Property & Casualty Update—US L O C K T O N C O M P A N I E S Market Update October 2017 Property page 2 Casualty page 6 Foreign Casualty page 8 Management Liability page 9 Cyber page 12 Environmental page 14 Terrorism page 15 Transportation page 16 Real Estate page 17 Onshore Energy page 18 Farm-to-Table page 19 Food & Beverage page 20 Product Recall page 22 Storms and Earthquakes May Disrupt Insurance Markets: Market Shift Ahead? The series of hurricanes and earthquakes in late August to early October devastated lives and upended communities in the US, Mexico, and the Caribbean. As these communities recover and start to rebuild, the potential impact on the global insurance market is beginning to emerge. Total insured losses for the three hurricanes—Harvey, Irma, and Maria (abbreviated by many as HIM)—are currently estimated at $85 billion to more than $125 billion. Sources: The Council of Insurance Agents & Brokers and Barclays Research. Rate Changes by Coverage Line -6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00% 8.00% 2017 Q2 2017 Q1 2016 Q4 2016 Q3 Commercial Auto Workers' Compensation Commercial Property General Liability Umbrella
Transcript
Property & Casualty Update—US
L O C K T O N C O M P A N I E S
Market Update October 2017
Property page 2
Casualty page 6
Foreign Casualty page 8
Management Liability page 9
Cyber page 12
Environmental page 14
Terrorism page 15
Transportation page 16
Real Estate page 17
Onshore Energy page 18
Farm-to-Table page 19
Food & Beverage page 20
Product Recall page 22
Storms and Earthquakes May Disrupt Insurance Markets: Market Shift Ahead?
The series of hurricanes and earthquakes in late August to early October devastated lives and upended communities in the US, Mexico, and the Caribbean. As these communities recover and start to rebuild, the potential impact on the global insurance market is beginning to emerge.
Total insured losses for the three hurricanes—Harvey, Irma, and Maria (abbreviated by many as HIM)—are currently estimated at $85 billion to more than $125 billion.
Sources: The Council of Insurance Agents & Brokers and Barclays Research.
Rate Changes by Coverage Line
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
2017 Q22017 Q12016 Q42016 Q3
Commercial Auto Workers' Compensation Commercial Property General Liability Umbrella
P&C MARKET UPDATE | LOCKTON US
2 October 2017
Property
Prior to the 2017 catastrophe (CAT) season, carriers had already been slowing the rate of price decreases in both property and casualty. That said, ample capital from both long-term underwriters and new entrants had kept terms and conditions at competitive levels. This abundant capital, coupled with strong overall underwriting results, had suggested that the current market conditions would endure for the remainder of 2017. As we’ve seen in the past four quarters, all lines have been soft except commercial auto, which is still seeing rate increases. We’ve seen no directional shift in the past year.
The CAT losses experienced to date present a conceivable shift in these conditions, with particular emphasis on property placements. While the property and casualty marketplace is well-capitalized, the hurricane, earthquake, and wildfire losses have the potential to drive price increases. This is especially true for the primary and reinsurance property marketplace, but some casualty underwriters are also signaling a firming in that space. Whether realized through more rigorous underwriting discipline and risk selection, less favorable terms and conditions, or increased cost of coverage, the buyer’s market is at a potential tipping point.
As recently as early October, we have seen some significant volatility in the property market. Messaging from carrier leadership attending the Council of Insurance Agents and Brokers (CIAB) meeting in Colorado indicates that the property market has suffered significant third-quarter CAT losses in 2017, following an already poorly performing first and second quarter from attritional losses. The wildfires in California have added another negative metric to their performance equation. They expect their cost basis to go up, and they will be asking for rate increases.
Carrier feedback from CIAB meetings was consistent, suggesting that carriers may pursue targeted rate increases with very general ranges as follows:
� Client with CAT exposure and losses—20 percent+
� Client with CAT exposure and no losses—10–20 percent
� Client with no CAT and no losses—flat to 10 percent
We do expect some significant rate increases through several poorly performing market segments, such as habitational multifamily and frame builder’s risk. We also expect some carriers to modify their underwriting protocols for specific regional perils. Carriers have committed to minimize surprises and manage the process on behalf of our mutual clients. All carriers agree to consider incumbency, risk quality, retention, rate history, and loss record when suggesting price modification.
