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State of the Insurance Marketplace - A Compilation & Some Renewal Considerations

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Executive SummaryWhat can be expected from the property and casualty insurance marketplace in 2014?

With more than $600 billion in policyholders’ surplus, the insurance industry is well capitalized in spite of large losses.

Insurers will lower prices for select accounts with good loss histories. However, they will remain reluctant to offer discounts across the board and have even been raising rates for accounts with marginal and poor loss experience.

Although some in the insurance industry believe that rates may be headed down/lower, buyers should temper their expectations. Some accounts may indeed warrant a rate reduction, but broad downward pressure on rates would be inconsistent with industry experience. Many insurers have been holding the price of property-catastrophe insurance about flat for most accounts. For many businesses — particularly those that have already seen price reductions or never had significant price increases — insurers have little room for further reductions. The price of properties with large concentrations of values and/or people and commercial flood insurance remains quite high.

Even with lower than in the past reinsurance prices, the price of property- catastrophe insurance is expected to remain flat- 10% increase due to many insurance carriers now purchasing more reinsurance at a higher than “in-house” rate. Also, insurers are now focusing on the specifics of each account, such as location, loss history, and overall quality of risk. We have specifically addressed these issues in the Property Insurance section of this report.

Primary and Excess Casualty InsuranceAs stated, capacity is still abundant. However, underwriters are pushing for higher retentions and attachments where underlying exposures and loss history indicate restructuring. Underwriters are less flexible when considering “manuscripted” endorsement language and are more likely to insist on ISO language unless there are higher retentions or only incidental exposures are involved.

More U.S. risks are looking to London and Bermuda for excess liability alternatives.

Uncertainty regarding the fate of the current federal terrorism backstop, set to expire December 31, 2014, is creating challenges for risks with concentration exposures.

The consensus is to expect increases in rate at 2% - 10% in 2014. For example, Liberty Mutual is seeking a 5% increase while Travelers is believed to be seeking increases in the higher levels.

Automobile InsuranceAutomobile Liability Insurance continues to challenge fleet owners nationwide. The consensus is to expect increases in rate at 2% - 10% in 2014. Underwriters are imposing higher retentions on risks with large fleets, heavy trucks or poor loss experience. Carriers such as ACE offer automobile liability buffer limits, coverage outside the working layer when primary limits do not meet umbrella attachment points.


Workers’ Compensation & Employer’s Liability InsuranceThe Workers’ Compensation Insurance marketplace is seeking increases in Premium and some traditional insurers (in particular Liberty Mutual) will no longer underwrite mono-line Workers’ Compensation Insurance. In general:

• overall market results continued to hold at unhealthy levels;

• many carriers will no-longer write stand-alone coverage;

• indemnity claim frequency showed a significant year-over-year increase;

• indemnity costs exceeded their 2001 pre-reform peak;

• medical payments showed a steady, material increase; and have now exceeded indemnity payments; and

• Medicare Set- Aside is rapidly increasing

There are several emerging issues in Workers’ Compensation. With the Affordable Care Act expected to bring new insureds into the healthcare system, expect strains on the Workers’ Compensation System. This will put pricing pressure on Workers’ Compensation premiums. While experts predict that earlier treatment for comorbidities will benefit Workers’ Compensation Experience, it is predicted that this will be a long-term benefit. Comorbidity is the presence of one or more disorders (or diseases) in addition to a primary disease or disorder, or the effect of such additional disorders or diseases. In medicine, the term “comorbid” can be either medical condition(s) existing simultaneously but independently with another condition, —or it can indicate medical condition(s) in a patient that are related to another condition.

The Patient Protection and Affordable Care Act (ACA), enacted in 2010, introduced significant changes to the U.S. healthcare delivery system. These changes are expected to expand access to insured care while also managing the costs of medical services. There were no significant elements of the ACA directed at Workers’ Compensation, so it can reasonably be assumed that the Worker’s Compensation insurance marketplace was largely ignored when the ACA was written. However, there are numerous potential indirect effects on the Workers’ Compensation system that will likely vary by state. As the most significant elements of the ACA, including health insurance mandates and the implementation of health insurance exchanges, become effective in 2014, providers of Workers’ Compensation benefits will soon begin to feel the true impact of the healthcare reform.

