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Workers Compensation Issues

State of the Commercial Insurance Marketplace

Mark Walls , Kimberly George | October 30, 2020

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In a survey of frequent Out Front Ideas attendees, one of the biggest concerns raised by risk managers was the rapidly evolving insurance marketplace. These challenges started back in 2018, but COVID-19, civil unrest, and other events have accelerated this change.

At the Out Front Ideas virtual conference, a panel discussed these challenges. Our guest speakers were the following.

  • Daniel Aronson—US casualty practice leader at Marsh
  • John Csik—chief operating officer and chief financial officer at Safety National
  • Lori Goltermann—CEO of Aon US Commercial Risk and Health Solutions
  • Joseph Peiser—executive vice president and global head of broking at Willis Towers Watson

US Commercial Casualty Market

Social inflation has been impacting civil jury verdicts for several years. Juries have been displaying antibusiness and antigovernment bias, and they have been desensitized to large awards. The combination of these factors is leading to record jury verdicts around the nation, even in cases with questionable liability. Umbrella excess liability and auto liability have been the most impacted by this jury behavior.

There has also been a significant impact on directors and officers (D&O) coverage. In 2019, there were over 400 lawsuits filed against public company directors, and that number is expected again in 2020. Public company D&O coverage saw a 74 percent price increase in the second quarter of 2020.

The COVID-19 pandemic raised an entirely new set of risk management concerns. Businesses were shut down. When would they fully reopen? What impact would these shutdowns ultimately have on the business? In addition, risk managers faced new risks in their existing operations. Sit-down restaurants started offering delivery. Many employees shifted to working in different roles.

In the insurer marketplace, there was a change in appetite seen. Some insurers walked away from certain industries. New exclusions emerged, such as communicable disease, which took away coverage for much more than COVID-19. For example, a communicable disease exclusion eliminated coverage for Legionnaires' disease, which was previously covered. Many insurers eliminated some communicable disease endorsements.

There was much uncertainty around the impact on claims due to COVID-19. What would the claims ultimately look like across multiple lines? What policy coverage period would apply? In medical malpractice, many coverage triggers required reporting in the policy term, so healthcare providers reported thousands of claims as a precautionary measure.

During all this, insurers started to grow concerned about the financials of their clients. Did they have sufficient collateral posted to cover potential losses? Some businesses struggled to pay premiums because of decreased revenues. Exposures changed dramatically almost overnight. New insurance regulations intended to provide premium relief to businesses created complications in the workers compensation market that already had a built-in premium audit function.

US Commercial Property Marketplace

The US property market is experiencing its 11th quarter of rate increases. Natural disasters like wildfires have been very impactful. Additionally, there have been over 18 named storms this 2020 hurricane season. Civil unrest and damage from riots have also heavily impacted the commercial property market.

One broker reported that over 91 percent of their clients had seen commercial property rate increases this year. Even without losses, these increases have been around 25 percent. Those with losses are seeing rate increases over 35 percent.

Exclusions have also increased in this market. What started as COVID-19 exclusions expanded to pandemic exclusions and then to exclusions on all communicable diseases. Insurers are trying to eliminate any potential uncertainty regarding their exclusion of coverage of business interruption relating to disease outbreaks.

Global Insurance Markets

Many businesses have global exposures or access to Lloyd's marketplace for some of their insurance coverage. The challenges seen in the US commercial insurance market are also being seen internationally. The United States has seen the highest rate increases, but Australia has also seen significant rate increases. Other international locations are also seeing low double-digit rate increases across multiple lines. These are driven by large losses worldwide, including natural disasters and shareholder lawsuits against directors and officers. Insurers are also pulling back on capacity in certain countries.

The low-interest rates globally are having a significant impact on insurer rates. With declining investment income, insurers have to raise rates just to stay even.

Lloyd's has been transforming for the last few years and acts as a de-facto regulator for the individual insurance syndicates that operate in their market. They started a series of reforms in recent years designed to increase profitability and are also limiting their capacity. Thus, companies who are renewing late in the year could face capacity challenges with the Lloyd's market.

Changing Terms and Conditions

Changing insurance policy terms and conditions are also being seen around the world. One big lesson in all of the litigation around whether COVID-19 closures are covered under business interruption claims is that words matter.

It is also crucial to make sure that you have concurrent wording in your insurance coverage towers. This is increasingly challenging as insurers move away from allowing manuscript or broker-driven policy language and only allowing the use of their policy forms.

Brokers need to work closely with their clients and the insurers to develop policy language that addresses the concerns of all parties. Any change to any layer of the coverage tower harms the entire tower as many higher layers take a "follow form" approach. Not all policy language is appropriate for all insureds, and this can lead to increased litigation over claims. Brokers and insurers need to make sure that the changing terms and conditions do not eliminate coverage for the day-to-day operations of a business.

