2020 trends Of the four sectors covered in this report, the US casualty market is currently the hardest, and also the most complex to define with broad brush comments. Many clients faced premium increases in excess of 100%, while simultaneously, a few clients saw premium reductions following large exposure reductions as a result of COVID-19. US casualty placements usually comprise a blend of US, London, and Bermuda participants. With umbrella and excess casualty being a London market focus, our London team is an extension of our US Casualty Practice, and insights should be read in conjunction with wider Aon casualty market commentary. Compared to 2019, the market of 2020 and early 2021 is much more bifurcated by loss free and capacity surplus placement sectors and loss active and capacity constrained areas, with the latter facing extreme pricing changes. Figure 18 records the price changes and offers a broader description of the ‘loss active and capacity constrained’ grouping.
"Of the four sectors covered in this report, the US casualty market is currently the hardest, and most complex to define with broad brush comments."
Fig 18: US casualty rate change range
Premium placed by the Aon London team increased by 30% in 2020, with the number of individual contracts transacted increasing by 16% and client count holding stable across the portfolio. Exceptions to the stable client count included digital economy, which saw large increases, and construction, which saw a drop off in deals throughout most of the year, although this picked up in Q4 2020. Also notable was a rotation in lighter hazard accounts moving back to the US local markets, as they searched for better terms. Throughout 2020, clients actively reviewed their liability purchasing strategy to mitigate the increasing premium component of their total cost of risk. Some clients chose to increase their primary retentions. Others elected to renew similar structures as expiring but self-insure via intra-layer co-insurance, while others completed their renewals with less overall limit. From 2019 to 2020, approximately USD 280 million of capacity exited the London US casualty market, as markets reduced maximum lines or withdrew entirely. Although theoretical per risk capacity still totalled USD 600 million at 1 January 2021, carriers only deployed just over half of that amount in practice, as underwriters shortened layers and ventilated existing capacity. Looking to 2021, Aon estimates modest growth in total capacity as new capital enters the space seeking hard market underwriting returns.
Fig 19: London capacity USD million
"Some clients chose to increase their primary retentions. Others elected to renew similar structures as expiring but self-insure via intra-layer co-insurance, while others completed their renewals with less overall limit. From 2019 to 2020, approximately USD 280 million of capacity exited the London US casualty market."
The most marked change has been in the structuring of placements. Shorter layers are now required to secure the optimum blend of capacity and pricing. This trend started in September 2019 and is now a universal feature of the US casualty market. We expect further fragmentation of layers within the first USD 100 million, with USD 25 million layers being increasingly rare. In this new environment, Aon facilities such as ACT and LLEAF are essential elements in placement structuring and completion.
The placement structures in figure 20 illustrate the evolution of a generic USD 100 million programme.
Fig 20: Continued fragmentation in programme structures
Carriers are increasingly focusing on layer rate relativity, leading to pressure on mid to high excess layers in terms of both rate and capacity.
These structural constraints require close co-ordination between US, Bermuda, and London broking teams to finalise placements. Preparation lead times and negotiation periods have been extended as brokers and underwriters work through pricing options with clients.
Whilst premium and rate increases have applied across the board, the higher risk industry sectors have been most impacted by underwriters’ general ‘risk off’ appetite during the past 12 months.
The road transport sector has been one of the most distressed sectors, following the 2019 trend. Within this sector, interstate US truckers with large tractor fleets have seen available capacity drop by over 50%. Across Aon’s portfolio, limits purchased have dropped from USD 250 million to between USD 75 million and USD 150 million, dependent on clients’ risk tolerance and budget.
A nuance within this trend is that those insureds who would not be classified as a traditional trucker (but who may have comparable large or heavy fleets) are experiencing less pressure on capacity. These clients (e.g. manufacturers who distribute their own product or service industries, such as telecom) are often not subject to reinsurance treaty restrictions imposed on truckers.
Capacity for companies with wildfire exposures, aside from power utilities where the market has dried up completely, have very few options with the largest Aon-transacted placement involving three carriers and a maximum USD 35 million of capacity. Berkshire Hathaway remained available for placements where cover was required due to regulatory requirements, but at its terms.
US coal miners continued to experience a withdrawal of capacity due to underwriter appetite. US carriers are increasingly following the European market lead and implementing new ESG guidelines working towards carbon neutral targets. Aon’s London data indicates remaining market capacity at below USD 100 million.