One clear intention of the ACA is that greater access to health insurance coverage should lead to a healthier population, which should have two direct effects on the Workers’ Compensation insurance marketplace. First, a healthier workforce is expected to lead to a reduction in claim frequency. Second, a healthier workforce could also lead to greater ability to recover from workplace injuries, which will accelerate the employee’s return to work. If this occurs, or if healthier individuals are less inclined to continue on Workers’ Compensation with a combination of work-related and other medical conditions, the claim experience of the Workers’ Compensation insurance marketplace should improve.

Less clear, but perhaps more significant, is the potential shift of costs between the Workers’ Compensation


and the health insurance markets. A common challenge for Workers’ Compensation providers is the tendency by a portion of the workforce that does not have health insurance to file for or to stay on Workers’ Compensation, with some health benefits being paid for medical conditions that may not be work-related. In practice, to the extent many of these claims are treated easily and closed quickly, the expanded availability of healthcare insurance by the general population may shift some of these claims to healthcare. To the extent that they are relatively small, there may not be a significant impact on either system. To the extent any of these claims are large, there could be a significant cost- shift from Workers Compensation to healthcare.

For workers with ailments that require regular treatments over a number of years, there is the issue of convenience in addition to the question of availability of insurance coverage—both workers and medical service providers (e.g., physicians, hospitals) generally prefer health insurance over Workers’ Compensation. Workers tend to dislike the lack of control they have in the Workers’ Compensation system, which is due to the requirements of dealing with claims handlers and medical claim payment systems and, in some states, having to select physicians from the employer’s medical provider network. Workers also seek to minimize interaction with a carrier’s claim handlers; this is a frequent driver of claimants’ pursuits of Workers’ Compensation claim settlements. When a choice between health insurance and Workers’ Compensation coverage is available, many workers will opt for health insurance.

For physicians, the Workers’ Compensation system typically requires more justification of the treatment, as well as the preparation of reoccurring formal reports and other paperwork. In some cases, they may be required to testify regarding their treatments before receiving reimbursement from the insurance carrier. This administrative burden and low fee reimbursements are why many physicians do not accept Workers’ Compensation claimants as patients. Opportunities to direct patients to claim coverage under health insurance instead of Workers’ Compensation will be welcomed by the physician community.

While workers find the administrative requirements of Workers’ Compensation to be onerous, the increased use of deductibles and copayment requirements in the health insurance market could drive some users back to the Workers’ Compensation insurance marketplace. Another factor that could increase the costs of Workers’ Compensation is the current shortage of primary care physicians in the United States. A shortage of primary care physicians could delay the employee’s medical evaluation(s) and thus impede carriers’ ability to deny questionable claims as quickly as possible. More importantly, the lack of primary care physicians will prevent timely treatment of workers’ medical conditions. Claims professionals commonly acknowledge that the first 90 days of a claim define the course for the claim while it remains open. Obstacles to timely initiation of a proper course of treatment will slow workers’ ability to recover and to return to work, which could unnecessarily extend the medical cost and wage replacement components of Workers’ Compensation claims.

Another way the ACA has facilitated the shift from Workers’ Compensation to group health coverage is the creation of the Pre-existing Condition Insurance Plan (PCIP). The PCIP is a program to provide health coverage to people who have been denied coverage because of their health condition or who presently have a preexisting condition. Before the ACA was enacted, Workers’ Compensation was used by many


people to obtain at least some healthcare for a preexisting condition that was arguably associated with a work-related injury. In 2014, the ACA will prohibit health insurers from refusing coverage because of preexisting conditions and will maintain the spirit of the PCIP, which will no longer be needed.

A different element of the ACA that could influence the Workers’ Compensation market is the Patient-Centered Outcomes Research Institute (PCORI), which was created to perform comparative effectiveness research. PCORI is expected to identify the most effective medical treatments and preventive medicine. As care providers and injured workers receive current evidence-based research about medical treatment options, the improved patient care could result in a faster return to work for claimants. This would reduce both the medical cost and the wage replacement components of Workers’ Compensation claims.

PCORI was not formed to improve the efficiency of the Workers’ Compensation system, so it is possible that its efforts will not be entirely favorable to the Workers’ Compensation insurance (or health insurance) marketplace. It could counteract cost containment efforts of the ACA. For example, PCORI research could also conclude that an increase in utilization is appropriate for the well-being of an injured worker. Nonetheless, PCORI should benefit the Workers Compensation system as the use of evidence-based medical guidelines has increased across the United States, because such guidelines have generally been found to decrease Workers’ Compensation medical costs. Evidence-based guidelines represent a tool for medical case managers to control physician services, and PCORI should enhance this.

