A Buyer’s Market
Cyber and errors and omissions (E&O) insurance rates will spike in 2016 — some by as much as 150 percent — driven by the growing threat of hacking and data theft, according to the latest market report by Willis.
Overall property and casualty premiums, however, will continue to soften as a result of benign losses and overcapacity, the global insurance broker said in its “2016 Marketplace Realities” report.
In total, Willis expects rates in 2016 to decline in 10 lines, including property, casualty and aviation.
However, cyber and E&O buck that trend, with cyber premiums expected to increase by up to 15 percent in general, and by between 10 percent and 150 percent for point-of-sale retailers and large health care companies.
Smaller organizations with revenues of less than $1 billion face lower increases, said Willis.
“There’s a recognition that because there’s a high frequency of events there will be more demand for coverage as people realize that they are vulnerable to cyber attacks.” — Meyer Shields, managing director, Keefe, Bruyette & Woods
Meyer Shields, managing director at Keefe, Bruyette & Woods Inc. at Stifel Financial Corp., said that cyber rates will continue to climb as a result of the high frequency of breaches.
“There’s a recognition that because there’s a high frequency of events there will be more demand for coverage as people realize that they are vulnerable to cyber attacks,” he said.
With total annual cyber premiums expected to reach $20 billion by 2025, according to industry experts, Willis said that underwriting requirements have continued to rise.
Insurers are also increasing retentions, reducing capacity and exiting certain lines, the broker said.
Excess cyber losses have also caused some markets to stop writing large accounts, while others have ramped up their premiums in upper layers of $75 million plus placements.
Willis said that those sectors at risk from large claims and litigation will continue to see the most upward pressure on rates, such as large technology companies dealing with expanding global privacy laws.
As a result of increasing cyber exposures, Willis said that some carriers have decided to withdraw from the retail, health care and financial institution sectors, as well as E&O programs that include cyber coverage.
Chris Lane, US placement leader at Marsh, said that while rates were decreasing on an aggregate basis, cyber is the exception.
He said “there is a big uptake in coverage by clients, while carriers are driving some rates up as a result of the recent losses experienced, particularly in the retail space.”
As for other lines, he expects “modest to single digit rate decrease across the board.”
“In property, it’s probably a higher single digit decrease and some of the casualty lines might be flat, as are financial lines.”
Soft Market Continues
The continued soft market, meanwhile, has been exacerbated by an increase in consolidation, driven by low interest rates and a benign year for catastrophes, — a trend that is expected to continue in 2016, said the Willis report.
“Marketplace forces have changed the size and shape of the pieces of the risk management puzzle to an extent we have not seen for some time.” — Matt Keeping, chief broking officer, Willis North America
“Marketplace forces have changed the size and shape of the pieces of the risk management puzzle to an extent we have not seen for some time,” said Matt Keeping, chief broking officer for Willis North America.
“The key force driving this change in the market is consolidation.”
“A smaller market with fewer, larger players also opens up the field to newcomers that can focus on smaller, specialized niches in areas of potential growth,” he said.
The report went on to say that while property rates will continue to fall, primary casualty rates for most buyers are declining for the first time in the current soft market.
Premiums for general liability are expected to fall by up to 5 percent and in umbrella/excess by up to 10 percent.
Property rates, on the other hand, should fall by 10 percent to 12.5 percent for non-catastrophe risks and by 12.5 percent to 15 percent for catastrophe risks, said Willis.
Most auto insurance buyers can also expect premium decreases of up to 10 percent, while airline insurance is expected to fall by 15 percent to 20 percent after the industry absorbed the major losses from 2014, according to Willis.
“We continued to hear from our members that this a buyers’ market,” said Ken Crerar, president and CEO, The Council of Insurance Agents & Brokers
The Council of Insurance Agents & Brokers likewise reported that commercial P&C rates continued to decline across all lines by an average of 3.1 percent during the third quarter of 2015. The biggest decrease was in large accounts, which dropped by 4.1 percent.
“We continued to hear from our members that this a buyers’ market,” said The Council’s president and CEO Ken Crerar.
Andrew Colannino, vice president of P/C at A.M. Best, said that the rating outlook for commercial lines in 2016 remained negative.
“There are going to be more downgrades than upgrades for commercial lines and the vast majority of ratings are going to be affirmations,” he said.
“There’s a now widening divide between the strong performers and the underperformers.
“For that second group, there’s going to be an increasing number of reserve charges amongst those carriers – a lot of them haven’t made the proper investments in technology, data and analytics and therefore some are at a competitive disadvantage.”
More Buyers Seek Cyber Cover
Cyber insurance is not just for retail organizations and health care companies any longer, the latest research shows. This year, brokers have begun seeing some fairly dramatic increases in the percentage of manufacturing clients, and power and utility firms purchasing stand-alone cyber policies, according to a new report from Marsh.