P&C MARKET UPDATE | LOCKTON US
3 October 2017
Impact From Catastrophes in Third Quarter 2017
Mexico has experienced two earthquakes excess of 7.1 magnitude, and the Caribbean, Southeast, and South Central US have been hit by multiple hurricanes. HIM’s damages are still being evaluated, but at present, the markets are estimating their losses to be between $85 billion and $125 billion. While a modeling company released higher estimates from the CAT events over the past 60 days, it will be some time before losses are evaluated, claims develop, and a more accurate forecast can be determined.
The insurance market response will be dynamic and unpredictable through the end of the year into the first- and second-quarter property CAT renewal season. The ultimate direction of the property market will be finding its way, as carriers continue to adjust their claims and forecast the impact of the reinsurance renewal period coming in early 2018 while managing the competition created from overcapacity in the property market.
The retrocession market, supported heavily from collateralized capital (CRI), is expected to have impacted recent 2017 CAT loss activity. Although there is no anticipation of a reduction in alternative capital in the retrocession market, some risk-based capital providers may be looking for rate improvement. This is expected to pass through to the reinsurance market.
P&C MARKET UPDATE | LOCKTON US
4 October 2017
Retail insurers will also be looking to pass their increased reinsurance costs on to their insureds. Carriers will also likely be reassessing their reinsurance needs. Some have increased their retentions during the past years to compensate for rate decline and found themselves with little to no reinsurance response from multiple events. Some will reconsider their horizontal protection as carriers were faced with a lack of auto reinstatement arrangements. Finally, some have realized that if Irma had taken a different direction toward Miami, they would not have adequate protection at the top of their treaties. The carrier will look to pass any possible expense line impact to its reinsurance strategy on to clients.
It is possible that Hurricane Harvey will put increased pressure on the National Flood Insurance Program (NFIP). Lockton continues to work on alternative solutions to combat rising costs and a potential nonrenewal or failure to extend NFIP beyond December 2017. There is an opportunity to cover flood with innovative solutions through private-market solutions. These alternative structures could prove more stable than the present renewal process of NFIP.
The insurance market is well-capitalized and remains a competitive environment driven by existing and new capacity for clients with strong risk management attributes. “Lockton will continue to invest in innovative tools that allow clients to analyze and understand their risks and make informed decisions on managing that risk in any market conditions,” said Mike Andler, Property Practice Leader. He added, “Insureds should consider the global marketplace when investigating risk transfer options as each region has a unique view of the market. As well, we will maximize our relationship capital with our carriers to minimize disruption for clients and structure the most efficient program possible.”
P&C MARKET UPDATE | LOCKTON US
5 October 2017
On September 7, 2017, an 8.1-magnitude earthquake struck in the Gulf of Tehuantepec off the southern coast of Mexico. The event caused buildings to tremble and resulted in a significant power outage in Mexico City alone. Scientists are still analyzing the data from the event; however, early indications reveal the possibility that the quake was triggered by a breaking or bending of the regional tectonic plate, which is wedged under Mexico.
A second 7.1-magnitude earthquake struck near Mexico City on September 19, 2017, causing significant property damage and loss of life. The extent of the devastation could prompt insureds to review their earthquake limits and an increased focus on damage, limiting construction. AIR Worldwide has put out preliminary estimates of $1.5 billion to $3.2 billion combined for both losses.
The 2017 Atlantic Basin hurricane season to date has experienced three major US continental landfall hurricanes greater than CAT 3, the first major landfall events since 2005.
On Friday, August 25, Hurricane Harvey devastated Houston, Texas, and surrounding counties with significant amounts of rainfall, resulting in widespread flood damage. Harvey dumped more than 52 inches of rain on the region, causing widespread devastation, and is expected to be the largest hurricane-related economic loss in history.
On Sunday, September 10, Category 4 Hurricane Irma made landfall in the Florida Keys before moving upward through the US mainland. Irma was considered an extremely catastrophic hurricane in terms of maximum sustained winds. Irma caused widespread and catastrophic damage, particularly in parts of the northeastern Caribbean and Florida Keys. Property claims, including flood, continue to increase in number.
On Wednesday, September 20, Category 4 Hurricane Maria, Puerto Rico’s worst hurricane in 85 years, made landfall, leaving the island without power and with a shortage of running water.
