North America Q1 2021 Market Dynamics
North America Q1 2021 Claims
North America Q1 2021 Rate Trends
It’s a race against time as the public health crisis continues. COVID-19 vaccine eligibility expanded notably over the quarter; however, the virus is mutating, and variants are spreading. Despite ongoing health concerns, there is general optimism, and economic conditions are strengthening, as interest rates remain near zero with no meaningful hikes expected. Multiple massive US economic stimulus bills – including the latest $1.9 trillion package in March – are creating positive impacts not only for hundreds of millions of direct US recipients but also for the North American and global economy at large. Strong performing sectors include Autos, Basic Materials, Finance, Retail, Construction, Industrial Products, Technology, and Medical.
The new US Administration is experiencing concurrent challenges related to the humanitarian crisis at the US-Mexico border, the re-evaluation of long-standing state voting processes and rights, gun control in the face of repeated mass shootings, and Senate gridlock that is leading to scrutiny of the filibuster.
In Canada, the public health crisis has necessitated renewed regional shutdowns and curfews, international uncertainty remains high, protectionist trends continue to weigh on the prospects for Canada's export-oriented economy, and the domestic political fight over carbon taxes and climate change continues.
Across the region, tensions related to inequality and racial discrimination remain high, although a recent court verdict in a high-profile murder trial related to a tragedy that kicked off months of protests in 2020 was broadly perceived as an important and necessary step toward police accountability for racial injustices. International Women’s Month garnered more attention than ever, and this year’s theme #choosetochallenge was widely celebrated.
Insurance Market & Key Risks
Pricing increases continue: The US market is now experiencing the 12th to 13th consecutive quarter of premium increase, while Canada is seeing its 7th to 8th consecutive quarter, for many product lines (e.g., Property, Financial lines, and Umbrella / Excess Casualty), meaning insureds have now experienced rate-on-rate renewals for up to four cycles. Despite this, pricing remains below the high-water mark seen at the peak of the last hard market. Drivers of the prolonged upward pricing environment include escalating loss costs and low interest rates.
Price increases have crept into areas previously less challenged: The few lines of business that had not experienced consistent, significant price increases like Workers Compensation, Cyber and Professions (namely, Lawyers & Accountants) are now also starting to experience notable upward pricing trends. Cyber, in particular, with increasing risk profiles (e.g., ransomware) as well as rising frequency and severity of claims, is starting to see significant spikes.
All options are on the table: Insureds continue to explore any and all options including self-insurance, creation or expanded use of wholly owned captives or non-owned captives, alternative products, alternative sources of capital, and changing insurance program architecture (e.g., higher deductibles).
Stabilization is on the horizon: New capacity – potentially in the $20 billion range between insurance and reinsurance – is entering the market. As more capital is deployed during the course of the year and pricing adequacy is reached in some spaces, a shift in market conditions may begin to occur.
Insurer views differ: The property claims process has become especially challenging when insurers on shared programs take different coverage positions despite the use of consistent wording.
Defense counsel interactions are problematic: Friction continues between insurers and insureds on the selection of defense counsel and payment of defense counsel rates/bills as well as on litigation strategy decisions, settlement valuation, and requests for settlement authority and funding.
Losses remain high: Claims frequency and severity remains high, driven largely by:
- Social inflation / nuclear verdicts – exacerbated by the current socio-political environment
- Natural catastrophes – including the February storm that swept the US
- Major ransomware / extortion events
- Continued COVID impacts and supply chain disruption
There is lack of clarity on Cyber coverage triggers: As ransomware claims increase in frequency and severity, insurers are spending a great deal of time especially on the business interruption portions of the claims. Requests are perceived as extra-invasive, as the trigger of coverage is not as clear as, for example, a Property claim might be.
Tips for Clients
Think big picture: If the net present value of transferring the risk is greater than zero - buy the insurance. Avoid getting caught up in year-over-year percentage increases; often, insurance is still the best option despite the (increasing) cost.
Find common ground: Describe your short- and long-term objectives and priorities in detail for Aon and insurers. Partner with insurers to understand their strategies and goals as well.
Broaden the team: In addition to partnering with underwriting teams, maintain lines of communication with insurer claims teams.
Develop a robust renewal strategy: Be proactive and start early so you to have greater control over the process. Describe in detail how you are addressing COVID-related risks. Leverage analytical tools like risk modeling to inform your discussions with insurers.
