Exposure and capacity challenges are putting pressure on brokers to find new ways to structure financial and professional lines programmes, retention levels and coverage.
Reflecting on what has been one of the hardest trading environments on record, it is difficult to think that we are now approximately 18 months into a hardened market, one very much global in scale.
During this period we have had to manage significant reductions in underwriting appetite and capacity, increasingly frequent and complex claims along with a global pandemic which has drastically impacted business and global commerce.
As a result, the global insurance community has had to re-shape the way in which we trade in order to continue to provide market leading solutions to partners around the world.
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Challenges as opportunities
Yes we are going through tough times and the problems faced by all markets isn’t going away anytime soon but we continue to view these challenges as opportunities – opportunities to differentiate and set ourselves apart from the crowd, and to work more collegiately with our markets to provide products that will protect individuals and corporations at a time when they need it most.
We also have the, opportunity to learn in this environment, to endure, to develop new thinking and new approaches to transacting insurance – to rise to the challenges we clearly face today.
With another year of forecasted rate hardening and capacity challenges ahead of us, now more than ever, information is king. The benefits of providing clear, concise and meaningful information with the support and knowledge of an experienced broker communicating important aspects of a risk is night and day.
Good information is paramount to achieving the best possible terms and although sometimes it is difficult to comprehend and feel this while rates and retentions are on the up across most classes of insurance, having more accurate and targeted information will enable the best brokers to secure the most favourable terms. That early engagement and continual dialogue during the placement process is critical, especially given rates have the ability of moving – sometimes materially, on a monthly basis.
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Creative approach
As brokers we must use a thought through and creativite approach to all opportunities, especially the hard to place, and ensure all eventualities are covered – including a focus on programme structure, retention, coverage and co-insurance options.
The expectation of bankruptcy related filings working their way through the courts through 2021 and beyond is unfortunately very real and if not already thought of, experienced brokers should be attempting to critique and secure coverage in a way that will ultimately protect individuals and their assets in the event of a restructuring, insolvency or liquidation type events – these include looking closely at the debtor in possession, change of control, insured versus insured exclusions, priority of payments provisions, waiver of automatic stay and supplementary excess Side A and drop down products.
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Important issues for the finpro market
- Possibility for capacity restrictions towards Q4 2020
- Favourable legislative rulings for IPO exposures such as in the area of Federal Forum Provisions – the more positive developments there are in this area will help facilitate positive discussions with underwriters
- Whether or not the record level of IPO activity will continue at pace, whether traditionally or otherwise
- Additional scrutiny from the SEC on SPAC transactions
- Placement timing for companies D&O programmes that have yet to or have only experienced minor corrections
- New capacity at attachment levels experiencing the greatest capacity void
- Emergence of Side A only, self-insured, self-funding or alternative risk transfer mechanisms and how these can be applied as cost saving techniques
- Any developments led by Joe Biden’s Democratic party on regulation, SEC activity & enforcement and international trade agreements
Trends in the main financial, professional and executive risk market sectors
Financial Institutions:
- Still holding relatively stable compared to other financial lines classes such as D&O
- Markets looking to apply 5-10% rate increases purely due to current trading conditions and previously underrated business
- Additional rate is being applied relative to material growth in core underwriting metrics such as assets, revenues and employee count, outside of any material claims activity
- Capacity for specialised areas such as Broker Dealers and Investment Banks continues to hold with the availability of new capacity for smaller risks under certain commission and fee revenue thresholds
- Private equity, real estate, credit and distressed buy-out focussed funds are particularly viewed as cautious by the underwriting community
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Executive Risk:
- Underwriting discipline and appetite will remain consistent after most carriers working through a significant remediation processed throughout 2020
- US incorporated capacity at primary and low excess levels remains scarce
- Non-US incorporated capacity also remains low with some new entrants helping to fill voids left by exciting capacity within the burn layers
- Underwriters are managing capacity for new IPOs and are starting to take a more cautious approach
- Continued influx of SPAC opportunities are experiencing rate and retention movements in an upwards trajectory
- SPAC underwriters are keeping a watchful eye on new entrants looking to enter the area aggressively and due to increased SEC scrutiny
- Favourable legislative rulings have typically been countered by a materially saturated settlement pipeline
- Aviation, retail and hospitality will continue to experience exceptional underwriting discipline and capacity shortfall
- Small to mid-market business becoming very challenging with absolute minimum rates now being applied consistently
- Public rating could see another 20-30% raise applied to companies that have already experienced a significant correction
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Professional Indemnity:
- (Re)Insurers had very strict underwriting guidelines to adhere to throughout the course of 2020, replicating the process applied at the start of 2019
- Many Underwriting Syndicates have been tasked with shrinking their portfolios whilst applying significant rate increases across all business classes
- Underwriting profits need to be sufficient enough to demonstrate to Lloyd’s that syndicates are actively looking to rectify profitability concerns
- Insurers have reached a point in November 2020 where income targets have already been met meaning appetite for new business it becoming an issue
- Insurers are now submitting Business Plans for 2021 and whilst we anticipate rate increase to remain on the up by 15% – 20%
- We do expect more stability in certain areas of the market although careful consideration on capacity deployment will continue
- It will become increasingly more valuable having meaningful relationships with overseas carriers
- 2021 will also see a movement to exclude Cyber Liability from many Professional Indemnity policies
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Cyber and Data Risk:
- It is anticipated that rates will harden by 5-15% as the claims experience develops negatively for a relatively new class
- Malware claims are one key issue in terms of claims volume and some carriers are anticipating that sub-limits may have to be introduced in an initial attempt to combat this exposure
- Capacity remains strong however we are beginning to see carriers exiting the class or starting to implement corrective measures
- Starting to see an increase in insureds purchasing greater limits
- Working from home and future flexible work patterns will start placing greater emphasis on the quality of cyber security and data protection systems and protocols
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M & A transaction risk:
- After several months of very low activity levels we are beginning to see activity picking up
- Rumours of an expected hardening within the M&A market with the possibility of exits during the next 12-24 months
- Deal momentum currently building towards the end of 2020 – with the gradual disappearance of government support possibly triggering increased share and asset sale activity
- Reps and Warranties insurance and its application to de-SPAC transactions could provide a significant opportunity for the market
- The utilisation of transactional risk transfer products in special situations such as bankruptcies, for example utilising Reps and Warranties cover for solvent asset disposals, Tax Insurance in a Section 382(l) or Contingent Liability Insurance in a 363 Asset Sale.
Our focus as a broker is to work closely with key trading partners and delivering on extremely difficult placements with the support of some of the world’s leading underwriters has been at the core of everything we do.
Although the current trading conditions are set to continue for the foreseeable future we are absolutely confident of representing our partners and mutual clients’ best interests – the ability to deliver on hard to place and distressed risks is very much part of our DNA and whether or not it seems as though there is no other option, boutique independent brokers have the expertise and global market relationships to ensure the best possible chance of obtaining the best possible outcome.
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David Thomas is the head of Financial and Professional Solutions at AFL Insurance Brokers.
This copy is reproduced with permission and thanks to Insurance Day, article originally published in their 17th November 2020 edition
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