Hurricane Nate was the fourth hurricane to make US landfall in 2017. Although it was downgraded to a tropical storm shortly after making landfall, the area has suffered flooding and power outages. Early estimates suggest an insured loss between $500 million and $2.5 billion.
P&C MARKET UPDATE | LOCKTON US
6 October 2017
Casualty
Guaranteed Cost* Loss-Sensitive*
*Source: Lockton Analytics
Commercial casualty insurance remains highly competitive for workers’ compensation (WC), as well as primary and excess casualty. The exception is commercial auto, where both claim frequency and severity are increasing industry combined ratios well beyond acceptable levels. Clients continue to experience WC and general liability rate reductions, while lead umbrella and excess liability rates appear to have bottomed out, particularly where high excess layers are already at market minimum pricing thresholds.
Of note: � Workers’ compensation rates dropped approximately 3 percent in the latest quarter. This is the third round of rate
declines clients have experienced in aggregate. For those with debit experience modifications, underwriters are taking a firmer stance on pricing, with average prices actually starting to increase.
� Commercial auto remains the topic of concern in the underwriting community. As noted in Lockton’s April 2017 report, rising frequency and severity are causing commercial auto results to deteriorate. Industry combined ratios have averaged 107 percent during the past five calendar years, with only two of the top ten writers achieving an average combined ratio of less than 100 percent during the past five years, indicating an industrywide challenge. Buyers face increasingly stringent underwriting and continuing price increases.
• Lead umbrella rates and structures vary widely based on the client’s overall
fleet composition. Prices have firmed for large fleet operations, while smaller fleet risks experience tempered pricing actions. In addition to the impact on prices, underwriters are carefully evaluating attachment points and limits to arrive at what they consider sustainable program structures.
Foreign Casualty
The market for US multinational insurance programs remains highly competitive, due in large part to continued profitability and increased demand. Underlying conditions also remain highly competitive, driving new entrants to the market, as well as consolidation, competition, and a change in carrier appetite.
Historically, the foreign casualty market has been limited to fewer than five global insurers, but this has changed during the past several years. New entrants have rolled out US multinational programs, eager to enter a competitive and profitable space. Today, there are more than 15 carriers now offering international controlled master programs to US multinational clients.
Some new entrants to the foreign casualty market are established global brands based in Europe. They hope to capitalize on their existing global capability by offering programs to US multinational clients. Other newer entrants are opportunistic, pursuing licenses and recruiting experienced international teams to write selective US multinational programs. In addition, traditional domestic or
Industry Commerical Auto Combined RatiosIndustry Commercial Auto Combined Ratios
� Lead umbrella rates and structures vary widely based on the client’s overall fleet composition. Prices have firmed for large fleet operations, while smaller-fleet risks experience tempered pricing actions. In addition to the impact on prices, underwriters are carefully evaluating attachment points and limits to arrive at what they consider sustainable program structures.
P&C MARKET UPDATE | LOCKTON US
8 October 2017
The market for US multinational insurance programs remains highly competitive, due in large part to continued profitability and increased demand. Underlying conditions also remain highly competitive, driving new entrants to the market, as well as consolidation, competition, and a change in carrier appetite.
Historically, the foreign casualty market has been limited to fewer than five global insurers, but this has changed during the past several years. New entrants have rolled out US multinational programs, eager to enter a competitive and profitable space. Today, there are more than 15 carriers offering international controlled master programs to US multinational clients.
Some new entrants to the foreign casualty market are established global brands based in Europe. They hope to capitalize on their existing global capability by offering programs to US multinational clients. Other newer entrants are opportunistic, pursuing licenses and recruiting experienced international teams to write selective US multinational programs. In addition, traditional domestic or specialty markets with limited international service capability have begun to offer exporter’s package products to complement their domestic offerings to insureds.
Despite the trend toward global expansion, a few insurers have withdrawn from the foreign casualty space due to the instability of foreign networks, complexity, and increased competition.
Newer entrants to the market, greater capacity, and competition for market share can create variation in insurer appetite year to year, or even quarter to quarter. This creates the potential for inconsistency among regions in the US. In this dynamic market, it is essential to stay current on carrier offerings and capabilities for new and renewal business alike. Marketing efforts can yield significant savings due to the greater number of participating insurers. However, international service capabilities should be closely monitored due to the importance of compliance and contract certainty.
