E&S Market Continues to Evolve
Risk managers should treat changes in the excess and surplus lines market with caution. Overcapacity is drawing more insurers to seek growth in that market, and they may not necessarily have the specialty underwriting knowledge needed to succeed in the sector.
That would mean a subsequent decision to remove themselves from E&S lines — leaving their insureds in the lurch – or not being able to effectively service accounts or manage claims.
“There are companies writing business in the specialty world that they wouldn’t normally write,” said Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox.
“On the mergers and acquisitions side, A.M. Best would probably not be surprised if more M&As occurred.” — Robert Raber, senior financial analyst, A.M. Best
“Companies are looking for anything to write because there’s overcapacity,” he said. “Many of the companies do not have the experience, expertise and talent but they are still venturing into this territory.
“Companies are jumping through hoops to write business and the rates keep coming down because of continued overcapacity,” he said.
Some insurers acquire organizations with a nonadmitted platform, while others bring over teams of experienced players in the field, such as when Berkshire Hathaway brought on Peter Eastwood from AIG and a team from Lexington to launch Berkshire Hathaway Specialty Insurance in 2013.
David Blades, senior research analyst, A.M. Best, said that another such event occurred in June 2015 when Argo Group through Colony Specialty expanded the environmental division within its E&S segment by hiring four individuals who had been with Freberg Environmental Insurance.
“On the mergers and acquisitions side, A.M. Best would probably not be surprised if more M&As occurred,” said Robert Raber, senior financial analyst, A.M. Best. “With current market conditions, it’s a challenge for them to grow their business.”
With all of the competition in E&S lines, Kaufman said risk managers may be tempted to look only at price instead of “expertise and where that company will be down the road. The company may have a strong enough rating to offer the product but will they be around to effectively handle the claims and service the insured?”
“I think if I was a risk manager,” said Raber, “I would probably be comfortable with a team that was familiar and had a lot of industry expertise in the business I was looking at. … I would be looking for consistency in the market, a presence in the market.”
“You want a company that has proven they understand that type of business,” said Blades.
“It’s not just underwriting, it’s claims and loss control. You want a company that has proven they understand that type of business, that they have committed to it for a long period of time.”
The interest in the E&S market has been increasing for several years because insurers are finding it challenging to grow organically in the standard lines, Raber said. At the same time, insurers are contending with a soft market and the continuing problem of low investment returns.
Kaufman said the acquisitions were also a way for insurers and brokers to acquire much needed talent.
The most significant new entrants to the E&S market include Kemper Corp., Knight Holdings and Hamilton Insurance.
The most notable M&As in the past year were ACE’s acquisition of Chubb (with the merged company retaining the Chubb name) and XL Catlin.
AIG, which primarily writes E&S through Lexington Insurance Co., remains at the top of the U.S. field, although Lloyd’s of London remains the leading surplus lines market, with 20 percent of the market share, according to A.M. Best.
E&S is also drawing new entrants into market.
The most significant new entrants, though still with minor direct premiums written, according to SNL Financial, include Kemper Corp., whose direct E&S premium in Q3 2015 was $40.5 million; Knight Holdings at $12.2 million; and Hamilton Insurance at $6.5 million.
In comparison, Lexington Insurance Co. wrote $965.9 million in direct E&S premium in the U.S. in the third quarter of 2015, according to SNL Financial.
No Damages for Peanut Explosion
On Aug. 4, 2009, Industrial Fumigant (IFC) dumped about 49,000 Fumitoxin tablets into a single access hatch of a peanut dome owned by Severn Peanut Co. to fumigate the North Carolina building.
A fire broke out on Aug. 10, which smoldered until an Aug. 29 explosion caused extensive structural damage and the loss of nearly 20 million pounds of peanuts.
Travelers Insurance Co. paid Severn $19 million to cover the costs of the peanuts, damage to the peanut dome, lost business income, and remediation and fire suppression costs.
On Jan. 4, 2012, Travelers, Severn and Meherrin Agriculture & Chemical Co. (Severn’s parent company) sued IFC and Rollins Inc. (IFC’s parent company) for breach of contract and negligence.
Severn argued that the Fumitoxin tablets were known to produce a toxic and flammable gas when piled atop each other, and that its agreement with IFC required the company to apply the pesticide “in a manner consistent with instructions.”
The Eastern District of North Carolina court dismissed the case, noting that the $8,604 contract between IFC and Severn specified that the fumigation fee was not “sufficient to warrant IFC assuming any risk of incidental or consequential damages” to Severn’s property or product.
The court also dismissed the negligence claims, finding Severn was “contributorily negligent” in its actions.
On appeal to the U.S. 4th Circuit Court of Appeals, IFC prevailed again. Allocating contractual risks between sophisticated business partners provides business predictability, it ruled. Enforcing such provisions is “far from an outlandish exculpation of responsibility.”
