How Lloyd’s Underwriters Are Viewing Today’s U.S. Casualty Insurance Environment

Today’s Lloyd’s of London market for casualty insurance is marked by rising prices, reduced capacity, and buyers embracing more self-insurance, according to underwriters at Lloyd’s.

It is also marked by underwriters who still believe in the value of long-term relationships with brokers and clients and who are somewhat worried they may not have adequately messaged these brokers and clients about what to expect in today’s market.

These same Lloyd’s underwriters want brokers and risk managers to know how to navigate their market and differentiate their clients to get the protection they need.

Jesse Paulson, managing director and U.S. Excess Casualty practice leader at Marsh, and his team provide clients with advice on manuscript wording, global market appetite, and product design. Last week, he donned the cap of moderator for a casualty insurance segment in the “Tuesdays with Lloyd’s” virtual series with various Lloyd’s leading underwriters.

The “Tuesday with Lloyd’s” series is designed to help U.S. agents and brokers — and their clients— understand what to expect when they reach out to Lloyd’s in today’s market.

Panelists for the casualty segment moderated by Paulson were:

The discussion began with the observation that the upward momentum in casualty insurance prices has definitely increased in 2020 even as the pandemic and recession have continued.

“I think some people think that it’s all happened at once,” commented Wood. “They think a lot in insurance must feel pretty horrible this year. But the price and correction started last year, even the year before, so what would’ve been a downwards spiral is slowly increasing and stabilizing.”

At the same time they are adjusting their pricing, carriers are also reconfiguring their portfolios and, in some cases, withdrawing capacity.

She said that many things happened to bring about the current pricing but that it comes down to this: “No one’s making money and people are trying to adjust.”

“I think there’s no doubt that 2020 has seen pricing accelerate far quicker than it has previously. But it’s not just this year; it has been happening for quite a few consecutive quarters,” agreed Wallis.

According to the underwriters, there are the usual suspects responsible for today’s market conditions, including years of poor results, social inflation, litigation funding, the current economic recession and uncertainty over the effects of COVID-19.

“The tort environment has suddenly become very challenged. In addition to that, we’ve got a lot of back year loss deterioration on people’s portfolios,” said Aspen’s Bland.

What’s noteworthy is that at the same time they are adjusting their pricing, carriers are also reconfiguring their portfolios and, in some cases, withdrawing capacity.

Bland explained that a “lot of carriers have been performing a lot of underwriting reviews” and establishing new appetites so that they can make their portfolios more resistant to the severe loss trends that they are seeing.

“You’ve got markets pulling out completely and just seeing that it might not be a profitable class of business going forward,” Bland said, adding that some of those withdrawing are big, established players.

Wallis said that after years of poor results, it’s now a matter of supply and demand. “You’ve had anywhere between $400 and $500 million of capacity withdraw from the existing space,” he said, while at the same time “there’s still a lot of demand to buy the products.”

To have a sustainable market long term, “people have realized that the pricing needs to change.”

Along with the pricing and capacity adjustments has come a change in buyer behavior.

According to Marsh’s Paulson, 2020 has seen a “large spike” in insureds purchasing lower limits than in previous years.

The purchasing-less trend can also be traced to the lack of availability. Clients can’t always get higher limits they might want since capacity is restricted.

Paulson and other underwriters believe cost is the main reason buyers are buying less.

Wallis said underwriters know how badly affected some clients have been by COVID and various lockdowns. “It must be challenging for them. We do appreciate that and try and take that into account,” he said.

Woods said “everyone has a budget to hit” and the current pricing and capacity must be “very challenging for some of those risk managers.”

According to Bland, it’s a fact that people have budgets and a certain insurance spend. “Some of the pricing dynamic has been so different in the last 12 months, so some people are evaluating what they need. More importantly, in some cases, we see they are buying less and going with more self-insurance,” said Bland.

Woods has been surprised about the amount of self-insurance. She would have expected a reduction in the limits purchased but has been surprised at clients self-insuring in the middle of a program. “I don’t know if that trend will continue, or if that’s a necessarily wise move,” she said.

The purchasing-less trend can also be traced to the lack of availability. Clients can’t always get higher limits they might want since capacity is restricted, according to panelists.

“Whilst clients are buying less, there still needs to be a market there to purchase limit from,” Bland added, defending the raising of prices. “We don’t want to be out of jobs, and as brokers you don’t want to lose markets.”

Paulson suggested there are a lot of clients coming out of renewals who are now wondering if long term partnerships mean anything anymore, if such partnerships benefit them in this market.