Foreign Casualty
P&C MARKET UPDATE | LOCKTON US
9 October 2017
Securities Claim Activity Continues to Lead the Charge in Directors and Officers (D&O)
Federal securities claim filings hit an all-time high through the first half of 2017, fueled by the move of merger objection suits from state to federal circuits. Interestingly enough, traditional securities lawsuits are also contributing to the record-setting numbers. The number of lawsuits based on the number of publicly traded companies is also at a record-setting pace, even excluding merger objection cases.
The life sciences industry represents the largest segment of filings, which comes as no surprise given that it has long been at the forefront of securities litigation activity.
While the underwriting community has taken note of the number and pace of filings, we have seen little impact to terms and conditions to date. While one carrier continues to cull its book, the market in general remains flat to slightly down for primary public D&O due to an excess of capacity. Meanwhile, competition is strong for excess placements, putting pressure on pricing and keeping rates down.
During the first half of 2017, the underwriting community kept rates fairly steady on private company D&O policies. A few markets pushed for rate increases, and the rates have moved up a few percentage points. Accounts in financial distress, and those in certain industry classes, are seeing some upward rate adjustments, but terms and conditions are holding firm. As in the first quarter, there is a proliferation of D&O insurance capacity, and carriers are quick to provide market-competitive renewal terms in order to retain profitable business. We expect D&O rates to hold fairly steady, as long as all other rating factors remain the same as expiring factors.
Management Liability
P&C MARKET UPDATE | LOCKTON US
10 October 2017
Mid-sized financial institution risks continue to enjoy a favorable rate and premium environment. Insurance carriers are eager to diversify their financial institution capacity into mid-sized alternative asset management types, with the exception of broker/dealer and insurance company risks. While there is some underwriting concern around the regulatory scrutiny and the potential for SEC enforcement actions against registered investment advisors, the marketplace is not reacting with any significant underwriting requests or changes. We expect flat to modest premium decreases on the primary with the potential for larger decreases in excess layers. Smaller risks may start to feel the effects of hitting minimum premiums. Large asset managers and money center banks also see a more limited underwriting appetite. There are markets for these risks, but they are not as prolific as they might be for a mid-sized asset manager.
Employment Practices Liability (EPL), Fiduciary Liability, and Crime
These markets continue to hold steady on terms and conditions, given the abundance of capacity and competition. The underwriting community continues to keep its eye on California EPL and excessive fee litigation in its fiduciary liability books of business. Southern California EPL continues to be underwritten with stricter terms when there are heavy concentrations of employees in that area of California. However, this has not affected fiduciary liability premiums or terms and conditions. Crime also continues to be stable and predictable, with social engineering fraud offered by many markets either as a sublimit of coverage or as a full-limits insuring agreement.
Employment Practices Liability—Southern California and Wage and Hour Remain Tough
The marketplace has stabilized, in general, for EPL due to the overabundance of insurer capacity and pockets of profitability. With the exception of some targeted underwriting and pricing of certain risks in certain states or counties, or risks perceived to be relatively poor, EPL rates should remain flat or up by a few percentage points.
Wage and hour claims continue to be a key part of employment-related claim matters, particularly those that settle for large dollar amounts. The industry continues to be cautious in how it approaches wage and hour coverage—either outright excluding it for certain industry classes and states or limiting its coverage to defense-only sublimited amounts. There are some stand-alone wage and hour products, but they come with significant retentions and high premiums due to the likelihood of a claim.
P&C MARKET UPDATE | LOCKTON US
11 October 2017
Fiduciary Liability, Excessive Fees: The New Fiduciary Claim du Jour
ERISA class action disputes against employers have increased dramatically during the past two years. These lawsuits allege breaches of fiduciary duties based on excessive fees paid to the ERISA plan service providers. Like moths to a light, the plaintiffs’ attorneys are drawn to these suits based on some recent large settlements; although, smaller firms have also been targets in these lawsuits (targeting ERISA plans down to $500 million in assets). Some underwriters have reacted by asking more specific questions relative to third-party service provider selections, due diligence, and fee determination. However, fiduciary liability premiums and terms and conditions have not been affected.
