential consequences of the various strategy responses to these uncertain times. To us, there are essentially two paths. There is that path of sharp rate increases and business as usual, with potentially dire results. The other path encourages innovation, a nimble look into the future and a commitment to leadership.

How do you think it will all work out? Let us know.

No More Need for Best-of-Breed Solutions?

Every five years or so, the insurance industry changes course. Hard market, then soft market. Keep the lights on, then innovate. Build, then buy. Outsource, then in-house. Best-of-breed, then suite.

Unlike with most politicians, some measure of this waffling is certainly beyond the control of insurers truly in the thick of it. However, other preferences reflect the uncertainty of markets and economies, the fluctuation of consumer expectations and demands and what some may call downright desperation to stay ahead of the curve.

Technology has long been recognized as an enabler, and it definitely fills that role when planned for strategically and implemented well. As the industry has taken up the challenge of providing faster, better, more personalized service to consumers, the demand for technology to facilitate the necessary processes has increased, as well. Core system modernization has become a top priority for insurers across all lines of business (LOBs). This means analyst firms and consultants are being engaged at a staggering (and expensive) rate to help spec out requirements, develop the request for proposal (RFP) and narrow things down to a very short list.

Interestingly, the biggest question for most insurers is not whether all of the core administration systems need to be replaced, but rather how and when is the best time to do it. Enterprise rip-and-replace projects traditionally come with a big stigma, a heavy dose of fear and bit of skepticism. Can it be pulled off successfully? With advances in technology such as the move toward cloud for deployment, the incorporation of configuration tools that promote insurer self-sufficiency and better implementation methodologies, the dark skies are definitely clearing.

Today’s most modern enterprise suites provide better integration, better capability and better results than niche-focused solutions of the past. While suite components can, by and large, all be implemented individually, pre-integration, reliance on a single data repository, use of a common architecture, an ensured upgrade path and common user interfaces mean these solutions still have a serious competitive edge over standalone systems. But does this really mean there is no more need for best of breed?

Better Integration

Once famous for creating silos and building “kingdoms” within the enterprise, insurance technology has come a long way. Recognition that insurance processes could be completed faster, and with greater assurance of accuracy, if every relevant employee was looking at the same information, insurers are turning to enterprise suites as the solution of choice. The core administration (policy, billing and claims) components of most modern enterprise suites offer increased integration and conveniently draw information for customer service representatives (CSRs), agents and underwriters from a single data or document repository. Further, by building on similar workflows, user interfaces (UIs) and processes, enterprise suites minimize change management issues and decrease downtime needed for training.

Better Capability

It’s pretty common to hear technology vendors talk about how their solutions let insurers concentrate on core competencies, but rarely is this turn of phrase actually applied to technology vendors. Insurance suites of the past typically built out full, robust capability for core administration processes, but only invested in the bare minimum when it came to supporting processes, functions and components. The best enterprise suites available today not only handle, but excel at, providing capability for peripheral processes that support core administration, including reinsurance, underwriting, document/content management, accounting/general ledger, agent/producer and consumer portals. This depth of capability was once only available to insurers through best-of-breed solutions, but now only highly customized situations and processes require such niche-focused systems.

Better Results

Even though everyone suspects it’s a much higher number, best guesses throughout the industry say that insurers replace core administration systems only once every eight to 10 years. That low frequency hardly allows internal IT staff to gain any kind of proficiency in implementation methodologies or change management. The tightly integrated nature of suite components eases implementation challenges measurably, and at the end of the day, once you get into a groove, why get out? By taking advantage of teams already established for one replacement project for another, insurers can lessen business interruption significantly. Plus, using an agile implementation methodology that incorporates iterative releases will eliminate the scope creep and missed expectations inherent to waterfall projects.


Five or 10 years ago, it may have been necessary to buy a best-of-breed technology solution to get capability specific to a certain LOB or process. However, modern enterprise suites, whether implemented together or individually, today offer the same robust capability once offered only by best-of-breed solutions, but with better integration, faster access to critical data, significantly easier upgrades and ultimately, better results.