North America Featured Industries Q1 2021 Overview
Industry Issues While labor, site-access, and supply chains were initially disrupted during COVID-19, contractors adapted, and most projects and operations either continued with modest disruption and/or have now resumed. As project backlogs were based on a strong, pre-COVID economic landscape, there remains a pipeline of work and a highly competitive bidding environment. Some segments have been more negatively impacted by the pandemic than others, namely the hospitality, gaming, office development, and retail, though hospitality will likely rebound the 2nd half of 2021 and beyond. On the other hand, segments like life science/healthcare/pharma, logistics/distribution and data centers are highly vibrant. Contractors across North America are watching with a keen eye toward infrastructure stimulus efforts in the U.S. and Canada. Market Conditions Market conditions remain challenging; appetite is focused and pricing remains elevated, particularly for D&O, Professional Indemnity, Excess Casualty, and Property/Builder’s Risk (especially, frame construction). While there is ample capacity for most risks, high liability-related risks like residential construction, New York construction, and wildfire can be extremely challenging to find sufficient capacity for. Excess of Wrap-up coverage has become more closely scrutinized by underwriters, with some insurers setting high minimum attachments or becoming less willing to provide coverage. There is a trend toward internal underwriting escalation / referrals which has led to quote and approval delays and a generally more conservative underwriting environment. Project extensions, both on Casualty and Builder’s Risk, are frequent pain points, particularly with insurers whose underwriting appetite has changed since project inception. Insurers are transitioning away from manuscript policy wording to their own, standard wording. A general deterioration in contractor credit quality has led to Trade Credit rate increases, and collateral requirements have notably increased. In the claims arena, insurers appear to be scrutinizing every detail before issuing a coverage position and/or claims payment. Liability insurers remain concerned about escalating claims frequency and severity stemming largely from social inflation and nuclear verdicts, while Builder’s Risk insurers are dealing with outsized loss results from fire and water intrusion. Aon is working with insureds to start the Property and Casualty renewal process as early as possible to ensure risk mitigation efforts and other detailed risk information is shared early to achieve the best possible outcomes. A Look Ahead Residential, institutional, and industrial & infrastructure projects are expected to contribute to continued strong construction industry performance, as investment accelerates and an estimated 430,000 new construction-related jobs are filled in 2021. The insurance market is expected to remain challenging, but will likely stabilize later in the year when new capital emerges, offering capacity alternatives. Deductibles - especially for water - will come under greater pressure and project loss prevention is expected to become a higher priority for insureds. More insurers are exploring, and in some cases funding or co-funding, the utilization of water sensors/mitigation, video/camera and wearable technologies in an effort to improve loss outcomes. These practices are expected to gain strong momentum in the year ahead. There is emerging evidence of some moderation - but not a softening of the market - on rate change in both Casualty and Builder’s Risk.
Industry Issues Initially, manufacturers were expected to rebound strongly from the challenges of 2020, when operating plants were disrupted by myriad factors, including COVID-related workforce issues and dampened downstream demand from industrial customers who were also experiencing COVID impacts. At the outset of 2021, most factories restarted at moderate to full capacity as the economy rebounded and began to catch up on lost production. However, momentum stalled, production slowed down, and plants idled when many manufacturers experienced significant supply chain delays stemming from the global semiconductor shortage, COVID-related re-staffing and local labor shortages, the severe winter storm's impact on chemical and plastic supply, and marine shipment delays from the Suez Canal blockage. The chip shortage, in particular, hit the Automotive Industry hard, and delays are expected to continue through the summer.
Market Conditions In the Casualty space, pricing continues to trend upward, with Auto experiencing the most significant impacts. Underwriting scrutiny - even on small, non-complex placements - continues to add complexity to the renewal process, leading to delays in securing approvals and meeting quote due dates. Underwriting referrals have become commonplace. Capacity continues to be reviewed at each renewal, and insurers remain conservative on capacity deployment, even if reductions were taken in a recent past renewal. Coverage is tightening, particularly for communicable disease, pollution, non-owned auto, and other emerging risks. Deductible increases are being imposed, particularly for insureds with poor loss performance.
The Property space is stabilizing. Double digit rate increases remain the norm, but there is less volatility and a general insurer focus on growth rather than book remediation. Faced with budget constraints, insureds are considering deductible increases to help offset program costs. Many; however, are not actually opting for the increase as the pricing reductions are often not commensurate with the additional assumed risk. The claims environment is experiencing an increase in evidence requirements and the trend to rely on external consultants to support adjuster arguments remains.
A Look Ahead While insurers have been addressing profitability issues for several cycles, their focus is now shifting toward growth. This is expected to create a more moderate – although still upward – pricing environment. Underwriters will also likely become more flexible, although referral underwriting will remain common. Primary limits will continue to shift downward, pressuring attachment points and creating a greater need for reinsurance.
Idustry Issues In Q1, the marine industry experienced several unusual circumstances. On one hand, the impacts of COVID-19 kept fuel prices low and airplane capacity abundant, which continued to create favorable, cost-effective shipping conditions. On the other hand, ocean transport continues to be fraught with mishap. The major Q1 event – the impact of which has not yet hit the insurance market – occurred in March when a skyscraper-sized ship, the Ever Given, a 224,000-ton container ship, became lodged in Egypt’s Suez Canal. The Ever Given completely blocked one of the world's busiest trade routes through which about 12% of the world's trade volume, including 1.9 billion barrels of oil, passes per day. The impact of this event has held up $9 billion in global trade per day and has slowed supply chains that were already affected by port closures due to the pandemic. Also, in recent months, four ships have hit heavy weather, sending the containers that were on deck overboard. In addition to ocean cargo challenges, warehouses have also experienced loss of inventory stemming from tornados and straight-line winds. Market Conditions It remains to be seen how much of the loss stemming from Q1 events will be insured as most marine policies exclude coverage for delay. In addition to the major events of Q1, Marine losses are on the rise generally in terms of both frequency and severity, and the Marine insurance market remains challenging. Pricing continues to be up for most renewals. Insurer appetite is becoming more focused. Coverage for Communicable Disease and Cyber, if not excluded in 2020, is being excluded across the board now. Capacity constricted over the past two years but has now stabilized, although there has been a trend amongst some insurers to transition from 100% participation to quota share. Deductibles are generally stable, except for risks with poor loss performance and/or warehouse inventory risks. Underwriters are beginning to review current wind definitions in Cargo policies, and they are expanding the CAT deductibles to include tornados and straight-line winds.
A Look Ahead The rate environment is expected to continue to be challenging in the near term; however, considering insurer growth targets, pricing may stabilize by year-end with the exception of risks with unfavorable loss experience. As market pricing is up, there will likely be further insurer interest in increasing capacity from both North American and Broking Center insurers.