Scorecard: Severn and Travelers will not receive damages to offset the $19 million paid by the insurer.
Takeaway: The manufacturer “chose to bargain away protection for consequential damages” through its contract with the fumigation company.
Excess Coverage Not Triggered
Montello Inc. distributed an oil-drilling mud viscofier containing asbestos between 1966 and 1985, resulting in numerous lawsuits from individuals claiming injury as a result of exposure to asbestos.
The company had primary insurance coverage from The Home Insurance Co. from 1975 to 1984, but the insurer had not paid out any claims for bodily injury by the time it was declared insolvent in 2003.
After Home’s insolvency, Canal Insurance Co., which had issued excess coverage, filed a legal action against Montello seeking a court determination that it had no duty to defend or indemnify the company. Montello responded by filing counterclaims, as well as filing complaints against Continental Casualty Co. and Houston General Insurance Co.
Houston General had also issued excess coverage. Montello alleged Continental had issued an insurance policy as well, but neither Montello nor Continental had a copy of it.
A U.S. District Court dismissed the cases in a series of rulings. On Nov. 27, 2015, the U.S.10th Circuit Court of Appeals agreed with those rulings.
The court noted that Montello’s policy with Canal and Houston General “did not undertake to insure the solvency of Montello’s primary insurer.”
“The Excess Clause is clear: When the underlying insurer’s limits are reduced by payment of loss, Canal’s liability is triggered. The underlying insurer’s inability to pay is not payment of loss.” — U.S. 10th Circuit Court of Appeals
“The Excess Clause is clear: When the underlying insurer’s limits are reduced by payment of loss, Canal’s liability is triggered. The underlying insurer’s inability to pay is not payment of loss,” it ruled, noting that the provisions in Houston General’s policies were similar.
As for the lost policy, it ruled Montello had the burden of establishing its existence. It said the company’s witness at the district court level could not testify as to which umbrella policy was in use or its specific wording. &
Scorecard: The three insurers need not defend or indemnify Montello.
Takeaway: Excess insurers usually have no obligation to drop down to cover a primary insurer’s obligations.
Court: Flood Threat Was Not Direct Physical Loss
In late May 2011, the U.S. Army Corps of Engineers issued warnings of potential flooding of the Missouri River near three properties owned by Infogroup, a data provider in Carter Lake, Iowa.
On June 1, 2011, Infogroup relocated most of its business operations and data center, and decided to set up a new permanent location elsewhere. The Phoenix Insurance Co. advanced $500,000 to the company for anticipated claims under its property and personal business property coverage.
The insurer noted the policy would cover relocation, but not establishment of a new facility.
The company’s parking lot flooded in August; Infogroup and Phoenix disputed whether water caused any physical loss or damage.
Infogroup submitted a claim for $12.2 million, minus a deductible and the $500,000 advance. Phoenix denied the claim under the policy’s Extra Expense coverage because there was no physical damage to the properties.
The U.S. District Court for the Southern District of Iowa ruled on Nov. 30, 2015 that the policy was unambiguous in its requirement that “direct physical loss or damage” was necessary to trigger the Extra Expense clause. It also said that the Preservation of Property clause covered property, not operations, but there was “a genuine issue of material fact” as to what relocation costs were necessary. It rejected the insurance company’s request to dismiss that element of the lawsuit. &
Scorecard: Further legal proceedings are needed to determine how much of the $12.2 million claim is properly due Infogroup.
Takeaway: While the Extra Expense clause required “direct physical” loss or damage, the broader Protection of Property clause required only “loss or damage.”
Commercial Auto Warning: Emerging Frequency and Severity Trends Threaten Policyholders
The slow but steady climb out of the Great Recession means businesses can finally transition out of survival mode and set their sights on growth and expansion.
The construction, retail and energy sectors in particular are enjoying an influx of business — but getting back on their feet doesn’t come free of challenges.
Increasingly, expensive commercial auto losses hamper the upward trend. From 2012 to 2015, auto loss costs increased a cumulative 20 percent, according to the Insurance Services Office.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow,” said David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty at Liberty Mutual Insurance. “As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
For companies with transportation exposure, costly auto losses can hinder continued growth. Buyers who partner closely with their insurance brokers and carriers to understand these risks – and the consultative support and tools available to manage them – are better positioned to protect their employees, fleets, and businesses.
Liberty Mutual’s David Blessing discusses key challenges in the commercial auto market.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow. As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
–David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty, Liberty Mutual Insurance
More Accidents, More Dollars
Rising claims costs typically stem from either increased frequency or severity — but in the case of commercial auto, it’s both. This presents risk managers with the unique challenge of blunting a double-edged sword.
