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It’s no secret to anyone in the insurance industry that significant changes in the business are occurring every day. Between new and more severe loss types occurring, changing risk tolerances for established carriers and new entrants alike, and pricing fluctuations, it is critical for insurers to stay on their toes and evolve with the market. The question is not only how the market is changing today, but where is the market headed in the future?
I have spoken with several Chief Underwriting and Claims Officers and other high-ranking members of insurance organizations to provide a deeper holistic understanding of the prevailing trends in the market and potential outcomes in the future.
One of the main questions on people's minds is where the main areas of growth are in the broader insurance market. Can we confirm that Excess and Surplus Lines (E&S) and Cyber are currently the largest growth areas of the market? According to department heads of claims and underwriting, this generally holds to be true for the time being. However, the key difference between the two areas is the sustainability of said growth.
E&S Space
The E&S space is more inclusive of different product lines but has taken significant strides along the property side due to decreased risk tolerances amid higher incurred loss severity and frequency. Carriers have taken action to correct the discrepancy between risk profiles and premium revenue, such as larger carriers offering lower policy limits, drastically increasing their pricing (in some cases tripling) or exiting the personal or commercial property space altogether. Due to these market shifts, the alternatives for insureds are to purchase coverage through non-admitted carriers or E&S coverage through reinsurance carriers to apply for these losses.
Cyber Coverage
For Cyber coverage, the market is beginning to harden due to the volatility and rapid evolution of losses, increased competition in the market, and carrier reassessment of covered losses. In the infancy of Cyber coverage, most carriers were able to collect premiums with minimal payouts from incurred losses, with most insureds purchasing coverage as an “add-on” rather than a necessity. However, in the last five years, the market has exploded due to new large-scale losses resulting from intentionally coordinated acts, such as ransomware, phishing schemes, or cyber warfare. The increased need for Cyber coverage has led to new entrants in the market, as many carriers are offering this product line as a core specialty coverage and led to undercutting in pricing. These Cyber losses tend to be large in scale and require additional expenditures on defense costs through claims defense. There is also the potential to bring in additional losses within the E&O/D&O policies, as they are tangentially related to one another, and if one policy has an exclusion for that particular loss, there may be coverage that applies with another policy. One example that we can expect to see along these lines would be new AI-related losses, which could be considered a 3rd party Tech E&O loss rather than a Cyber loss. Regardless, carriers will be expected to pay for one form of coverage or another while paying defense costs for each policy as well. With the prolonged nature of these claims, they are now beginning to mature and become realized as losses against carriers’ books. This will necessitate pricing adjustments, as claims defense and indemnification expenditures currently exceed incoming premiums. We can expect to see an adjustment in pricing over the next year, which should help recalibrate the deficit in claim payments versus incoming premiums.
Product Line trajectory
With this in mind, can we count on these product lines to continue to maintain their current trajectories over the next 3-5 years? In the eyes of industry experts, growth will continue, but necessary adjustments will be made in terms of appropriate pricing models and covered losses.
The E&S market will continue to increase in relevance as time passes on. While property is expected to make a relative comeback as premium pricing readjusts itself, there still will be pockets of high-risk geographical areas that require additional coverage. In general, as losses increase across the board and new loss types across different coverage lines continue to occur, there will be a need to have broader Excess coverage to serve as a method to protect the Insured from direct personal exposure. Carriers such as AmWins are heavily investing in bolstering their Excess lines and can expect to see strong growth over the next decade.
Cyber coverage will continue to be a necessary coverage as the world continues to evolve digitally, but the policy language will need to be adjusted in a comprehensive and agile way. Lloyd’s has already announced their concern about the ambiguity of Cyber policies and potential exclusions needed for Cyber warfare attacks. Lloyd's has implemented exclusion requirements in stand-alone cyberattack policies for state-backed cyberattacks since August. The company is working through gray areas around cyber cover and is now seeking a more definitive approach. Along these lines, with the rapidly evolving nature of potential losses and technology in general, the onus will be on carriers to articulate coverages in a way that limits unnecessary and potentially damaging exposures.
New Entrants to the market
On a broader scope within the insurance industry, one aspect that cannot be ignored is new entrants into the market. With newer carriers and InsureTechs coming in with lower pricing to put pressure on more established carriers, can this trend continue in a sustainable way, or will this more aggressive strategy create long-term issues for these carriers?
For the time being, the market is providing an opportunity for MGA programs, Insuretechs, or newer carriers with external funding to enter the market with highly competitive pricing for customers, which puts pressure on established carriers to keep up with pricing models. This can also serve to help afford coverage in filling a vacuum for spaces where established carriers are exiting the particular space in the market, such as Allstate and State Farm no longer writing homeowners’ coverage in the state of California. That said, it remains to be seen if this model is sustainable on the whole, as the aggressive pricing of new entrants can result in short-term cash infusions from new premiums but will face difficulties down the road when claims against their policies mature. Some carriers feel they are well equipped with their underwriting and actuarial modeling internally that they can write the risk more effectively, but the risk-to-reward ratio remains high given the potential exposure on specific loss types and product lines. The likely outcome from these new market entrants will not be a seismic shift in the power balance in the industry as a whole but will serve as a complementary portion of the market filling needs in specialty areas of expertise and force more established carriers to modernize their approach on the broader business structure.
I thoroughly enjoyed and continue to enjoy conversations with senior market leaders. If you are interested in discussing current and future market conditions, insights from the broader insurance market, your next career move or business objectives, please do not hesitate to contact me at: richard.lazaro@eamesconsulting.com
Check out our US teams', Eames Insights, with David Miles covering conversations with senior market leaders surrounding what it takes to succeed in the actuarial market and Wise Stine exploring the impact of natural disasters and increasing loss types on the P&C actuarial market