The consensus is to expect increases in rate at 2.5% - 10% in 2014. The exception is California, where employer can expect rate increases of up to 20%

Employment Practices Liability (EPL) InsuranceInfographic dramatically shows the disconcerting enforcement trends facing employers throughout the US. Over the last several years, US government agencies have significantly stepped up enforcement efforts against employers from all angles. The Equal Employment Opportunity Commission (EEOC), the Department of Labor (DOL) and the Immigration and Customs Enforcement (ICE) have been very candid about their promises to execute their enforcement strategies targeting noncompliant employers and they are making good on their promises. Equal Employment Opportunity Commission (EEOC) received 99,632 charges from employees alleging employment practices violations — including discrimination, harassment, retaliation, wage and hour claims — by their employers. Wage and hour claims (including related meals and rest period and/or unfair practices claims) remain largely excluded from coverage under EPLI policies, even as they remain the single largest employment-related exposure for US employers. Wage and hour claims filed in 2012 more than tripled the total number of employment discrimination claims and Employee Retirement Income Security Act (ERISA) claims that were filed in the same period, accounting for more than 80% of all employment class-action lawsuits filed. The settlement value of these claims outpaced settlements of employment discrimination claims. The Equal Employment Opportunity Commission continues its aggressive enforcement plan despite some staggering trial losses for the EEOC in 2013. The most recent thrust is in the changed workplace demographics and “national origin discrimination”.


Also, the National Labor Relations Board (NLRB) is at full strength for the first time in years operating without a quorum for years and under a cloud of questions about its Constitutional legitimacy. That will change, as the Senate approved five new members on July 30, 2013.

Adverse claims experience is placing upward pressure on EPL coverage. While overall capacity remains “abundant,” there are no new EPL carriers entering the market. Pricing overall will be flat to a 10 %, with private, nonprofit and smaller employees predicted to face up to 15% increases.

Cyberrisk InsuranceThe market for stand-alone Cyber policies is active. Rates remain competitive for some, with renewals bringing slight reductions, though with increased losses, markets may be looking for slight increases over expiring premiums around 10%.

More stringent privacy laws in the U.S., Europe and other countries have multinational corporations addressing Cyber risk enterprise-wide, although implementation of the E.U. Data Regulation could be pushed off to 2015 or later. EPIC can help you draft you contracts to reflect these issues.

As for underwriting, there is no consistency in coverage or definitions. Some carriers will offer many of these modules and none all. It is imperative that a Client’s risk be aligned with the appropriate module.

Module 1: Loss of Data

Module 2: Denial of Service

Module 3: Privacy Liability

Module 4: Cyber Extortion

Module 5: Transmission of Virus

Module 6: Unauthorized Access

Module 7: Unauthorized Use

Module 8: Physical Theft of Hardware, Laptops, Servers, Etc.

Module 9: Errors and Omissions

Module 10: Failure to Deliver

Module 11: Copyright

Module 12: Breach, Theft or Use of your Copyright or Software Code

Module 13: Defamation, Invasion or other violation of a right of Publicity, Libel, Invasion or other violation by you of a right to Privacy, Product Disparagement, Slander, Trade Libel

Module 14: Business Interruption Loss

Module 15: Period of Restoration

Module 16: Administrative/Regulatory Proceedings


Module 17: Legal Proceedings Against You

Module 18: Crisis Management Fund

EPIC offers a one- hour, three- hour and five-hour CEU Course entitled “Cyber, Technology, Media and Privacy Risks: Risk Management and Insurance”.

Fiduciary Liability InsuranceFiduciary Liability Insurance and Liability is one of the most misunderstood and claims have more than doubled in recent years. There is a new focus on this risk especially from the federal government. These are some frequently asked questions.

What is ERISA?

In 1974 Congress passed a law called the Employee Retirement Income Security Act (ERISA).

What is the function of ERISA law?

The ERISA law regulates the administration of pension and welfare benefit plans offered by private employers. Under ERISA law. business entities that administer, design, evaluate, manage and have discretionary control over the plan’s administration or the investment of plan assets are called “Fiduciaries”.