Wood believes long-term relationships “absolutely” make a difference from an underwriting perspective because patterns are revealed over time and the underwriter can recall how the risk was differentiated from others. “You can see how they have adjusted and responded to issues; how they are managing their exposures, how they are managing their education profile,” Wood said.

Having a history with a client also enriches the underwriting process, opening conversations to different questions that help differentiate the client even further and allowing underwriters to educate insureds on what the market is like.

Has the underwriting community done a good enough job advising clients of what they need to be prepared for in terms of pricing?

“I think if there have been claims on the account, the value of partnership really comes into play then, because the insured knows us better, we know them better, we know what each other’s expectations are,” Wood noted.

The “people” angle is perhaps most important.

“On a really human level, I think relationships are really important, especially if markets change, because I’d say it’s hard not to want to work with somebody that you’ve known for a long time and try and do right by them,” Wood said.

The extent to which brokers and their clients may be surprised by what’s going on in today’s market depends on whether conditions have been adequately communicated. That kind of communications, in turn, depends on the relationships with the brokers and clients, underwriters agreed.

Wood suggested underwriters bear responsibility to do a better job “explaining those adjustments to clients when they come in for individual renewals and explain early in the process what the expectations are and talking them through that.”

Underwriter’s Responsibility

Wallis insisted that messaging on pricing is not just the broker’s responsibility.

“I don’t think it’s necessary just for brokers to do. I think it’s incumbent on all underwriters to do whenever you have that conversation,” he said.

He offered that one of the disadvantages of the virtual business model is the loss of what he calls “out of renewal cycle” conversations with risk managers, brokers and clients to explain where the market is and why the market is where it is.

“It’s really the underwriter’s responsibility to start that process. It’s not the broker’s responsibility. The broker can obviously ask the underwriter for their opinion, but the underwriter should be explaining where we see our pricing — it’s our pricing — and why we feel we need to put the pricing where we need to put it, and the terms and conditions, as well.”

Paulson asked if the underwriting community has done a good enough job advising clients of what they need to be prepared for in terms of pricing. He cited brokers who feel they have met with the market more than once this year and still are having a tough time knowing what to expect.

“I think we can translate messages better,” acknowledged Wood. She said Lloyd’s historically has been good at warning clients of changes coming and making sure that client expectations are managed in terms of capacity.

She said “price is always the bit that people shy away from talking about” until they have all the exposure and submission information to really judge it. She thinks underwriters can be having conversations earlier, especially on renewal accounts, about three months before renewal.

“We’ve probably been a bit slow to start doing that kind of thing,” she said.

Bland feels that the pandemic pushing everything to virtual has taken a toll on underwriters’ ability to communicate and that clients, big and small, also feel that loss. But he thinks that even virtual meetings are better than none.

“The opportunity to get in front of people makes a massive difference,” said Bland. “It also allows us to differentiate, rather than doing a broad brush approach.” He said most clients value the calls that are “definitely a two-way street” even when they are virtual. “If we do get in front of people to see them in person or virtually, it makes such a difference.”

Paulson suggested there may be a silver lining to the Zoom meetings for clients “that haven’t worked with Lloyd’s previously” or who may “not have a budget that’s built around traveling to Bermuda and London.” He said Zoom meetings may give them an opportunity to get in front of underwriters where otherwise they might struggle to get in front of them, especially with the number of submissions underwriters have been fielding.

Bland said that virtual still falls short, especially when dealing with complex risks.

“We would always want as much interaction with clients that you can possibly have. The thing which underwriters crave more than anything else is information. The best way to get that information has historically been to have a face-to=face,” he said.

He said the best situation is for the underwriter to meet clients where they operate and actually see their facilities and give clients the opportunity to fully explain their operations “Unfortunately, that can’t happen.” he noted.

Renewals seem to be taking a lot longer and seem to be more chaotic than in previous years.

Wood said she finds smaller Zoom meetings can sometimes be more beneficial than larger ones where there “may be a lot of Zoom shyness” happening but that Zoom also allows for covering a lot of territory efficiently.

Paulson also likes the efficiency of one-on-one meetings and Zooming between geographies “as opposed to spending a week in London and a week in Bermuda and doing this whole world tour.”

‘Eleventh Hour’

Another thing that’s happening is that renewals seem to be taking a lot longer and seem to be more chaotic than in previous years, according to Paulson, who wondered what or who is causing the renewals to come down to the eleventh hour.

