Overall Market Sees Greater Stability but Rates Still Up: Risk Strategies Report

Cybercrime is up, properties are underinsured, and the management liability market is softening.

These are a few of the predictions and results revealed in the Risk Strategies 2023 State of the Market report, which examines the trends of 2022 and provides a risk forecast for the coming year. The report digs into various markets and assesses the hurdles those lines may face in 2023.

Cyber

Ransomware attacks, cyber threats and their costly tolls have increased dramatically in the last few years. Not only is recovery expensive but compromised organizations are left open to lawsuits potentially involving thousands of exposed parties.

One factor behind the spike is the gaps left in cybersecurity when everyday business shifted to a work-from-home model during the COVID-19 pandemic. The landscape quickly changed as organizations sent workers home with little warning and adjusted timelines for return as the pandemic continued. IT departments were left playing catch up.

More threats and higher costs are forcing companies to examine their cyber security and increase the insurance they carry to cover damages resulting from a breach. And insurers want to know that prevention measures are in place and that a company stays up-to-date.

The outlook for 2023 is for greater stability than in the previous few years. Insurers have learned more about threats and how to price policies to maintain profitability. Organizations are taking steps to mitigate cyber and ransomware attacks to protect their people and get the cyber coverage they need in case of an attack. Rate increases have leveled — averaging 20% in Q4 2022.

Industry recommendations include early renewals, ongoing dialogues about the risk environment and events, and making sure insureds are maintaining up-to-date security measures across the board, at every level and with every machine tied to the organization. Firms should have an ongoing cyber security maintenance program and update as new threats are detected.

Property

Weather and climate-related events such as wildfires and hurricanes caused losses exceeding $150 billion.

Insureds across the board have seen significant reductions in coverage capacity, as well as higher deductibles, rates and premiums. The market continues to refine its underwriting position on secondary perils such as tornadoes, floods, wildfires, hailstorms and freezes.

A recent building appraisal analysis showed that nearly 90% of buildings appraised in 2020 and 2021 were undervalued. It showed 68% of buildings were underinsured by 25% or more and 19% were underinsured by 100%. Underwriters continue to focus on the adequacy of replacement cost values amidst inflation, higher labor and material costs, and supply chain issues. Underwriters may look for building and contents value increases as high as 10%-20%, which translates to higher insurance premiums.

The rate disparity between good risks without catastrophe exposures and losses and poor risks with them will continue in 2023. Good quality risks without CAT exposures and losses will see rate increases, on average, of 10%, while poor risks with CAT and loss experience will see increases of 50% or more.

Many clients with January 1 renewals may have missed the full impact of treaty changes. Some new capacity entered the market, capitalizing on better pricing and terms but not enough to slow the market down. At press time, the April 1 critical treaty renewal period proved to be more challenging than January 1 as reinsurers had a clearer picture of 2022 results and what they need to be profitable in 2023.

Management Liability

The accelerated downturn in the directors and officers (D&O) and management liability space has continued into 2023.

The market is transitioning from hard to moderate/soft. Still, it is facing headwinds from a challenging economic environment, the financial impact of COVID-19, continued high inflation, and an industry that has seen a significant uptick in loss costs impacting carrier profitability. The degree of transition varies by line of business and industry segment.

The new capacity of the past three years has led to much more favorable pricing and expanded policy terms. Less net new business in the market coupled with the new capacity should benefit buyers with attractive risk profiles and little-to-no significant claims activity. Buyers will benefit in terms of reduced premiums, lower SIRs, stable or increased limits of capacity, and expanded coverage terms. However, the challenging macroeconomic environment puts increased financial pressure on clients, potentially tempering the improved pricing environment stemming from the influx of new capacity.

The final impact of pandemic-era securities class action claims is uncertain. The total amount of securities class action settlements was $7.4 billion in 2022, a 75% increase from 2021. Insurance carriers funded a portion of those settlements, and the ultimate impact on balance sheets for this business line remains to be seen.

Increasing environmental, social risks and governance (ESG)-related requirements demand companies address relevant challenges. Failing to address ESG could lead to derivative claims, shareholder claims, and accusations of breach of fiduciary duties by D&O. Diversity, equity and inclusion (DE&I) issues continue to impact D&O. Equal pay and compensation-related claims are on the rise.

Casualty

The 2022 casualty market saw a return to a more competitive and nuanced market than in the previous three years. While companies with exceptional loss control in low-to-moderate hazard classes of business achieved good results in 2022, several industries, such as transportation, education, nonprofits and retailers, continue to face headwinds.

In 2023, the casualty market is generally expected to experience rising premiums but at much lower levels than recent results. Concerns with the reinsurance market eased somewhat based on casualty treaty renewals as of January 1, suggesting at least three to six months of stability for many primary insurers.

Emerging and adverse casualty claims are expected to rise in areas such as “forever chemicals” and other hazardous exposures, and sexual abuse exposures. Workers’ compensation risks are expected to increase. However, while loss ratios are rising again, significant premium increases are not likely. Third-party litigation funding will continue impacting verdicts, which could exceed the inflation rate.

As 2023 progresses, a crucial concern will be the ongoing availability of reinsurance at a reasonable price for casualty insurers, given the pressure now placed on the property reinsurance market.

Captives

Broader adoption of captive solutions with a more sophisticated mid-market clientele made 2022 a banner year in the captive insurance industry, and the high demand will likely continue through 2023.

Healthcare costs, nuclear verdicts, cyberattacks, catastrophic climate events and market-specific drivers led to steep commercial insurance premiums, prohibitive exclusions and even a complete lack of insurability as reinsurance dries up.

A continuing hard market in some lines has made it more challenging to control total cost of risk, making it difficult to lower the insurance premium component of that cost. By retaining more risk in a captive, insureds can choose when to transfer risk to third parties.

The demand for long-term solutions has led to the structuring of different captive programs such as enterprise risk captives, single parent captives, group captives, risk retention groups, sponsored cells, and financial guarantee arrangements. Businesses with a larger employee base who self-fund their group medical benefits are increasingly writing a layer of stop loss insurance in their own captive to retain a level of underwriting profit.

As businesses discover how captives can provide risk financing solutions, the use of captives that can offer a revenue stream complementary to the core business will grow, according to the Risk Strategies’ report findings.