Insurance Market Update - Amazon S3...insurance carriers reducing their available capacity,...

Insurance Market Update Willis Towers Watson Joseph C. Peiser Head of Broking North America October 10, 2018

© 2018 Willis Towers Watson. All rights reserved. October 2018

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• Record high capital & surplus - $750+ BN • Loss ratios are highest since early 2000’s • ILS and Cat Bond investors becoming part of the market • Capital fluidity has changed the market fundamentally • M&A among insurers and brokers • Drive for underwriting discipline to achieve ROE • Technology arms race and Insuretech • Retrenchment at Lloyds – Resurgence of Bermuda • Some tightening of reinsurance market for US Casualty

I. Market Overview II. Insurer M&A III. Reinsurance snapshot IV. Deep dive on major lines V. Specialty Lines Overview VI. Q&A

• Interest rates are still low but increasing • Improving investment returns • M&A funding

• US tax reform has improved US Insurer financial outlook.

• More funds for M&A / more attractive targets

• Decreased advantage for Bermuda and others

• Stock valuations at record highs • GDP is rising (Premiums have not kept same pace) • Infrastructure needs are becoming very apparent • Geopolitical landscape is increasingly multi-polar

• Diversity & inclusion initiatives and legislative changes • #Metoo movement • Social media and viral spread of (mis)information • “Reptile” legal strategies by plaintiffs bar • Millennial juror views on corporate responsibility • Technology impact on diagnostics and accountability • Increasing punitive damage threats and realities

2018 Market Overview

Macroeconomic Factors

Insurance Industry Trends

Societal Factors

Looking Ahead…

2 October, 2018


Insurer Mergers & Acquisitions

3 October, 2018

M&A Overview • M&A large-value deals are on the rise

• Major Recent M&A Deals • Chubb & ACE • AXA & XL & Catlin • Hartford & Navigators • AIG & Validus • AWAC & Fairfax • Sompo & Endurance

• Regulatory environment is shaping new business models

• Strategic acquisitions and disposals are at the forefront of M&A activity

• There is potential for a megadeal rush before the close of 2018


Insurer Mergers & Acquisitions

4 October, 2018

• $1 trillion of PE funds

• Low interest rates

• Tax reform in the US

• Inorganic revenue growth & synergy savings

• Acquisition of technology & talent

• Search for Global Scale

• Desire for breadth of offerings

• Revived emphasis on core strategy

• Companies are offloading unprofitable business segments and reinvesting in high growth markets

• Implementation of Solvency II for European companies is largely complete.

M&A Activity Drivers

Impact on Buyers

• Increased financial security of insurers

• Little impact (yet) on capacity and pricing

• Promise of improved efficiency and service

• Change in claims handling philosophy

• Change in underwriting appetites

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5

Reinsurance Deep Dive

© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. October, 2018

Property & Liability Reinsurance

Property • Capacity remains plentiful which mitigated 4/1

and 7/1 price increases

• Difficult to quantify perils like wildfire received greater increases

• New models from AIR and RMS for wildfire are likely to cause price increases on Western business

Liability • Liability treaties are likely to see tightening at

1/1 dues to loss severity in in the US

• Most affected lines: auto, excess casualty, D&O, medical malpractice and lawyer’s E&O

Per Risk loss free:

Flat

Per Risk loss affected:

Cat loss free:

Flat

Cat loss affected:

Function of perils & experience

Function of perils & experience


Abundant Capacity

+ Industry Losses

= Stable but

volatile at the margins

Pricing • Property rates remain fairly stable

• Individual account underwriting has triumphed over broad-brush rate hikes.

• Non CAT will range from flat to +2.5%, CAT+2.5% to +7.5% and CAT exposed / loss affected +10% or more.

Capacity • Capacity continues to be plentiful with

reductions for only a few hardening subsectors

• Lloyds and one major US and Global insurer are reducing line sizes . Bermuda is picking up the slack.

• Availability of alternate capacity continues to absorb industry losses

Issues Coverage • Underwriters continue to take a more

critical look at exposures and are adjusting portfolios and appetites

• Sub-limits and deductibles are being looked at closely by the markets. % deductible for hail are more common

• First party cyber exclusions are common

• Many loss affected and CAT exposed accounts are being re-underwritten

• Challenged occupancies include dealers open lot, hospitality, food, primary habitational/multi-family, and waste management.

Property State of the Market

October, 2018 © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.


Rate Prediction?

7

Hurricane Losses 2017 “HIM” losses

developed lower than expected – estimated

at $92 billion. 2018 Florence did not pan out to be record wind event, rather driven

by Flood losses. .

Q1/Q2 2018 were “the calm after the

storm” as CAT losses were the lowest in over a

decade.

Market Capacity Fears of reduced

capacity going into 2018 proved to be unfounded.

Industry capacity was replenished though

traditional and alternative sources – surplus is at an

all time high.

Loss Ratios Property marketplace

loss ratios remain challenging in 2018. Attritional losses and

limited rate continue to erode profitability.