Paulson suggested one reason is that “capacity is tough to find” and that maybe some underwriters are “playing their cards close to the vest and not wanting to leave money on the table.”

Bland doesn’t think it’s the fault of London underwriters.

“I think, especially in Lloyd’s. we pride ourselves to try and be as responsive as quickly as possible and decision maker-centric,” he said. But what he often sees is that the hold-up is in other markets where the authority doesn’t lie with the front line underwriter, but with the home office, and where the broker and the underwriter may be tousling.

“Quite often, we’re sitting here wanting to quote business, but we see that in certain layers, especially low down in a particularly tough class, is the stall,” he explained.

Wallis sees other contributors to the “eleventh hour” dilemma.

He thinks everyone’s workload has increased as the amount of business going to the excess and surplus market has increased and this is happening at a time when the market itself is changing underwriting rules.

“If your volume has doubled, and I don’t think anyone has doubled their workforce, then, unfortunately, everyone is fighting fires across many different risks and doing the best job they can, but there are only so many hours in the day,” he said.

Wood, referring back to the importance of relationships, noted that she thinks most underwriters prioritize renewals that they know and they feel good about landing again as an account. New accounts, on the other hand, are trickier. Underwriters don’t know if there’s actually a real chance to add value and work with that insured over time.

“You find yourself working on the account that’s going to go nowhere when you should have been working on the other account that’s going to go somewhere,” she acknowledged. “I think that’s one of the challenges of this working environment. You don’t have that relationship link, necessarily, as there isn’t much feedback into the process to know what to focus on.”

‘To properly differentiate your risk, you need to invest the time and the effort to go through that risk in great detail with your underwriters.’

Paulson suggested that the current market has heightened the importance of brokers and clients working together to differentiate their risks. He asked for suggestions for brokers and clients who are trying to differentiate themselves in this market.

Wallis said he recognizes that Lloyd’s is a market of last resort, but it’s important to know that differentiating risks still takes time, so sending detailed submissions early is an advantage.

“If you want Lloyd’s, or I think any underwriter, to properly differentiate your risk, you need to invest the time and the effort to go through that risk in great detail with your underwriters,” he said.

The process can start with the conference call and an individual call and a fully detailed submission. “If all I’m getting is an ACORD and a link to a website, it’s probably unlikely that I’m going to underwrite the account or spend any time looking at it,” he said candidly.

Wallis said brokers may be accustomed to getting quick quotes and turnarounds on submissions without details in other markets but it’s not feasible for Lloyd’s underwriters who deal with complex risks.

“If you invest in creating a full submission with a lot of information, with detailed risk information, and a conference call where you can actually go through who you are and what you do, you have a good chance of actually getting some positive feedback from underwriters.”

Wood agrees that differentiating a risk starts off with the broker first giving the underwriter a heads-up on the client and submitting a detailed submission with lots of proper information. She said even if underwriters had “all the time in the world” to dig into a website in detail, they would still be without a lot of information on products, sales and the company they need.

“Make it quick and easy to see, but also give a nice narrative about the account. Too often I pick something up and I can’t quite work out what the insured even does, so I can’t work out what the exposure might be,” Wood said.

Brokers should indicate why they think it’s a good client, according to Wood.

COVID Effect

Bland emphasized that differentiating a submission depends on managing the message that gets delivered among underwriter, broker and client. Brokers should know the “hot topics” that underwriters say they are interested in. He urged brokers to differentiate with the quality of information they provide. “Quality rather than quantity. That’s key,” he added.

In terms of the effect of COVID-19 on casualty lines, Wood cited the possibility of emerging risks around litigation. Large rewards aren’t being settled because the court system is backed-up due to pandemic restrictions. It’s not clear what this means for claims.

“Will Zoom verdicts mean that the verdicts are larger? Smaller? There’s definitely going to be a delay and more uncertainty,” Woods predicted. “Then there’s the economic impact: how badly is the economy crashed down? What are our exposures?”

Bland said casualty is in uncharted territory with COVID. “I think it’s not the 911 moment that we had in 2001 in terms of the impact of where the market is. I think there’s a lot of unknowns.”

He does not think casualty is impacted as much as other lines in terms of claims, at least in the short term.

“You can imagine that there probably will be some emerging issue that we wouldn’t have thought about. It might come down the line two or three years later,” Bland said. “Could there be more of the mental anguish side? Are expanded definitions of bodily injury coming into play? That could be. If we had a crystal ball and could see that, we would be doing completely different things, that’s for sure.”