Which benefit plans fall under ERISA law?

There are two broad categories of benefit plans falling under ERISA:

1. Retirement Plans including: defined benefit pension plans, profit sharing such as 401(k)’s , stock bonus plans and even employee stock ownerships plans (ESOP).

2. Welfare Plans: medical dental, life and disability.

The scope of ERISA law is quite broad.

Who is considered a Fiduciary under ERISA law?

A Fiduciary is any person who:

1. exercises any discretionary authority or discretionary control in managing the plan or who has any authority or control in managing or disposing of its assets;

2. renders investment advice for a fee or compensation with respect to any monies or other property belonging to the plan; or

3. has any discretionary authority or responsibility in administrating the plan.

What are Fiduciaries’ requirements under ERISA?

Fiduciaries are required to perform their duties solely in the interest of the plan participants and their beneficiaries. Fiduciaries must exercise the care, skill, prudence, and the diligence of a prudent person who is acting in a like capacity and is familiar with such matters. This is a commonly referred to as the “prudent expert” rule. ERISA requires that the fiduciary be an expert in his or her duties, not just a “prudent person”.


What are Fiduciaries’ exposures under ERISA?

Fiduciary liability is personal, absolute and unlimited. ERISA made fiduciaries personally liable for their actions.

What is a Co-Fiduciary under ERISA?

A Co-Fiduciary might be a third party administrator (TPA), a professional consulting firm, or outside service provider (OSP) that exercises discretion over the management or administration of a plan, or provides investment advice for a fee.

What are some common mistakes made by employers under ERISA?

“Promised” coverages or benefits or promised performances are at the core of most ERISA lawsuits. In recent years, there has been an increase in the number of lawsuits involving the management and misuse of plan assets.

Does my Fiduciary Bond cover my fiduciary exposure?

The fidelity bond protects the plan from loss due to dishonest acts of those who handle plan assets.

Is there a difference between an ERISA Bond and Fiduciary Liability insurance policy?

Yes, you are required by ERISA to bond or insure your plans from employee dishonesty in the lesser of $500,000 or 10% percent of all plan assets. The Department of Labor has the authority to prescribe a bond in excess of $500,000, up to 10% of the value of all plan assets as of the beginning of the plan year. Fiduciary liability is not required by ERISA.

What is a Fiduciary Liability insurance policy?

A fiduciary liability policy protects the personal assets of a plan Fiduciary due to allegations of breach of fiduciary duties.

What can Fiduciary Insurance policies cover?

1. Breach of fiduciary duties

2. Negligent errors and omissions

3. Improper disclosures to plan participants

4. Remiss investment advice

5. Imprudent choice of outside service provider (OSP)

6. Faulty advice of counsel

7. Improper amendments to plan documents

What is the difference between Fiduciary Liability insurance and Employee Benefit Liability (EBL)?

Both policies cover administrative errors and omissions, however the EBL policy does not cover ERISA violations. Some companies have added the employee benefit liability endorsement (EBL) to their commercial liability policy (CGL). This approach leaves a gap in coverage for ERISA law claims.


We have turned over all investment decisions to our bank, insurance company agent, or other professionals. Are we correct?

Plan Fiduciaries can never completely insulate themselves from liability. Plan Fiduciaries can take steps to reduce their personal liability, however ultimately they are responsible for the management and administration of the benefit plan.

The key premium rating factor, after total assets and funding levels, continues to be the level of employer securities in employee pension and benefit plans (such as 401(k) plans) and asset levels are generally increasing in 2013.

Capacity remains constant, and unlike D&O, there are no new entrants into the marketplace.

More than one market is now willing to consider multi-year deals.

The migration of recent D&O coverage enhancements into Fiduciary policies is expected to continue. This can include affirmation wording relating to (presumptive) indemnification and advancement of defense costs as well as expanded coverage for investigations.

ERISA tagalong litigation, including Fair Labor Standards Act (FLSA)-related activity, continues, while suits involving cash balance plans are still making their way through the courts. Class certification in ERISA cases, especially in potential class actions involving 401(k) plans, has been strongly impacted by the 2011 Dukes v. Wal-Mart employment decision by the U.S. Supreme Court.

Expect a 0- 10% increase in Premium.