Policy coverage for all mining companies has continued to be limited, with coverage for tailings dams sub-limited or available at much more expensive terms. For global US miners with operations in Latin America, this has been the most severe, following the trend of Canadian and other global mining companies. This is due to major loss activity relating to tailings dams, mostly in Latin America but also in other regions such as Asia.
Rail transport Capacity for class I rail companies reduced from USD 1.3 billion to approximately USD 800 million across US, Bermuda, and London markets. In London, class I’s total per risk capacity reduced from a maximum of USD 600 million to roughly USD 370 million. Global participation and high retentions that are prevalent in class I helped to drive competition and limit rate increases. Like other US casualty lines, we expect limited new capacity in 2021 and continued pressure on rates.
Fig 21: London capacity USD mm
Class 1 freight exposure stayed relatively flat during the pandemic, while passenger counts were decimated. This translated to comparatively large rate increases for passenger rail.
From a passenger rail perspective, London capacity reduced from around USD 450 million to USD 330 million. Underwriters looked to manage shared track aggregation, which has limited capacity for larger transit systems and resulted in large rate increases when compared to their smaller (i.e. local) peers.
Despite ridership dropping more than 80% in many cases, carriers are not offering commensurate allowance in renewal terms. Brokers are working to develop minimum deposit premiums adjustable with passenger volumes to help clients manage cash flow and better reflect reduced risk.
As of 31 December 2020, Positive Train Control has been fully implemented across all 140,000 miles of track in the US, at a cost to the industry of approximately USD 14 billion. While this has been proven to increase safety and will reasonably reduce claims, the reduced exposure has not translated into lower renewal rates because of the wider market hardening trend in most cases.
Fig 22: Rail
Oil and gas
Aon’s transacted oil and gas liability premium was up 41% to the London market with a median rate change of 49%. Rate increases were exacerbated by pandemic related exposure reductions, particularly in downstream throughput.
Fig 23: Oil and gas
“Trends in the energy liability market have tracked closely with the broader US casualty space, including social inflation and a rising quantum of auto claims and higher bodily injury settlements.”
Clients that fit into the loss free/surplus capacity classification were more often dominant in upstream operations, while the loss active/capacity constrained category was more closely correlated with midstream and downstream operations. Our analysis also highlights a large variance between the weighted average (+83%) and average (+57%) rate increases. This indicates that larger accounts (i.e. premium volume) are subject to greater increases, which likely points to historical under-pricing achieved by purchasing power.
Trends in the energy liability market have tracked closely with the broader US casualty space, including social inflation and a rising quantum of auto claims and higher bodily injury settlements.
Based on this evolving loss picture, carriers are responding by increasing attachment points and/or restricting coverages, particularly for onshore operators, drillers, and service contractors. In addition, carriers are moving away from significant auto exposed accounts.
Overall energy capacity is shrinking, with expiring USD 1 billion limit programmes renewing in the USD 500-600 million range. Although we are seeing limited new entrant capacity in the lead and excess, we do not believe this will have a material impact on market forces.
There have been some individual market opportunistic plays lower down in programmes where lack of market appetite or availability has forced very significant rates increases. Although the energy market has seen sizeable rate increases this year, we expect to see further increases in 2021. Early negotiations, quality risk data, and close broker/client objective clarity will be crucial to successfully renewing programmes.
Offshore 10-20% average rate increases; capacity stable; London comparatively competitive.
Onshore 15-25% average rate increases except for heavily exposed accounts, e.g. service contractors where 100% + increases were not uncommon. London carriers were prepared to non-renew accounts if they did not secure what they deemed to be the right price.
A trickier market segment where overall capacity has reduced. Although midstream companies often appear lower risk, there is both frequency and volatility in the sector. As a result, some carriers are choosing to exit this business entirely, particularly for risks that include pipeline exposures.
Coverage restrictions are prevalent for downstream clients, particularly regarding policy pollution language as well as restricted coverage/exclusions for certain chemicals, namely PFOA/PFAS, Teflon, Benzene, and Glyphosates. Most carriers will not consider an occurrence trigger. Carriers are also showing resistance in the refinery space, where treaty pressures are a factor.
The London US casualty construction market has largely tracked the hardening of the US casualty market as a whole, seeing line sizes and attachment points being managed with more underwriting scrutiny. This, coupled with increasing concerns over aggregation with operational or practice policies, has created a more challenging placement environment, with pricing increasing but remaining closely linked to each project’s risk profile.