Stable Crime Market Continues
The crime market continues with stable capacity and terms and conditions. The marketplace is generally providing flat renewals. Social engineering fraud coverage is now included as a small sublimit of coverage by most carriers, with the opportunity to increase the sublimit amounts, subject to underwriting of vendor controls. However, a few markets can provide full limits for social engineering fraud coverage, subject to underwriting and premium considerations.
P&C MARKET UPDATE | LOCKTON US
12 October 2017
Cybersecurity has become an enterprisewide issue requiring governance and the engagement of executives, board members, and key stakeholders throughout the organization. The influence of the executive suite and board of directors has driven a more collaborative strategy to address cyber risk.
The cyber marketplace has seen significant increases in global premium volume and the number of insurers that offer coverage. Three factors impact the current cyber marketplace: the threat landscape, the regulatory environment, and business interruption losses.
The cyber specialist marketplace continues to grow rapidly as the focus on data assets drives risk transfer solutions for companies in all industry verticals. The coverage that has become a priority for insureds is the business interruption component, in light of the recent widespread ransomware attacks (WannaCry and NotPetya) that affected organizations of all sizes in significant ways. The regulatory environment, mostly driven through the upcoming GPDR, will prompt more global organizations based outside of the US to seek cyber risk transfer solutions.
Cyber
P&C MARKET UPDATE | LOCKTON US
13 October 2017
Due to the evolving threats and regulatory environment, companies continue to evaluate cyber risk transfer based on qualitative and quantitative factors. The cyber marketplace has responded to insureds’ needs by designing solutions that address the risk to both data assets and physical assets. Insurers must decide whether to house the cyber risk to physical assets in the traditional property/casualty or specialist cyber component of their insurance programs. This decision will impact the types of solutions available to them.
The Equifax data breach, by some reports exposing as many as 143 million Social Security numbers, represents the latest example of the risk that companies face with protecting data assets. The corresponding impact on the insurance marketplace will play out over the next three to six months as underwriters grapple with the severity risk that continues to exist. The motivation of the bad actors continues to shift, but the risk to data assets is still the greatest threat to companies seeking to protect their enterprises from cyber events.
Property coverage continues to evolve as carriers realize the competitive advantage of offering limited first-party cyber coverage as well as the risk involved. Operational technology (OT) risks, the Internet of Things (IoT), and recent threat and loss activity have increased awareness of the need for a first-party cyber strategy.
In the middle-market space, cyber liability continues to be a popular topic among business owners and risk managers. The market has generally flattened out, with some increases expected among companies with large point-of-sale exposures, retailers, and healthcare. Market capacity is still high, which provides pressure to keep premiums in line.
Lockton continues to emphasis the “cyber as a peril” approach to holistically solve a client’s challenges, rather than offering cyber coverage across multiple programs. Companies benefit from investing in a cyber hygiene solution that provides the broadest coverage at the most competitive price.
P&C MARKET UPDATE | LOCKTON US
14 October 2017
Major storm events and natural catastrophes that cause flooding and property damage can result in environmental issues. Expected outcomes of these events include claims for cleanup, damage to natural resources, and bodily injury.
Potential claim scenarios will arise out of:
� Contaminated drinking water sources (both public and private).
� Toxic compounds released from industrial facilities with flooded or compromised containment systems.
� Under- and aboveground storage tanks with damaged primary or secondary containment.
� Exposure to general sewage and resulting cleanup.
� Mold growth within flooded structures.
Carriers and insureds will face specific challenges in navigating these claims. For instance, comingling of contaminants from various sources in flood waters leads to unclear assignment of liability. Losses are further complicated by the latent nature of bodily injuries resulting from exposure to polluted water and mold-ridden buildings. To ensure the best possible claim outcome, insureds must be diligent in adhering to claim-reporting requirements. Timely notice and abiding by the terms of the insurance contract will be pivotal in negotiating any claim and getting insureds back to business.
As with any event that generates large losses, the insurance marketplace will more closely evaluate exposure to loss. Underwriters will look for evidence of robust prevention and mitigation plans, and may also refresh their appetite for specific risks if they are identified as claim drivers. For example, after Superstorm Sandy in 2012, pollution underwriters reconsidered their approach to underwriting residential mold coverage. We may witness a similar reaction following these recent events.
