As we reflect back on 2021, a lot of things that we anticipated came to fruition. Rates continued to increase but not at the levels we witnessed in 2020, and displacement from non-renewals or capacity reductions were not as cumbersome to deal with and much less frequent. Insurers continued to reduce limits in an attempt to control costs and carriers continued to be a timing bottleneck thanks to the underwriter carousel and not having enough underwriters across the marketplace to fill all the needed positions.

The one aspect we weren't anticipating is that the end of the fourth quarter would be as competitive as it was. We're hesitant to say we are entering into a buyers' market, but in December—for the first time in a couple years—many accounts were oversubscribed with capacity, rate reductions were achieved across asset classes, and buyers were not stuck with the only option because they finally had options.

However, buyers having options meant that competition amongst carriers was rising. We think it's too early to tell if this will continue through 2022. Many carriers stated back in November that they are targeting 8% - 15% rate increases for this year, which has largely been supported by our research. We may be entering a period of displacement driven by competition versus changing underwriting guidelines, which is a much more favorable environment for our buyers.

A Shifting Market

Let's focus on the market shift. Starting at the end, in December incumbent carriers appeared to be at a disadvantage on their renewals for the first time in over two years. This is a sharp contrast to last December, when it felt like many carriers had packed it in for the year and were actively looking at trimming current renewal books of business and not entertaining adding new accounts to their portfolios.

All year carriers have been trying to write new deals, but their pricing was regularly coming in higher than an incumbent's renewal pricing. In the fourth quarter of 2021, however, this changed and pricing from non-incumbent capacity was coming in less than incumbents, occasionally by 20%+ on middle- and lower-hazard accounts.

Many accounts were oversubscribed with capacity, leaving the insured with options both from a pricing standpoint and a terms and conditions standpoint. We saw numerous instances where incumbent carriers either got pushed up a tower or moved off entirely, as they were unable to compete due to being tied to rate change restrictions within their pricing models or mandated pricing guideline changes from Chief Underwriting Officers.

Based on our conversations across the industry, the environment we witnessed in December looks to continue into 2022, given that all the insurers and reinsurers have aggressive growth goals for the year. We will probably see two different excess markets playing out this year as the low- to medium-hazard accounts with perceived high rates get a lot of interest from the marketplace, especially standard carriers, while medium- to high-hazard accounts don't get the same carrier attention and thus don't have the same competitive landscape.

The Effect of New Market Entrants

We've spent a lot of time over the last year talking about new market entrants, as investment capital looking to take advantage of the current market conditions have flooded into the marketplace. Throughout the first three quarters of 2021, that new capital didn't have a significant overall impact on rate change, but was predominantly holding rate increases at the low end of the spectrum.

Then came the fourth quarter and for the first time in a couple years, we were actually seeing new capacity offer rate reductions across the excess marketplace and not just in pockets. This helped in shifting placement structures in order to achieve more competitive pricing than we would have seen if the incumbent structure had been renewed. It would appear as if these new entrants finally have their feet under them and are starting to actively attack business in order to grow their books of business and produce returns for their capital-backed partners.

Incumbents Increased Capacity

Another important aspect to point out that is slightly contradictory to the above is we started seeing pockets of business in which incumbent carriers were increasing or stretching capacity. This wasn't across the board by any means, but is important to point out because when we saw this happen the cost of a carrier's additional capacity offered was significantly less than the incumbent capacity in that layer.

For example, an incumbent carrier previously offering a Lead $5M Excess placement was not only able to offer renewal at the expiring capacity, but was inclined to offer a full lead $10M, with that $5M excess of $5M portion coming in at relativity percentages only seen back in 2016/2017. With relativity percentages on follow form excess placements typically hovering around 50% of the underlying layer price in most instances for the past few years, this had a very positive impact on pricing for insureds as it helped reduce cost up through the tower in many instances.

What's to Come in 2022

2022 will be another challenging year, but different from the last two. The biggest challenge may likely be the turnaround time from carriers, as many are struggling to find enough qualified individuals to fill open positions. This puts a strain on their ability to address all submissions within the brokerage communities' timeframes, an aspect that most insureds are probably overly frustrated with.

Meeting board deadlines and budget meetings has been one of the most difficult points of the market in the last few years and we do not anticipate that changing. This increases the importance of clients managing their insureds' expectations from a timing aspect in order to preserve the relationship.

We should expect excess placements to be shuffled around with new carriers moving onto placements holding down cost, while many incumbents could be displaced off their accounts. The market finally seems to be turning in the insureds' favor and we hope that dormant claims that have been waiting for the court system to catch up don't push us back in the other direction.

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