Hardening Markets, Social Inflation, E&S Business: Berkley, AIG Execs Face Analysts

September 13, 2019

The commercial general liability line will be the next property/casualty line to harden, the chief executive of W.R. Berkley Corp. predicted at an industry conference.

Speaking at the Keefe, Bruyette & Woods Insurance Conference last week, W. Robert Berkley Jr., president and CEO, added that although general liability’s hardening lags changes already taking place for commercial property, professional liability and commercial auto, it will happen within the next 12-24 months.

Not only will the general liability market harden, but the changes will also be as meaningful as those occurring now in the other lines, although they will be implemented much more gradually, he said. Berkley also referenced some of the hardest markets in the industry’s history when an audience participant asked him to discuss his observations of the excess and surplus lines market, in particular.

“There are clear signs that business is beginning to flow out of the standard market into that nonstandard market,” he said, although he noted that he did not have specific submission counts on hand to support his assertion. Among the reasons: “The standard market [is] beginning to grapple with appetite sprawl that has occurred over the last few years.”

He cited the actions of “some of the larger players [that are] limiting or curtailing their appetites [and] reducing the amount of capacity they are willing to offer.” Berkley said this is all “driving opportunity” for E&S carriers.

“So, I would suggest to you that this is not yet 2002, 2003 or ’86, if you really want to take a trip down memory lane. But I would tell you that there is a growing amount of evidence that this market is going through a period of meaningful transition. And while perhaps, for some, it is more pronounced or visible on some of the shorter-tail lines, such as property, I would tell you that the casualty and professional [liability] market is likely to turn as much—or more, though it is a more gradual build. But it will also perhaps be more long lasting,” he said.

(Editor’s Note: A hard market for liability lines in 2002 and 2003 followed the 9/11 attacks in 2001. The 1986 hard market was one of the most severe on record, famously described in a Time magazine cover story, “Sorry, America, Your Insurance Has Been Canceled,” March 24, 1986. The article recounted situations where premiums doubled for some insureds and soared by multiples for others, mirroring similar spikes in jury verdicts, and where capacity dried up for day care centers and other types of businesses that were prime targets of litigation.)

More Litigation

The audience participant also asked Berkley specifically about the potential market impact of states like New York and New Jersey lengthening their statutes of limitations on sexual abuse claims—actions that some industry research analysts have suggested could drive a spike in liability insurance prices and loss costs. Berkley noted that the impact wouldn’t be great for his organization but there would be ramifications across the industry.

“I would never say we had no exposure because we are a big enough, complicated enough organization that you can never know with that degree of certainty. But based upon the work that we have done, we are confident that it is very limited,” he said. Answering the broader question, he continued: “Purely thinking about the industry and the economics, it is likely to drive significant trend and hardening because there are some meaningful players that are having to actively change their approach. I think that many have meaningful exposure on a historical basis as well,” he said.

(Editor’s note: Coverage litigation has already begun. In July, the Roman Catholic Archdiocese of New York filed suit seeking to compel more than two dozen insurers to cover claims that will be filed within a one-year window opened up the New York’s Child Victims Act. The suit from the Archdiocese reportedly came after a coverage denial from Chubb. Separately, in April, Travelers boosted its prior-year loss reserves in response to the passage of the Child Victims Act.)

Following up on that discussion, another participant asked about the insurance market impact of headline litigation related to talc and opioid judgments and settlements. Again, Berkley reiterated that his company’s book was not totally immune. “But the lion’s share of what this organization does is focused on businesses that you don’t read about in the newspapers, by and large,” he said, indicating that 90 percent of the insurance portfolio is written at limits of $2 million of less.

Bigger picture, Berkley said he is conscious of what he and others have labeled social inflation. “We’re seeing awards coming out of juries where they’re not only looking to compensate the injured, but they are also looking to punish,” he said, also noting the impacts of more liberal judges appointed under the Obama administration and an aggressive plaintiffs’ bar that has ramped up advertising.

AIG and Q&A

At the following session, Peter Zaffino, global chief operating officer of American International Group, teed up the opioid question himself during his opening remarks prior to Q&A. Referring to lawsuits “filed primarily by state and local governments against manufacturers, distributors and retailers of opioids,” he said that “while it’s too early to predict or quantify the outcome of all the litigation or the insurance that may apply, we are very closely tracking these developments so that we can address these complicated risks appropriately as they continue to evolve.”

Asked later whether an adverse loss development cover from Berkshire Hathaway’s National Indemnity Company would provide protection from legacy liabilities that have started to emerge, Zaffino could only say that AIG is watching the actions of state and local governments carefully, that AIG would provide relevant fact-based information quarter-by-quarter, and that a clearer answer will depend on exactly what emerges and what’s excluded from coverage.

Zaffino, who is also CEO of General Insurance at AIG, voluntarily provided some commentary on rate trends as well. “We continue to see meaningful rate increases across our portfolio—in the high-single digits in the second quarter compared to a mid-single-digit improvement in the first quarter,” he said. In fact, he added that nearly 60 percent of the second quarter’s gross premium volume was associated with double-digit rate increases, while less than 10 percent had rate declines attached.

“Our comprehensive and disciplined strategy to reposition our businesses as market leaders has improved the quality and rate adequacy of our overall book of business,” he said, referring more specifically to AIG’s successful actions to return the insurance giant to profitability in the first two quarters of this year rather than overall market conditions.