Lloyds has been hit and forced to retrench.

Wild Fires and hail storms in the US continue to drive industry

loss ratios even higher.

$7 billion of new reinsurance capacity was

added in the last 4 months of 2017.

Reinsurance 2018 treaty renewals did not experience the rate increase that were expected. The forecast for 2019 is more muted however we will follow the remainder of this

hurricane season. .

In 2018 saw a return to more

detailed account underwriting, rate

changes were very account specific.

Rate Prognosis: Stable for 2018, barring any major CAT event Forecast: Flat to +2.5% non CAT +2.5% to +7.5% CAT +10%> CAT with losses

Property – Factors Affecting Rate

October, 2018 © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

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Full Portfolio

2015Q1

2015Q2

2015Q3

2015Q4

2016Q1

2016Q2

2016Q3

2016Q4

2017Q1

2017Q2

2017Q3

2017Q4

2018Q1

2018Q2

Effective Rate Change -5.70% -8.41% -7.44% -6.28% -5.81% -6.80% -2.15% -6.46% -4.79% -1.18% -4.56% 0.87% 2.53% 1.41%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

% R

ate

Chan

ge

Lowest Average

Reduction

Hurricanes Harvey, Irma

and Maria

Hurricane Florence estimated between

$1.7B - $4.6B

WTW Portfolio Rate Change by Quarter

© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

Property – Historical Rate

October, 2018

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October, 2018

Casualty Deep Dive

General Liability Workers Compensation

Auto Liability

Rate Prediction

Rate Prediction

Rate Prediction

• Loss frequency remains stable, but severity is increasing • Frequency and severity increase with economic

growth • Marketplace continues to revise policy verbiage to

account for emerging risks – e.g. cyber • Major markets are starting to re-evaluate general liability

reserve adequacy • Foreign casualty remains a softer market, but reductions

are slowing

-4% to Flat

The U.S. has seen a 1.8% average increase in employment over the past two years, and across all sectors

Improvements in medical care and adoption of return-to-work programs have led to a decrease in lost time claims

Telemedicine should provide quicker, more efficient access to high-quality medical care, mitigate medical expenses and lost time from work — in turn leading to reduced claims severity

The 7.7% rise in commercial auto pricing in Q1 2018 is the highest rate increase in 7 years

Unprecedented jury awards of $30–$40 million for single plaintiff auto accidents claims are somewhat common. 5 years ago it was rare for an auto claim to reach $10 MM

From 2013 to 2017 the U.S. economy pushed more vehicles on the road than ever before. During that time drivers logged 300B more road miles than in the previous 5 year period. This has led to an uptick in frequency of auto claims, and the volatile legal environment has made those claims more costly to manage


October, 2018

Casualty Deep Dive

Umbrella Rate Prediction

• Lead umbrella marketplace starting to experience a shift towards tightening of rate and reducing lead limits on high hazard risk profiles

• Historical “national account” umbrella markets are changing strategies and looking to expand in the middle market and reduce underwriting exposure to large accounts

• Global liability exposures are growing with economic recovery and the development of a multi-polar global economy

Excess Rate Prediction

• Both the retail insurance and reinsurance markets are starting to notice abnormal, negative development within their liability loss portfolios

• This trend has led to several major umbrella and excess insurance carriers reducing their available capacity, particularly for large multi-billion-dollar corporations

• Historically high capacity continues to be available even for challenging risk classes. This has led to stability in pricing even with minor rate increases on the umbrella or within scheduled underlying insurance


Worker’s Compensation Aging Workforce Regulatory Reform Medical Bill Inflation Opioid Addiction

Auto Liability Distracted Drivers Auto Fatality Trends Accident Frequency Cost of Technology

Umbrella Liability Personal Injury Trends Toxic Tort Landscape Highly Organized Plaintiffs

Bar

General Liability Liberal Class Action

Certification Catastrophic Liability Losses Desensitized Jury Pools Punitive Damage Trends

October, 2018

Casualty Marketplace Disruptors


October, 2018

FINEX Deep Dive

Cyber

Professional Liability

Employment Practice Liability

Rate Prediction -3% to 5%

Rate Prediction

Rate Prediction Flat to +5%

Directors & Officers

Rate Prediction

Flat to +7.5%

Flat to +5%

• Private Companies seeing closer to 10% increases. • Excess is more competitive at -5% to +5% • Side A / DIC is soft at -5% to flat • Securities class actions remain at high levels • Many stock valuations are at historic highs • IPOs are a challenged class

• California: +5% to +10%.

