It’s no secret that the public entity casualty marketplace has arguably been the most turbulent of them all over the last couple years, even when compared to other classes of business.
Now, past the halfway point of 2021, agents need to understand what is driving the current state of the market, why we’re in this current predicament and what the future looks like in order to educate clients about the space, what’s behind their rising costs, and what they can do to control it.
Loss of Markets Leads to Loss of Capacity
Over the last two or so years, the public entity casualty marketplace has seen a mass exodus of carriers from this class of business, especially in the western states. The driving force behind this active migration from previously-entrenched carriers is clearly due to big losses.
Specifically, the ongoing civil unrest the country saw last summer, coupled with rising settlements and even costs to defend claims has pushed a lot of carriers to rethink their positions entirely. The unfortunate side effect is a lack of adequate capacity available for municipalities, and competition between carriers that are still actively participating in the space is very sparse.
This has led to extremely difficult renewals for insureds, causing many to rethink the purchase of liability insurance, specifically excess liability insurance, altogether. This is absolutely not recommended in this day and age, given the increasingly litigious environment, however it does become a matter of whether a municipality can even afford their renewal and what that cost, passed onto taxpayers, will be.
While the conversation may be difficult to have and fall on deaf ears with the more price-driven buyers, the important distinction we must make to clients during this difficult market is that the lack of capacity is being driven by the bigger picture: the reinsurance world. Over the last few years, increased litigation, the rise in nuclear verdicts and even the increased costs and frequency of natural disasters around the world have all impacted the reinsurance marketplace.
Many insureds may not be familiar with reinsurance, which is essentially the purchase of coverage by a primary insurer to cover a single risk or even a large swath or chunk of similar risks with similar exposure, thereby mitigating the primary insurer’s potential loss payout in the event of a catastrophic loss, or multiple catastrophic losses, across their book of business. It is the primary insurer’s way of spreading their own risk by their issuing of capacity to insureds.
Reinsurers operate similar to insurers in the sense that they make decisions on whether or not to provide reinsurance to a primary insurance company or to a book of business by considering loss ratio and exposure, amongst other contributing factors. Given increased claims costs, jury verdicts and rise in judicial “hell holes,” reinsurers have become significantly more hesitant to offer capacity on public sector business and if they do, the offering is at a significantly increased costs than in years past. Increased cost is passed onto the primary insurer, who must then increase their cost of providing capacity to an insured.
It all but boils down to a simple supply and demand equation. With less capacity available in the reinsurance marketplace for public sector business due to loss history, costs and other aforementioned factors, there is less capacity available from primary insurers or and an inability for those primary carriers to secure reinsurance capacity, which results in increased costs.
A New Wave of Contributing Factors
In addition to the continued market-driving nuclear verdicts and increased litigation costs, there are additional factors that are impacting and will continue to impact the public entity marketplace going forward.
For the most part, the impact of COVID-19 hasn’t truly been felt by municipalities when relating to their insurance costs, however that may not be true for much longer. With the continued surge of the new Delta variant, coupled with the return to work and subsequent talk of how or whether or not to show proof of vaccination for employees, the next year could prove pivotal. More lawsuits could be filed in regards to EPLI claims or if the employee contracted the virus at work after being told they could no longer work from home. While there haven’t been many concrete cases and verdicts exploring this yet, it is very likely that there will be an increase in lawsuits going forward.
A bright spot, however, may be the Public Readiness and Emergency Preparedness Act (PREP) which provides immunity of liability for entities and individuals involved in the development, manufacturing, testing, distribution and/or administration of countermeasures against a present or credible threat to public health. While PREP isn’t a complete protection of liability as it provides a statutory exception for actions or failures to act that constitute willful misconduct, it may help municipalities in their fight to mitigate COVID claims or suits brought against them.
Sexual Abuse and Molestation
SAM coverage has been a hot topic for years in the public sector, education and religious and non-profit classes of business, though recently it has garnered significant attention due to certain jurisdictions and their exploration of increasing look-back windows. These are now established in eight states and the District of Columbia.