The trend illustrates the fact that more clients are seeing the need to cover risks associated with their technology not working and doing damage to digital assets, said Bob Parisi, Marsh senior vice president and technology product leader.
Take-up rates for cyber programs among existing Marsh clients in the power and utilities industry more than doubled from 9 percent to 19 percent from 2014 to 2015, according to Marsh’s midyear benchmarking report.
The report also found that manufacturing client purchasing cyber coverage rose from 6 percent to 11 percent.
In the past, Parisi said, client-facing companies in the retail, health care, and finance sectors had the lead in purchasing cyber insurance to protect the privacy of their customer data. That is still the case, he noted: For instance, both new and existing Marsh health care clients were the largest purchasers of cyber coverage (41 percent) in the first half of 2015.
At the same time, however, “other businesses have begun to realize that breaches could also corrupt or destroy their software, which is an asset like a building is an asset,” he said.
“More than 60 carriers now offer stand-alone cyber insurance policies.” –Insurance Information Institute
“This is property not typically covered under a property policy,” Parisi said, “since we are talking about protecting intangible assets from a physical peril like computers at a data center not working due to a virus.
“That is a critical change in the nature of the insurance buyer and what they are thinking of,” he added.
Cyber Purchases Increase
Marsh found that overall, the number of U.S.-based Marsh clients purchasing stand-alone cyber insurance increased 32 percent in the first-half of 2015, compared to a 26 percent growth rate in the first half of 2014.
Other brokers are seeing similar increases. Willis, for instance, saw 37 percent growth during the first half of this year, compared to 28 percent for the same period last year, said Willis’ Geoffrey Allen, executive vice president, cyber and E&O practice leader, FINEX North America.
The sectors showing the largest growth in purchase of stand-alone cyber insurance were the education sector (an increase of 155 percent in the first half of 2015) and transportation (an increase of 150 percent).
Also increasing, said Marsh’s Parisi, are the prices paid and limits sought by cyber insurance buyers.
“On average, our limit purchase has gone up,” Parisi said. “Limits were up 18.1 percent last year and it’s closer to 21.6 percent this year, he said.
Retailers on average paid 32 percent more for cyber coverage in the first half of 2015, Marsh found, compared to average price increases of 19 percent for all other industries.
“Premium increases [for retail companies] depended on a number of variables including size, loss experience, and information security controls and practices with emphasis on tokenization and encryption.” — Geoffrey Allen, executive vice president, cyber and E&O practice leader, FINEX North America
Willis also found that premium for retailers have increased generally of late, with many customers purchasing higher limits, Allen said.
“Premium increases depended on a number of variables including size, loss experience, and information security controls and practices with emphasis on tokenization and encryption,” Allen said.
Meanwhile, a new report from the Insurance Information Institute, found that insurance carriers are getting better at providing cyber coverage.
“Insurers are issuing an increasing number of cyber insurance policies and becoming more skilled and experienced at underwriting and pricing this rapidly evolving risk,” according to the report, “Cyber Risk: Threat and Opportunity.”
“More than 60 carriers now offer stand-alone cyber insurance policies,” according to the III, using Marsh statistics that found that the U.S. cyber insurance market totaled more than $2 billion in gross written premiums in 2014, with some estimates suggesting it has the potential to grow to $5 billion by 2018 and $7.5 billion by 2020.
The III report also confirmed that cyber rates are firming: “Industry experts indicate rates are rising, especially in business segments hit hard by breaches over the past two years.”
On the other hand, the report found, the risk may be too much for the private insurance sector to handle.
“Some observers believe that cyber exposure is greater than the insurance industry’s ability to adequately underwrite the risk,” said the III.
“In 2014, the number of U.S. data breaches tracked hit a record 783, with 85.6 million records exposed,” it said. “In the first half of 2015, some 400 data breach events have been publicly disclosed as of June 30, with 117.6 million records exposed.”
III noted that researchers have estimated the likely cost of cyber crime to the global economy ranges between $375 billion and $575 billion.
“Cyber attacks have the potential to be massive and wide-ranging due to the interconnected nature of this risk, which can make it difficult for insurers to assess their likely severity,” said the report.
“Several insurers have warned that the scope of the exposures is too broad to be covered by the private sector alone, and a few observers see a need for government cover akin to the terrorism risk insurance programs in place in several countries,” the group concluded.
When the Going Gets Rough, the Smart Come to Aspen Insurance
Sometimes, renewals don’t go as expected.
Perhaps your company experienced a particularly costly claim last year. Or maybe it was just one too many smaller incidents that added to a long claims history.
No matter the cause, few words are scarier to hear this time of year than, “Renewal denied.”
But new options are now emerging for companies that are willing to tackle their product liability challenges head-on.
Aspen Insurance’s products liability team – underwriters, loss control engineers and claims professionals – welcome clients who have been denied coverage from other, more traditional carriers.