• Media / Entertainment: +15% to +30%

• Pay equity continues to be a major focus of underwriters

• #MeToo movement not slowing down

• Loss severity is on the rise with growing defense costs and lower tolerance to error

• Risks continue to emerge and expand due to companies offering more online services

• Underwriters are scrutinizing insured’s standard contractual language with counterparties especially related to Cyber

• Claim frequency is on the rise on a global scale, as well as costs associated with cyber and privacy claims

• Insureds demonstrating increased levels of security and internal policy controls are seeing decreases

• Cyber premiums are expected to climb and may reach as high as $10 billion by 2020

• Global capacity is $600 million

• Middle market, low hazard firms are seeing more competitive rates


Financial Lines and Cyber Marketplace Disruptors

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Directors and Officers Cyan Case - IPO Record Securities Class

Action Suits – M&A Cases High stock valuations

Cyber Liability Cyber-Extortion

Cost - $11.5B Internet of Things GDPR

Employment Practices #MeToo Movement Pay equity Plantiffs’ Bar Target less than

$1B Legislation preventing

Arbitration

October, 2018


HPL Rate Prediction +5% to +10%

Fiduciary Rate Prediction -7.5% to 5%

Fidelity Rate Prediction Flat to +5%

• Favorable rulings for policyholders regarding social engineering

• Coverage restrictions for social engineering claims are beginning to appear

• Coverage overlaps and potential gaps between fidelity, cyber and K&R policies should bear scrutiny

© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

Professional & Management Disruptors

Class Action Landscape

Regulatory Reform

Exposure Uncertainty

Technology

Nat CATs

Data Security

Healthcare Reform

Tax Reform

M&A Activity

Fraud

Employee Training

Economic Conditions

• Fiduciary market is competitive due to stable capacity • Fee cases continue to drive loss severity • Uncertainty surrounding U.S. health care system and

extent of employers’ roles creates general concern for insurers

• HPL market changes as a whole due, in part to the rising frequency and severity of claims

• Rates are rising in response to loss activity.

• Shrinking pool of insureds due to M&A is keeping some competition in the market.

October, 2018 14

FINEX Deep Dive


Construction

Energy

Environmental

Kidnap & Ransom

Rate Prediction:

Flat to +5%

Rate Prediction:

Flat to +10%

Rate Prediction:

+5% to +15%

Rate Prediction:

-5% to 5%

• Capacity remains high, but experienced and more disciplined underwriters are firming up on pricing, stabilizing rates

• Carriers are less willing to agree rate decreases despite increases in exposures, an indication that the marketplace may be stiffening

• Downstream losses are severe

• Demand for higher limits is a factor increasing rates

• Insurer M&A is creating a few dominant players

• The environmental insurance market continues to be relatively hard • More construction activity has fueled demand for pollution coverage • Indoor Air Quality claims continue to drive loss activity

• The market is moving to limit coverage for cyber-related extortion

• The main drivers of kidnap in 2019 will continue to be economic instability, weak rule of law and ongoing conflicts

Aerospace Rate Prediction:

Flat to +10%

• General aviation is seeing the most upward rate pressure • Airports and municipalities are seeing consistent upward rate

pressure • Lessors and banks remain an attractive class

October, 2018

Specialty Lines Deep Dive


Marine

Cargo

Terrorism

Surety

Rate Prediction:

Flat to +10%

Rate Prediction:

Flat to +15%

Rate Prediction:

Flat

Rate Prediction:

Flat

• For the first time in many years the marine insurance market is hardening

• Stricter underwriting is prevalent, especially in Lloyds • Insurer M&A is expected to reduce competitive pressure leading to a

continuation of hard conditions

• Increases in frequency and severity of cargo claims are driving rates upward for the first time in years.

• Tanjin, Thai Floods and Atlantic hurricanes losses have been catastrophic.

• Lloyds is reducing capacity and M&A activity may further impact capacity.

• Broad policy terms are still achievable under certain conditions

• A turbulent political environment may increase terror activities • Increased interest in Active Shooter products • Physical damage resulting from a cyberattack is a concern, as

technological advances may allow terrorist groups to wreak havoc on corporations and public utilities

• Sureties are aggressively pursuing new business as the construction economy continues at a healthy pace

• New entrants have added capacity. Mergers have improved surety ratings

• Record number of sureties competing in the middle market space


October, 2018


Product Recall

Political Risk

Senior Living

Rate Prediction:

Flat to +5%

Rate Prediction:

Flat to +2%

Rate Prediction:

+5% to +30%

• The market continues to harden at a very slow pace • Contractors are increasingly requiring suppliers to purchase product

recall insurance • Negative media attention is intensifying contamination and recall losses

• International tension is increasing demand for political risk insurance and driving rates up slightly.

• Influx of capacity is keeping rate hikes moderates and capacity available.

• Currency inconvertibility is a growing concern.

• Concerns over profitability is driving a hardening market, with greater volatility and underwriter scrutiny

• Natural catastrophes and a changing litigious environment are drawing attention and scrutiny from insurers

• Increasing claims frequency and severity is driving rates, and pushing increased retentions


October, 2018

Trade Credit Rate Prediction:

Flat

• As the market continues to harden, we will see higher rates and far more conservative responses from insurers.

• Large losses are impacting carriers, which is driving a tightening of their underwriting.

• Additional large and small bankruptcies will stress available trade credit capacity.


2018 Market Overview

Insurance Industry Trends

Societal Factors

Ahead…

18 October, 2018

Questions?

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