There are also reviver statutes, which is state legislation enacted to allow adult survivors of childhood sexual abuse to bring civil claims (often negligence or assault and battery) after the statute of limitations has passed and even the complete removal of the statute of limitations altogether, such as Colorado’s Senate Bill 73 which is currently under review. Furthermore, seven states have even increased the discovery age of a sexual abuse claim, allowing victims to sue later in life if they’re able to show they only realized the impact of abuse in recent years.
These changes and expanded reporting periods for sexual abuse and molestation claims will continue to increase claim costs and settlement size, which will further lead to increased premiums and even some carriers to change their coverage offering, whether by providing only a sublimit of coverage or changing the language in which coverage is triggered.
Arguably the largest driving force behind the significant market shift over the last few years in the public sector space, Law Enforcement Liability is a coverage offering that is keeping most insurance company executives up at night.
Whether it’s the impact of an officer discharging their firearm or the recent movement by groups to defund the police, Law Enforcement Liability claims are increasing in frequency and severity and are making it increasingly difficult for carriers to provide the necessary capacity at an affordable price point, which negatively impacts insureds and their ability to afford and obtain proper coverage to insulate themselves from a large claim.
Another factor behind the increased scrutiny of Law Enforcement claims is the uptick in use of cameras and video recording equipment. Law Enforcement officials have increased their use of body and dashboard cameras to monitor and record incidents which, in theory, should yield more positive results and outcomes in a court case should protocols and training have been deemed to be followed. The flip side of this, however, is that the public is also using cell phone cameras and other devices to monitor their interactions with law enforcement, which has resulted in a larger public eye on events through social media. This can result in outrage over events involving law enforcement and triggers the potential of larger settlements due to increased public scrutiny.
Reduction in Market Participation
Through the middle of 2021, a very prominent MGA cut their renewal capacity back to a $2M limit, the maximum amount of capacity they could offer without the reinsurance support they had from prior years. Given the difficulty in the class, this facility was unable to secure and renew their reinsurance support in the spring, which led to significant difficulty and market maneuvering prior to 7/1. The result is a serious impact to renewal results for those clients that partnered with this facility over the years.
When capacity in the public sector marketplace disappears or is significantly reduced, the cost to replace it through another carrier has become much more expensive. For example, we’ve been seeing the marketplace price an alternative primary $5M layer roughly 15% - 25% higher (and sometimes much more depending on loss history/development, jurisdiction, exposures and whether or not tort protection is available) than an incumbent carrier’s expiring $10M limit. On top of this, renewal disruption is further driven by the lack of carriers in the current marketplace with the ability to offer $10M in limits, directly excess of the insured’s retention. We are now seeing the use of at least two carriers to fill out the expiring primary limits on the majority of these placements. Given the carriers’ guidelines for pricing relativity to the layer below them, each additional market added to a placement significantly drives up the premium.
A Light at the End of the Tunnel?
While the current liability marketplace may look bleak for municipalities, there have been a few new entrants into the space. We are not seeing the abundance of capacity offered in years past, but it does promote more solutions and potentially even more carrier competition on accounts. This should yield better results for the smaller and less loss-heavy accounts.
It is of the utmost importance for retail agents and insureds alike to communicate openly and often about the expectations of their insurance renewal and ensure these conversations are taking place at least four to five months in advance, sometimes longer, of their renewal date. Brutal honesty and supporting, factual information from the incumbent underwriters will help facilitate important and meaningful conversation and will continue to help manage expectations so insureds understand what to expect when their renewal date comes.
The addition of an expert wholesale broker knowledgeable of the current market climate with deep carrier relationships, both in the primary insurance and reinsurance markets, will ensure that the client is getting the best result available in the marketplace. To drive the optimal result for the client, retail agents must be prepared with complete submissions including at least 10 years of ground up and uncapped loss runs, along with fully completed supplemental applications, vehicle schedules and budgets.
To go a step further, carriers are increasingly asking for information regarding law enforcement training as well as policies and procedures, so retail agents and insureds must be able to produce supporting documentation. As with all firm markets, the need for underwriting information and questions greatly increases, but with proper preparation and adequate time, a successful renewal is absolutely attainable.