Because of all the complexity in the marketplace right now, brokers must have the time to work with the insured and the insurer to work out any policy language challenges. The broker needs to have experts reviewing the policy language. Insureds need to make sure that they are fully describing their business operations. Insurers need sufficient time to digest all of this information and get approval for any proposed wording changes. Having a long-term relationship with your broker and insurer can be very helpful under these circumstances.

Collateral Considerations

As mentioned previously, insurers have significant concerns about whether the collateral they are holding is sufficient to cover potential losses below their attachment point on high-deductible policies. COVID-19 has presented an unprecedented credit risk event. Usually, such events are limited to certain geographic areas or industries, but the challenges of COVID-19 impacted most businesses. It has created significant financial uncertainty around businesses.

Credit risk underwriters with insurers look at debt ratios, cash flow, and business operations to develop a credit grade for each policyholder. That grade is used to determine what percentage of the projected losses below the attachment point need to be collateralized on a deductible policy. There is almost always a percentage of the projected losses that are not fully covered by collateral.

The collateral determination process needs to be transparent. What factors are being considered by the insurer? What is the financial outlook for the policyholder? The more information shared, the better the decision-making on both sides.

One of the challenges of COVID-19 was that it required insurers to analyze the collateral they were holding on their entire book of business in a short period. Insurers focused on what accounts had the most significant risk in terms of funds not collateralized and the impact of COVID-19 on their industry.

While reviewing financial statements is important, collateral decisions in this COVID-19 marketplace require much more information. Are the policyholders able to access any state or federal government relief funds? Are they issuing new debt to increase their liquidity? What changes have they made to their payroll and expenditures? How many months of their operations can they fund with available cash? Insurers also want to know the policyholder's view of their future. What are their expectations for reopening and their business volume returning to prior levels?

There has been an increased volume of business bankruptcy because of COVID-19. However, for the most part, these have not been a surprise to insurers. These businesses struggled going into the pandemic, and the additional stresses in this environment were more than they could financially handle, necessitating restructuring under bankruptcy.

Advice for Risk Managers

It is imperative for brokers not just to deliver bad news to clients. They need to have a game plan on how to approach the situation.

The timeline for preparing for renewal has changed. Even 6 months before your renewal is not too early to start thinking about how you will approach it. Risk managers need to involve their company leadership to not only help develop messaging for the insurance marketplace but also to manage their expectations in terms of budgets.

Companies need to look at things at a more enterprise-level instead of just line by line of insurance coverage. Should they consider retaining more risk in more predictable insurance lines? Are there potential uninsured or underinsured exposures?

Data and analytics can assist with this analysis. Every company today is different than what it was 6 months ago. All the risk models are based on a risk profile that has likely changed, and companies need to know what has changed and what they expect to further change in the future.

Best-in-class loss control and business operations are now the expectation, not the exception. If you do not have this, it will be challenging to get insurers interested in providing coverage. It is important to highlight all of your safety and loss prevention activities and demonstrate how you will operationalize those across your enterprise.

Consider the use of more insurance options, such as captives and facultative reinsurance coverage. Clients need to understand their appetite for risk and their tolerance for volatility.

It is also important for companies to consider the bigger picture of their employee health and wellness and the impact that has on both their health insurance and workers compensation costs. As workforces are evolving and workers are pushing off retirement, that aging workforce is impactful to your claims.

The Path Forward

The theme of the Out Front Ideas virtual conference was "The Path Forward," so we asked our guests to comment on what they see as the path forward for our industry.

Video conferencing is a crucial tool to maintain business relationships. You can video conference with underwriters worldwide, making it much easier to maintain these relationships than ever before.

Unless there is meaningful tort reform, the challenges in the insurance marketplace will continue. As long as claims continue to grow exponentially, rates will also continue to grow. Insurers, brokers, and their clients need to partner together to pursue tort reforms across the country.

We have shown that we can continue to conduct business without in-person meetings and with many workforces working from home. What will businesses look like in the future? Companies are reconsidering which people will ultimately return to the offices and which will permanently become work from home. This shift will change the way that businesses recruit and retain talent and how they develop their culture.

Relationships are more important than ever before. It is a mistake to sacrifice a long-term business relationship for short-term premium savings. Look at the bigger picture and make sure that you partner with insurers that can meet your needs in the short and long term.

Finally, transparency goes a long way to eliminating uncertainty and making your business partners comfortable. Now is the time for risk managers to shine and show the impact they are having within their organization.

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