Directors & Officers Liability (D&O) InsuranceThe price-firming momentum for primary D&O placements will ease in 2014. For larger programs, it may be possible to counter modest increases with some price relief on the excess layers. Competition is changing carrier strategies. Some non-incumbent markets may retreat, while newer entrants look to become a primary layer option. Buyers may be forced to choose between a familiar and experienced market looking for rate/higher retentions and a new entrant that may be more competitive but is relatively untested.

Coverage terms and conditions are still competitive. The most significant product changes have been in the area of investigations and earlier claim triggers. Coverage for investigations is still generally available solely for individual directors and officers. For the corporate entity, limited coverage for securities-related investigations may be available if linked also to a covered director or officer. More extensive coverage is only available for significant additional premium.

M&A claims are still a consideration. Primary carriers took a direct hit in both public and private cases, and the trend is expected to continue, fueling a push for higher, separate deductibles/retentions.

Lead A-Side D&O carriers continue exploring ways to differentiate their product offerings. Mega limits (of up to $100 million) on the A-Side could be available.


The influx of non-traditional capital currently making itself felt on Property placements, may begin to exert further downward pressure on D&O rates during the second half of the year .

The following are important current trends and developments

D&O Insurance Implications of the SEC’s New Policy Requiring Admissions of Wrongdoing

In “egregious cases”, the SEC’s new policy requiring admissions of wrongdoing in order to settle an enforcement action has important implications for the enforcement action itself, and has important implications for potentially related civil or criminal proceedings. Another issue that inevitably will arise is the impact of factual admissions on the continuing availability of D&O insurance.

The SEC’s admissions requirement has a number of significant implications. First, it means that in egregious cases, the SEC enforcement actions will be much harder to resolve as defendants, wary of the possible impact the admissions could have in other proceedings, will be reluctant to provide admissions. Another consequence could be that the SEC will be compelled to try more cases, which could strain the agency’s resources.

Additionally, a defendant’s provision of admissions potentially could have enormous consequences for related proceedings. The admissions in the Consent may or may not draw criminal charges, but at least some commentators have suggested that criminal charges could follow.

Another question about the admissions is their collateral effect in related civil proceedings. Yet another issue that the admissions raise is the question of their impact on the availability of D&O insurance. The specific question is whether the admissions are sufficient to trigger the fraud and criminal misconduct exclusion in the D&O policy. The wording of these exclusions varies, but they typically preclude coverage for loss arising from fraudulent or criminal misconduct, but only after a final adjudication determines that the excluded conduct has taken place. If the admissions were found to be sufficient to trigger the exclusions, coverage would no longer be available for the wrongdoer, and the insurer could arguably try to recover amounts that had already been paid in defense of the wrongdoer.

There is the potential that insurers could assert that a settlement of this type represents a “final adjudication” A related question is whether this adjudication occurred in “the underlying proceeding” as many policy exclusions require. The specific factual admissions to which the defendants agreed were not only stated in the public court record, but they are incorporated verbatim into the Final Consent Judgment filed with the court. On the other hand, there is a question whether the admissions satisfy the exclusion’s misconduct requirement. While the admissions represent an extensive concession that the defendants engaged in wrongdoing – and while the admissions expressly recite that the defendants acted “improperly” and “recklessly” - at no point do the defendants admit to “fraud” or to any other level of conduct that would expressly trigger the typical D&O policy’s conduct exclusion.

A related issue that could arise is the question of exactly how bound the admitting parties are by their admissions


D&O Insurance Implications of the Massive Derivative Lawsuit Settlements

Traditionally, insurers have viewed derivative cases as relatively low exposure events for the D&O policy. The increasing risk of this type of settlement represents a significant challenge for all D&O insurers, but particularly for those D&O insurers concentrating on providing Excess Side A insurance. Those insurers will have to ask how they are to underwrite the risks associated with these kinds of exposures, and how they are to make certain that their premiums adequately compensate them for the risk.

Interrelatedness Issue Continues to Affect D&O Claims

One of the most vexing issues that can arise in the D&O claims context is the question of whether or not two claims are interrelated. The typical context in which the question arises is when two (or more) claims are filed in separate policy periods. If the claims are related, they trigger coverage under only a single year’s policy, with the subsequent claims deemed to have been made at the time of the first related claim. If the claims are not related, but instead are separate, multiple policies are triggered. There are few reliable guideposts on the interrelatedness issue and it is often litigated because it directly affects the amount of insurance available to resolve claims. The financial crisis of 2008 has led to a number of contentious situations revolving around the interrelatedness issue. Many of the companies involved in the crisis have been hit with multiple lawsuits, often filed over the course of several years.

