Risk managers and their brokers are restructuring their liability programs as markets evolve and underwriters take a closer look at exposures.
The general liability market has changed unrecognizably since the start of the COVID-19 pandemic.
Ever-increasing economic and social inflation, medical costs and litigation funding have all led to spiraling claims and legal costs, which continue to outpace rates. Additionally, sexual harassment cases are on the rise and decades-old general liability policies have been exposed as many states have removed limits on financial recovery and victims have been given more time to file or pursue claims. .
The emergence of potential new risks such as the use of cannabis, herbicides and pesticides over several decades, nutraceuticals, PFAS or “chemicals forever”, contaminated drinking water and the impact of technology 5G on flight safety has also raised the specter of a full-scale class action lawsuit. lawsuits, fueled by growing anti-corporate sentiment, mistrust and social polarization.
Insurers have been further hampered by post-pandemic uncertainties about professional liability exposures and litigation and prolonged low interest rates limiting their investment returns.
“AM Best’s expectations for a modest decline in underwriting performance in 2022 assumes a return to pre-pandemic economic and litigation activity, as well as a further increase in jury verdicts,” AM Best concluded in its latest General Liability Market Segment Report.
“Employer liability exposures will merit close monitoring as employees are expected to return to traditional workplaces at an accelerated pace in the third year of the pandemic.
“Furthermore, since so many cases were put on hold in 2020 and early 2021, the pace of attorney publicity and reactivation of court proceedings has increased significantly.”
Despite moderate to mid-single-digit increases, soaring nuclear verdicts and unsustainable loss accumulations have caused a sea of change in the market over the past two years. The biggest problem has been finding enough capacity to build insurance towers to cover these new exposures. This means that brokers and insurers have had to work more closely together to develop coverage that meets customer needs.
Policyholders are also increasingly turning to alternative forms of insurance such as captives to secure their coverage.
Nuclear jury verdicts
Social inflation and nuclear jury verdicts with settlements totaling tens of millions of dollars have been the biggest challenges for insurers, and they show no signs of abating, said Carol Laufer, head of liability for the North America at Allianz Global Corporate and Specialty.
On top of that is the inflation of medical costs, which has increased exponentially in recent years, she said.
“Plaintiffs’ attorneys are also becoming increasingly sophisticated in their tactics,” Laufer said. “It’s become a vicious circle where claims are filed, they’re adjudicated and a big award is given, and then it all starts again with another claimant.”
Some of the most common cases reported include mass shootings in retail stores and hotels, sexual abuse and assaults in universities and colleges, traumatic brain injuries, accidents involving multiple vehicles, building collapses , forest fires and the collection of biometric data. With 50 companies specializing in litigation funding, it is likely that these types of claims will only increase.
Insurers responded by raising premiums to at least cover average claims inflation of 8-10%, with the largest increases in multi-peril and multi-peril cover, and tightening terms and conditions.
A slew of policy exclusions were then introduced, including for sexual abuse, COVID-19 and territories, especially for businesses exposed in Russia and Belarus, following the war in Ukraine.
Capacity reduced by half
Laufer said capacity has been halved for some insurance towers from $1 billion before 2019 to $500,000 today, leaving significant gaps and forcing policyholders to take larger retentions, in especially in the primary layer. Despite the arrival of new capabilities, as jury rewards continue to rise, they will either shrink or disappear from the market altogether as vendor risk appetite declines.
“Previously, policyholders could go out and get $25 million in coverage, and even $50 million or more in some cases,” said Donnacha Smyth, president of excess risk, Americas for AXA XL. “Now they have to build insurance towers with smaller chunks such as $5 million, $10 million from several different carriers and even, in many cases, quota sharing, to reach the total amount that they need.”
Despite reduced capacity, policyholders still need to secure higher limits to protect against these exposures, prompting many to turn to the excess market, said Erich Bublitz, senior vice president and head of excess and surplus. at AmTrust Financial Services.
They also need to make sure they have the right cover in place, after many were forced to change their business models due to the pandemic, he said.
“Brokers have to have a lot of tough conversations with their policyholders about the need for additional limits to build bigger towers,” Bublitz said. “It’s a real balancing act between securing the required number of limits at the best possible price.”
CFOs and policyholder treasurers are also working more closely with their brokers and underwriters to better understand the insurance process and become familiar with risk, Smyth said.
Although he is able to communicate electronically during the pandemic to do this, however, he said there is no substitute for in-person interaction.
“As we emerge from the pandemic, brokers and insurers need to rebuild that personal interaction through face-to-face meetings,” Smyth said. “This will ensure everyone gets better results, with policyholders telling their story fully and therefore policyholders wanting to do business with them.”
Stephen Hackenburg, national property and casualty practice leader at Aon in the US, added: “Policyholders need to be fully transparent and provide as much relevant information as possible for the insurer to meet their coverage needs. Getting out early before the renewal cycle is also extremely beneficial when it comes to getting proper coverage.
Access to data
Brokers and insurers also benefit from greater access to data and predictive analytics, enabling them to make more informed decisions. Underwriters can also benefit by focusing on specific subsets of the market, said Ashley Moffatt, vice president, brokerage — lead victim at Nationwide.
“The players who will be most successful are those who take a vertical approach to the industry, focusing on a specific area where they are true experts, such as automotive surplus, construction and product manufacturing,” he said. she declared. “Data and technology will allow them to gain deeper insight to help them.”
In addition, corporations, which tend to incur larger jury verdicts and settlements, are increasingly taking on their own risk and turning to captives, self-insurance and quota sharing. They are also adopting assigned risk pools, especially for large transport companies, to bridge the gap between primary and excess insurance premiums.
But it is a collaborative approach between policyholders, their brokers and insurers that will yield the best results. That means leveraging some of the tools that have proven so effective during the pandemic.
“The partnership between brokers and risk managers remains essential to a successful and effective general liability program,” said Liz Larsen, vice president of CAC Specialty. “With risks evolving in the physical and digital world, communication not only with these two partners, but also with those who are in claims, can help detect potential coverage failures before losses occur.
“Clients have become more visible to underwriters during the pandemic, joining negotiations and giving presentations on operations, risk management and security advancements as Zoom/Teams has become part of our daily lives. ” &