Environmental
P&C MARKET UPDATE | LOCKTON US
15 October 2017
Market Innovation and Broader Product Availability Needed
The terrorism and political violence market continues to increase its capacity, and prices for property damage and business interruption cover continue to be favorable to clients. Favorable rates remain more difficult in major metropolitan concentrations, where insurers can build up aggregation issues with exposure in one area. For example, in New York’s Times Square, each carrier is limited to how much exposure it can have at any one time. As many insurers purchase terrorism coverage in this area, there is not always capacity freely available or at an affordable price.
In light of the spike in terrorist attacks, insurers are taking a more conservative approach to contingent sublimits, such as denial of access. The attacks across Europe resulted in substantial, unexpected losses, and insurers are now closely monitoring their exposures.
A Shift in Terrorism Attacks
Historically, terrorist attacks have targeted infrastructure, with intent to cause catastrophic property damage. The current trend has evolved with primary focus on causing civilian casualties, instilling fear, and intimidating the public. Economic damage is invariably a consequence of terrorist attacks, often in the form of reduced footfall or even complete shutdown of the affected area. This economic damage is typically not covered by insurance because it is caused by nondamage business interruption rather than business interruption following property damage.
The Market Response
In response to ever-changing terrorism threats, the insurance market has developed broader coverage solutions and extensions. Lockton and a panel of insurers have developed a product that provides customized Terrorism Crisis Solutions (TCS) on a worldwide basis which leverage multiperil multiline aggregate strategies into low-frequency, high-severity claim scenarios.
Terrorism
P&C MARKET UPDATE | LOCKTON US
16 October 2017
The primary commercial auto market is volatile. Given the unprofitable combined ratios and volatility in claim settlements, this is creating rate pressure not only on trucking but also on private fleets with mid/heavy trucks.
Underwriters are advising that their facultative reinsurers are pushing for rate increases even on accounts that have not penetrated the risk transfer layer. Reinsurers are looking closely at year-over-year loss reserve development. If loss development is significant, the rate pressure is greater. Primary carriers are exploring the alternative of accepting more risk on a net basis.
Trucking sits at the more volatile end of the spectrum, with fleets increasing retentions and assuming risk in auto liability buffer layers. These layers are typically defined as excess of primary but less than the $10 million attachment point for auto liability. Buffer layer excess rate changes are not as dramatic following 2016 but continue to increase in the high single to low double digits.
The $10 million umbrella attachment point (for transportation accounts) remains challenged due to decreased capacity and rate pressure from underwriters. With a frequency of judgments and settlements exceeding $10 million, fewer insurers are willing to write the layer, and those that do are charging a higher price for it.
While auto liability and excess liability have been volatile, workers’ compensation for trucking and passenger transportation is calm, with mostly flat renewals.
During the next six months, we anticipate interesting activity in the freight market. Effective December 18, 2017, federal law requires all interstate motor carriers to have electronic logging devices. Most large fleets have already implemented the technology, but small fleets and single-truck operators may have been waiting for a reprieve from the mandate. Experts are mixed on how much this mandate may reduce overall freight capacity. While underwriters have taken electronic logs into consideration when pricing an account, trucking companies can expect greater scrutiny in this area in the coming months if they are not compliant going into renewal.
Lockton continues to differentiate clients on the basis of their investment in technology and their strict adherence to driver qualification standards. Creating linkages between these investments and the resulting loss experience helps secure favorable rates relative to market pressures.
Transportation
P&C MARKET UPDATE | LOCKTON US
17 October 2017
Real Estate
Property market conditions in the real estate segment remain competitive. While underwriters have been receptive to further rate reductions in an effort to retain profitable business, factors such as loss experience, asset quality, geography, and program design continue to affect results.
A recent update of the RMS risk model has led to decreased loss estimates for earthquake, and this has helped with securing more competitive rates. Conversely, losses from perils that are difficult to model, such as hail, are getting closer scrutiny as underwriters search for ways to reduce exposure.
For portfolios containing multifamily housing exposure, insurers are evaluating the level of risk more carefully. In circumstances where loss performance has been unfavorable, higher retentions and program structure changes may offset potential rate increases.
The builder’s risk market, particularly for wood frame structures, is in a state of transition primarily due to a number of recent large fires resulting from insufficient hot work procedures and arson. This has prompted some insurers to exit the space, and after-hour security requirements are becoming more prevalent.