Whilst there are specific areas of concern, New York and residential construction to name two, there is still a good appetite for construction risks within the London market, with approximately USD 300 million of capacity available and limited new capacity on the 2021 horizon.
The London construction market remains an innovative environment. Amidst a recent propensity for project overruns, London underwriters are providing solutions to replace a flight of capacity and coverage from this space. A syndicated approach has allowed markets to limit their exposure while simultaneously increasing their staying power. Future line size management and changes to underwriting appetite are less likely to impact these participations.
“As a result, some carriers are choosing to exit this business entirely, particularly for risks that include pipeline exposures.”
London is a major player in the digital economy/sharing economy sector and a growth sector during 2020. Brokers and carriers are constantly innovating to create solutions for rapidly changing client needs, or in some cases, brand new business models.
Apollo’s dedicated ibott syndicate is the largest market (writing around USD 150 million of digital economy casualty premium in 2020) and can consider most risks on a primary, umbrella, and excess basis. Its maximum capacity is USD 10 million. ibott is focusing on growth in the following areas:
- Platform delivery
- Autonomous vehicles
- Peer to Peer sharing
- Workforce on demand
Below a USD 25 million attachment, there are very few markets able or willing to participate. This can create a challenge when trying to fill out a layer excess of the lead USD 5 million or USD 10 million, which can lead to inefficient pricing for this layer or clients deciding to self-insure.
Coverage continues to be restricted for sexual molestation and assault & battery, and most accounts are now seeing some form of COVID-19 or communicable disease exclusionary language.
COVID-19 has had a significant negative impact on clients' exposures, with home-sharing, ride-sharing, and micromobility (scooters) the most affected. However, platform delivery companies have seen the reverse with most significantly exceeding expectations. Although impacted by the large swings in exposure, on average, we are observing 20% to 30% rate increases across the portfolio. Clients with adverse loss experience are seeing far greater increases.
London carriers following their US and international peers have applied blanket pandemic/communicable disease exclusions, common across most insurance classes. The real exposure is sometimes difficult to quantify for manufacturing companies. For consumer-facing industries such as hospitality and leisure businesses, this has transferred the risk to company balance sheets. The underwriting market’s position is that the risk is too large for any private company and should be handled at a country level. In time we expect the private market to start offering cover, but US casualty markets intend to limit coverage for COVID-19 and future pandemics going forward.
Availability of coverage for limited cyber buyback events is on a case-by-case basis. The London market is moving towards clear cyber coverage policy language, either excluded or covered. While in the US, some carriers remain open to staying silent, relying on the current policy language to dictate coverage. This can cause some difference in policy coverage language through placement towers. Buyers are balancing their requirement for capacity for the other perils against cyber perils.
Based on reduced capacity in the US, Bermuda, and London, we expect the US casualty markets to remain challenged into 2021, with relatively greater pressure on rating and capacity in excess layers compared to lead umbrellas. We expect continued pressure on primary casualty retentions, especially where clients have been successful in maintaining historical retentions thus far. There is very limited new capacity to change the current dynamic, and carriers remain determined to return to profitable underwriting. Additionally, social inflation figures indicate that jury awards are still increasing, and it is difficult for carriers to rate anything other than conservatively while this trend continues.
Reading across from the international casualty business placed in London, all carriers appear to have very little reserving release flexibility to fall back on. Nearly all carriers’ actuarial models are being revised to add more prior-year loss deteriorate loading, indicating no early change in the hard market trend. To manage this rating trend, we anticipate buyers will examine their primary and umbrella layer purchasing options in more detail during 2021. In the excess layers, buyers may elect to self-insure where the pricing is perceived to be too expensive, and/or where business constraints mean protecting cash flow is a greater priority, or where they intend to maintain total limit integrity. Hardening rates are happening across many risk classes at the same time, and risk managers and risk officers are weighing up multiple options with their brokers. The impact of their firms’ TCOR calculations is also a factor. We are seeing a trend to retain more on short-tail and transfer slightly more on long-tail risk, but this isn’t a uniform trend. The return of clients to London for face-to-face meetings will be welcomed, so all stakeholders can better explore options, and clients can make their case for bespoke underwriting and pricing.
"There is very limited new capacity to change the current dynamic, and carriers remain determined to return to profitable underwriting."