Returning AIG to Profit

Zaffino spent most of the time allotted for AIG at the conference on a review of those strategic actions, which included slicing capacity and buying more reinsurance protection, and on a preview of the go-forward strategy known as “AIG 200.”

Leading off with a discussion of Hurricane Dorian, Zaffino flagged the storm as a reminder of the days when AIG leadership was not diligent enough about reinsurance protection, property limits or the consistency of its underwriting approach, all of which exposed the company to volatility and outsized risk. In particular, he noted that when Hurricanes Harvey, Irma and Maria hit in 2017, AIG’s reinsurance protection for the events consisted only of a catastrophe cover with per occurrence protection attaching at $1.5 billion, resulting in no recoveries for the material losses that AIG experienced.

AIG has since changed the reinsurance program, cutting the $1.5 billion attachment point in half and adding a global aggregate protection that attaches at $750 million (with a $100 million per event deductible). Enhancing the program further in the second quarter this year, AIG bought separate discrete cat covers to reduce retention in its Private Client Group and for certain cat-exposed geographies, he said.

Zaffino called the combination reinsurance and primary capacity changes “very compelling,” noting that at year-end 2018, AIG reduced gross property limits from $2.5 billion to $750 million. Net limits were reduced from $611 million at the end of 2017 to a range $5 – $50 million per risk at the start of 2019, he added.

And there were changes on casualty business as well, he noted. In primary D&O, he reported that gross limits were reduced by over $8 billion in the aggregate throughout 2018. While not sharing specific figures for AIG’s E&S business, Lexington, he said there were also material changes to gross and net limits at Lexington within financial and casualty lines.

“I don’t apologize when we go to talk to clients that I can only put out $750 million in property limit. That’s a healthy limit. That is a lead limit. That is something that is going to help [brokers] and drive leadership in the marketplace,” Zaffino said. “We are still a very large insurance company that can be very prevalent in solving risk issues for clients and brokers.”

KBW Analyst Meyer Shields asked Zaffino, who previously held executive positions at Marsh & McLennan, to describe how brokers reacted to AIG’s changes. Zaffino responded that while they haven’t been ecstatic, they have been receptive. “They very much want a strong AIG,” he said, adding that the conversation has changed since AIG first announced its “return-to-profit” strategy.

“What brokers want, if they could pick one thing, is certainty. Tell me what you’re going to do and make sure you deliver on that,” he said, recalling the initial stages of the turnaround. By April 2019, Zaffino’s first RIMS meeting as an AIG executive, the brokers were no longer asking, “What are you doing to change? Who are we going to be doing the underwriting with?” Instead, conversations focused on how AIG could be relevant to their accounts, allowing him to focus their attention on the carrier’s cyber expertise, its multinational platform and other differentiating services.

“Quite frankly, we outlined to them in very clear words what we were going to do: We’re going to shrink our gross limits strategy. We’re not going to have multiple channels where brokers can find ways into risk. We’re going to have Lexington be a wholesale distribution channel and be an E&S player. And where we need more rate, we’re driving more rate,” he said.

Market Behavior Rational

Berkley said that the drive for more rate is happening across the industry for commercial property, professional liability and commercial auto, where the market is hardening “at an accelerating pace.” He contrasted those three lines to a softening workers compensation line.

“The cycle has changed from what it once was. Once upon a time, the market tended to harden and soften across product lines somewhat in lockstep,” Berkley said.

Still, today, “there is a fair amount of predictability as to what lines are going to harden. It’s just not particularly clear how quickly it is going to happen,” he said.

That said, Berkley went on to provide his forecast: “I am reasonably confident that you are going to see that the GL line over the next 12-24 months is going to harden. Just like two years ago, we were beating the drum about what was going to happen to commercial auto. A year ago, we were talking about what needed to happen with professional liability, and in particular D&O.”

“Directionally you can see where its’ going. The level of precision if you’re trying to predict this quarter versus that quarter is not always so clear,” he said.

Berkley and his father, Executive Chair William R. Berkley, began their discussion of market cycles with references to mistakes that carriers made in the past in assigning adequate prices to the risks they took on—largely a result of the lag between writing a policy and the emergence of claims. But the elder Berkley, who typically highlights irrational behavior of competitors, noted that the softening of the workers comp line was neither unforeseen nor irrational.

“Everyone knew it was incredibly profitable. It wasn’t brilliant to [say] that prices are going to come down because that level of profitability was attracting people [and] regulated pricing was going to change. It was a rational behavior…Totally rational.”

“True, but I think we both agree that at some point, history would suggest [that carriers] overshoot that mark,” Rob Berkley interjected.

Separately, toward the end of the AIG session, Shields noted that both AIG CEO Brian Duperreault and Zaffino have stressed that price movements are not the primary driver of AIG’s improved results. “But we see pricing move,” Shield said, going on to ask about the relationship between AIG’s price hikes and the rest of the market.

“How much of that is a cause of AIG’s movement and how much is an effect of AIG’s move?”

Alluding to a viewpoint shaped during his tenure on the brokerage side, Zaffino said, “The big domestics are the ones that really have to demonstrate leadership.” Using D&O as an example, he said that AIG obtained rate increases of 30 percent on primary corporate D&O while shrinking limits in lead layers dramatically—and still retained 90 percent of the policies.

He suggested that movement of business out of the standard market and into E&S has also had a positive impact.

This article is republished from Carrier Management, the publication for P/C insurance carrier C-suite executives.