While the liability market remains stable, underwriters have been evaluating exposures such as assault and battery more carefully, employing third-party vendors to obtain information on locations based on past crimes and statistics in the surrounding area. Loss performance, program design, contractual risk transfer, and loss prevention/training programs continue to influence results.
P&C MARKET UPDATE | LOCKTON US
18 October 2017
Onshore Energy
The property onshore energy market for operational and construction risk continues to soften, primarily due to an oversupply of capacity driven by a low-interest environment.
Last year, we saw an increased supply of capacity, which created an environment of increased competition. Rates began trending down and continue to do so, with self-insured retentions remaining stable. Cyber coverage generally remains excluded, but ensuing damage from a cyber event is typically covered.
Ensuing damage tends to be the key focus for onshore energy, because physical damage and resulting business interruption can be significant. Prior to 2017, loss experience of the worldwide onshore energy market, with limited CAT events and moderate operational losses, was manageable and trended close to a combined ratio of 100 percent for the majority of the market. This has changed, as there have been a handful of significant losses in the worldwide energy market that, when combined, far exceed the worldwide onshore energy premium for the year. This hardly impacted the market, but we now see a change after the recent CAT events in Texas, Florida, and the Caribbean. The majority of the market is attempting to renew at flat rates or above, due to the uncertainty surrounding the losses. The market is also trading on expected treaty renewal increases.
Through 2017 and Beyond
We expect the ripple effect being experienced in the market to continue through the end of the year and into the first quarter of 2018. The uncertainty of treaty pricing, total operational losses, and the major impact from CAT losses will make rates flatten or increase, depending on the CAT and loss profiles of individual clients. We also have yet to see what else the hurricane season may bring between now and the end of November.
If there is no impact to the amount of capacity that is currently available in the market and the loss activity remains manageable, we expect further softening in the market to start again by the second quarter of 2018. The only way the market will harden is if there is a shift in competition, driven by capacity leaving the market. This happens when additional loss activity makes the environment unattractive or when event capacity backers find other, more profitable investment opportunities outside the insurance market. An increased interest rate could be the trigger.
In summary, despite a slightly hardened market, the outlook for clients remains positive.
P&C MARKET UPDATE | LOCKTON US
19 October 2017
Farm-to-Table
“Farm to table” is used across the food industry, and some restaurant menus include the farm name and location of where the food was raised. Fortunately, farmers are able to insure their crops through federal crop insurance, also referred to as multiperil crop insurance (MPCI). MPCI provides coverage for loss of revenue and production caused by drought, excess moisture, insects, frost, wind, wildlife, and other acts by Mother Nature. Swine and cattle coverage provides protection from market swings.
MPCI is one way for companies to offset product shortage. If a company experiences a loss, it often needs to fulfill contracts by buying product from a competitor or risk losing future contracts.
The US federal government subsidizes MPCI policy premiums up to 50 percent and, in some cases, as much as 80 percent. In the late 1990s, the USDA introduced subsidies to offset the high cost of premiums and encourage more farmers to purchase insurance.
Crop insurance is the largest of the USDA’s farm support, at nearly $8 billion a year. In May, the government proposed cutting $74.6 billion in agricultural programs during the next decade, including a reduction to the crop insurance subsidy. This would drive premium increases for farmers, many of whom would likely carry a lower level of coverage and self-insure more than they do today. If the subsidy cuts are drastic, many farmers will not be able to afford full coverage and one weather-related event could destroy their business. Such widespread losses lead to higher food and beverage prices. Farmers and legislators are advocating keeping subsidies in place so that they can continue to insure their crops. Lockton now offers federal crop insurance on swine, cattle, and more than 70 crops nationwide.
P&C MARKET UPDATE | LOCKTON US
20 October 2017
As mature and healthy as the industry is, the food and beverage sector faces unique and emerging risks. The evolving landscape presents a series of complex challenges, from supply chain to regulatory environment to shifting consumer demands. Companies are proactively evaluating industry changes to keep pace with new risks.
Technology’s Impact on Supply Chain
Business interruption from supply chain disruption is in the limelight. Recent significant losses brought a heightened awareness to the cyber exposure resulting from an increased reliance on technology. While technology creates measurable efficiencies in the supply chain workflow, the risks are growing within the food and distribution sector. Companies are working quickly to evaluate the business impact of cyber disruption to critical machinery and logistics technology. While the insurance marketplace is making adjustments to consider the emerging risks, it is the beginning of a bigger shift. Insurance carriers are adjusting their underwriting process to contemplate the emerging risk, and brokers and clients are taking critical reviews of cohesion and gaps.