“For our team, we view our best opportunities to be with clients who have specific problems to solve. In these cases, we leverage our deep expertise and integrated team approach to help the client identify root causes and fix issues,” said Roxanne Mitchell, Aspen U.S. Insurance’s executive vice president and chief casualty officer.
“The result is a much improved product or manufacturing process and the start of a new business relationship that we can grow for many years to come.”
“We want to work with insureds as partners, long after a problem has been resolved. We seek clients who are going to stick with us, just as we will with them. As the insured’s experience improves over time, pricing will improve with it.”
— Roxanne Mitchell, Executive Vice President, Chief Casualty Officer, Aspen Insurance
Of course, this specialized approach is not applicable to all situations and clients. Aspen Insurance only offers coverage if the team is confident the problems can be solved and that the client genuinely wants to engage in improving their business and moving forward.
“Our robust and detailed problem-solving approach quickly identifies pressing issues. Once we know what it will take to rectify the problem, it’s up to the client to make the investments and take the necessary actions,” added Mitchell. “As a specialty carrier operating within the E&S market, we have the ability to develop custom-tailored solutions to unique and complex problems.”
For clients who are eager to learn from managing through a unique, pressing issue, and apply the consequential lessons to improve, Aspen Insurance can be their best, and sometimes only, insurance friend.
The Strategy: Collaboration from Underwriting, Claims and Loss Control
Aspen offers a proven combination of experienced underwriting professionals collaborating with the company’s outstanding loss control/risk engineering and seasoned claims experts.
“We deliver experts who understand the industries in which they work, which is another critical differentiator for us,” Mitchell said.
Mitchell described the Aspen underwriting process as a team approach. In diagnosing the causes of a specific problem, the Aspen team thoroughly vets the client’s claims history, talks to the broker about the exposures and circumstances, peruses user manuals and manufacturing processes, evaluates the supply chain structure – whatever needs to be done to get to the root of a problem.
“Aspen pulls from every resource we have in our arsenal,” she said.
After the Aspen team explores the underlying reason(s) and root cause(s) producing the client’s problem in the first place, it will offer a solution along with corresponding price and coverage specifics.
“We have a very specific business appetite and approach,” Mitchell said. “We don’t treat products liability as a commodity.”
As noted, a major component of Aspen’s approach is that they seek to work with clients who are equally interested in solving their problems and put in the work required to reach that end.
Mitchell cited two recent client examples of manufacturers of expensive products that could endure large claim losses but had some serious problems that needed to be solved.
A conveyor systems manufacturer had a few unexpected large claims and lost its coverage in the traditional insurance market. The manufacturer never managed a product recall in the past, and Aspen’s loss control engineers dug into why several systems failed. Aspen also helped the company alert customers about the impending repairs.
Another company that manufactured firetrucks had three or four large losses, when telescoping ladders collapsed, resulting in serious injuries. The company’s claim history was clean until this particular product defect. When Aspen researched the issue, it found that the specific metal and welding used to make the telescoping ladders didn’t have the required torque to keep the ladders from collapsing.
Both companies worked with Aspen to correct the issues. Problem solved.
“It is so important that our clients are willing to actively engage in finding out what is causing their losses so they can learn from the experience,” Mitchell said.
Apart from the company’s problem-solving philosophy, Mitchell said, the willingness to allow qualified clients to manage their own claims is the second biggest reason companies come to Aspen.
“We are willing to work with clients who have demonstrated the expertise to handle their own claims — with our monitoring — rather than hiring a TPA,” she said. “It is a useful option that can save them money.”
Mitchell explained that customers who stay with Aspen for the long-term can be confident that Aspen will help them – whatever the challenge. For instance, if they need a coverage modification for a new product that they bring to market, Aspen can help make it happen. Mitchell noted, “We pride ourselves on the ability to develop custom-tailored solutions to address the complex and challenging risks that our clients face.”
Aspen’s desire to help solve difficult client problems comes with a caveat, but one that benefits both Aspen and the insured: It wants to move forward as a true partner – one with clear long-term relationship potential.
In a nutshell, Aspen’s products liability worldview is to partner with a manufacturer who is facing a difficult situation with claims or coverage, help them solve that problem, and then, engage in a long-term, committed relationship with the client.
“We want to work with insureds as partners, long after a problem has been resolved,” she said. “We seek clients who are going to stick with us, just as we will with them. As the insured’s experience improves over time, pricing will improve with it. This partnership approach can be a clear win-win.”
This article is provided for news and information purposes only and does not necessarily represent Aspen’s views and does constitute legal advice. This article reflects the opinion of the author at the time it was written taking into account market, regulatory and other conditions at the time of writing which may change over time. Aspen does not undertake a duty to update the article.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Aspen Insurance. The editorial staff of Risk & Insurance had no role in its preparation.