Cumulative miles driven in February, 2016, were up 5.6 percent compared to February, 2015, Blessing said. Unfortunately, inexperienced drivers are at the helm for a good portion of those miles.
A severe shortage of experienced commercial drivers — nearing 50,000 by the end of 2015, according to the American Trucking Association — means a limited pool to choose from. Drivers completing unfamiliar routes or lacking practice behind the wheel translate into more accidents, but companies facing intense competition for experienced drivers with good driving records may be tempted to let risk management best practices slip, like proper driver screening and training.
Distracted driving, whether it’s as a result of using a phone, eating, or reading directions, is another factor contributing to the number of accidents on the road. Recent findings from the National Safety Council indicate that as much as 27% of crashes involved drivers talking or texting on cell phones.
The factors driving increased frequency in the commercial auto market.
In addition to increased frequency, a variety of other factors are driving up claim severity, resulting in higher payments for both bodily injury and property damage.
Treating those injured in a commercial auto accident is more expensive than ever as medical costs rise at a faster rate than the overall Consumer Price Index.
“Medical inflation continues to go up by about three percent, whereas the core CPI is closer to two percent,” Blessing said.
Changing physical medicine fee schedules in some states also drive up commercial auto claim costs. California, for example, increased the cost of physical medicine by 38 percent over the past two years and will increase it by a total of 64 percent by the end of 2017.
And then there is the cost of repairing and replacing damaged vehicles.
“There are a lot of new vehicles on the road, and those cost more to repair and replace,” Blessing said. “In the last few years, heavy truck sales have increased at double digit rates — 15 percent in 2014, followed by an additional 11 percent in 2015.”
The impact is seen in the industry-wide combined ratio for commercial auto coverage, which per Conning, increased from 103 in 2014 to 105 for 2015, and is forecast to grow to nearly 110 by 2018.
None of these trends show signs of slowing or reversing, especially as the advent of driverless technology introduces its own risks and makes new vehicles all the more valuable. Now is the time to reign in auto exposure, before the cost of claims balloons even further.
The factors driving up commercial auto claims severity.
Data Opens Window to Driver Behavior
To better manage the total cost of commercial auto insurance, Blessing believes risk management should focus on the driver, not just the vehicle. In this journey, fleet telematics data plays a key role, unlocking insight on the driver behavior that contributes to accidents.
“Roughly half of large fleets have telematics built into their trucks,” Blessing said. “Traditionally, they are used to improve business performance by managing maintenance and routing to better control fuel costs. But we see opportunity there to improve driver performance, and so do risk managers.”
Liberty Mutual’s Managing Vital Driver Performance tool helps clients parse through data provided by telematics vendors and apply it toward cultivating safer driving habits.
“Risk managers can get overwhelmed with all of the data coming out of telematics. They may not know how to set the right parameters, or they get too many alerts from the provider,” Blessing said.
“We can help take that data and turn it into a concrete plan of action the customer can use to build a better risk management program by monitoring driver behavior, identifying the root causes of poor driving performance and developing training and other approaches to improve performance.”
Actions risk managers can take to better manage commercial auto frequency and severity trends.
Rather than focusing on the vehicle, the Managing Vital Driver Performance tool focuses on the driver, looking for indicators of aggressive driving that may lead to accidents, such as speeding, sharp turns and hard or sudden braking.
The tool helps a risk manager see if drivers consistently exhibit any of these behaviors, and take actions to improve driving performance before an accident happens. Liberty’s risk control consultants can also interview drivers to drill deeper into the data and find out what causes those behaviors in the first place.
Sometimes patterns of unsafe driving reveal issues at the management level.
“Our behavior-based program is also for supervisors and managers, not just drivers,” Blessing said. “This is where we help them set the tone and expectations with their drivers.”
For example, if data analysis and interviews reveal that fatigue factors into poor driving performance, management can identify ways to address that fatigue, including changing assigned work levels and requirements. Are drivers expected to make too many deliveries in a single shift, or are they required to interact with dispatch while driving?
“Management support of safety is so important, and work levels and expectations should be realistic,” Blessing said.
A Consultative Approach
In addition to its Managing Vital Driver Performance tool, Liberty’s team of risk control consultants helps commercial auto policyholders establish screening criteria for new drivers, creating a “driver scorecard” to reflect a potential new hire’s driving record, any Motor Vehicle Reports, years of experience, and familiarity with the type of vehicle that a company uses.
“Our whole approach is consultative,” Blessing said. “We probe and listen and try to understand a client’s strengths and challenges, and then make recommendations to help them establish the best practices they need.”
“With our approach and tools, we do something no one else in the industry does, which is perform the root cause analysis to help prevent accidents, better protecting a commercial auto policyholder’s employees and bottom line.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.