Shifting Consumer Demand
As consumer trends shift toward healthier options, companies are evaluating risks inherent to product development strategies, mergers and acquisitions, and labeling. Product labeling remains a focus, as regulatory requirements remain fluid on genetically modified organisms (GMOs), natural and organic products, and various allergens. Mergers and acquisitions remain a key strategy for food companies to acquire additional healthy brands and expanded distribution opportunities.
Grocery supply chain disruption is the latest area of focus, given Amazon’s recent acquisition of Whole Foods, as well as the wave of boxed meal delivery services. Many food and beverage companies are considering how these disruptions will affect their business, but it’s premature to evaluate the immediate and long-term customer-buying shifts.
Food & Beverage
P&C MARKET UPDATE | LOCKTON US
21 October 2017
Regulatory Environment
The current political and regulatory landscape may impact future trade and labor amid pending policy changes relating to taxation, immigration, and minimum wage. NAFTA renegotiation, Brexit, and proposed border taxes affect supply chain and international operations for food companies globally.
While market trends are generally following industry, insurance companies have a heightened awareness of food safety, labeling, and supply chain disruption. Recent catastrophic cyber losses and increased product recall loss trends promote additional underwriting efforts to ensure fair renewals and comprehensive coverage outcomes. The combined effect results in increased attention during the underwriting process. Given the market state and recent risk evolutions, it is worthwhile for companies to work with their brokers to assess how their programs would support corporate priorities and what insurance products can reduce operational risks.
Lockton’s global farm-to-table practice works with some of the industry’s largest and most complex food-related risks, as well as mid-sized and smaller companies. The team comprises coverage and risk professionals to meet the unique and evolving risks of food and food-related companies.
P&C MARKET UPDATE | LOCKTON US
22 October 2017
Recalls in all sectors continue rising steadily, along with the associated costs. Even so, recall and contamination insurance remains soft—especially in the US, where new carriers brought increased competition to the market in 2015 and 2016. The soft market has resulted in not only decreased rates but also expanded coverages and wordings.
Food Manufacturing
The frequency and severity of recalls and contamination events in food and agriculture continue to increase due to the implementation of new environmental testing requirements of the Food Safety and Modernization Act, as well as increased FDA inspections.
Food product recalls that occur due to positive environmental pathogen testing, and those involving government authorities, are more significant in terms of product and financial loss than those tied to labeling or foreign body, allergen, or confirmed pathogen contamination. Increased financial costs correspond to amount of product recalled, as well as the consequential damages that must be reimbursed to third-party customers. These include product value, restocking fees, the cost of obtaining a replacement product, brand damage, drop in sales and foot traffic, loss of gross profits, and other damages.
In response to increased frequency and severity, some US carriers have increased their minimum rates and attachments on food manufacturing risk, and some have written off certain classes of food business altogether. Carriers that have increased their rates have remained competitive by expanding coverages around “voluntary” government recalls and by increasing sublimits for certain coverages such as brand rehabilitation.
However, excess rates remain highly competitive, giving clients the opportunity to purchase additional limits on existing programs and have their programs structured with high limits for catastrophic coverage.
Restaurant Contamination
The restaurant contamination market has benefited from the soft recall market by attracting a number of new carriers, which has driven rates down and expanded coverage offerings. The restaurant product includes broad reputation coverage for adverse publicity events that damage the brand and reduce sales. Most restaurant contamination coverage also includes business interruption loss caused by a workplace violence event. We expect that coverage offerings will continue to expand while new carriers enter the space.
Product Recall
P&C MARKET UPDATE | LOCKTON US
23 October 2017
Hard Goods and Component Parts
Insureds in the hard goods and component parts markets have benefited the most from carriers looking to diversify their books and diversify from food recall risks. The US market has new carriers, and the appetite among existing carriers has increased. Coverage may now include auto parts recall, and some carriers are willing to provide third-party financial loss coverage for aviation exposure. Coverage for manufacturer errors and omissions has also emerged in the US auto and component parts recall market in response to the demand for insurance that covers quality issues in addition to safety-related recalls.