Multi-Jurisdiction Litigation and By-Law Forum Selection Clauses

Over the past several years, one of the more troublesome litigation trends has been the rise of multiple lawsuits involving the same circumstances, but filed in separate jurisdictions. As a way to try to avert the inefficiencies and added expense associated with multi-jurisdiction litigation, reformers suggested that a provision could be added to company by-laws requiring shareholders to litigate claims in a specified jurisdiction (usually Delaware). The boards of a number of companies adopted forum selection by-laws.

The first judicial challenge to a forum selection by-law resulted in a set- back for the idea but rather had been adopted only by the company’s board of directors.

Courts Extension of the Broad Judicial Support for the Enforceability of Arbitration Clauses

In the latest in a series of decisions in which it upheld the enforceability of arbitration agreements, the U.S. Supreme Court ruled on June 20, 2013 that an arbitration agreement with a class action waiver is enforceable even it means that an individual’s cost of pursuing a claim exceeded the economic value of the individual’s potential recovery (American Express Co. v. Italian Colors Restaurant).

Although the decision is consistent with other recent Supreme Court rulings, it has its own important implications – and it also raises a question of just how far the principle of broad enforceability of arbitration agreements can be taken. In particular, does the broad enforceability of arbitration agreements reach far enough to include the enforceability of arbitration agreements and class action waivers in corporate articles of incorporation or by-laws?

The question about the inclusion of arbitration provisions and class action waivers in corporate by-laws is not far-fetched. In fact, at least one court has already held these kinds of by-law provisions to be enforceable.


Cyber- Security Threats Effect on the Liabilities of Corporate Directors and Officers

Cyber-security risks represent a significant concern for just about every company and their respective directors and officers. But while these issues are not new, it now seems clear that cyber-security is going to be one of the hot button issues for the foreseeable future, both in the media and for the affected companies.

The heightened scrutiny of cyber-security issues has a number of important implications for potentially affected companies, and not just from an operational standpoint. These developments also have important implications for public company’s public disclosure statements, and, as a consequence, for the company’s potential regulatory and litigation exposures.

According to a February 21, 2013 memo from the King & Spalding law firm entitled “Cyber-security: The New Big Wave in Securities Litigation?”… “it is likely that this issue will continue to gain momentum among government regulators and opportunistic plaintiff lawyers seeking to catch the next wave of shareholder litigation.” In particular, the failure to promptly disclose a cyber- breach “may put a company at risk of facing formal SEC investigations, shareholder class actions, or derivative lawsuits.” However, given the increasing awareness of this hot issue, it seems likely that the SEC will increase pressure on companies to disclose such events.

In addition to the risk of SEC enforcement action, companies experiencing cyber breaches also face the possibility of a securities class action lawsuit. However, the memo notes, a company experiencing a cyber-breach “will likely not be a target of securities class action unless the disclosure of the breach can be linked to a statistically significant drop in the company’s share price.” Companies that do not experience a share price decline following a cyber-security incident may not experience securities class action litigation, but they are still susceptible to derivative lawsuits alleging, for example, that company directors breached their fiduciary duties by failing to ensure adequate security measures.

As the law firm memo notes, shareholders may claim that senior management and directors “were either aware of or should have been aware of the breach and the company’s susceptibility to hacking incidents.” Of course, any lawsuit of this type would face significant hurdles, including the requirement to make a formal demand on the board as well as the business judgment rule.

In any event, it is clear that cyber-security issues are going to be an increasing source of scrutiny for companies and their senior officials.

How Will These Trends and Developments Affect the Market for D&O Insurance?

As should be apparent from this discussion, there is a great deal happening in the World of D&O. The surge in M&A litigation, in which virtually every merger or acquisition attracts at least one lawsuit, continues unabated. The SEC whistleblower program, which recently announced that it had made its second whistleblower bounty award, threatens an upsurge in whistleblower-driven enforcement actions and related securities claims. Anti-bribery enforcement actions are but one of the many regulatory risks in an increasingly global economy. And all of these developments are in addition to the wave of litigation relating to the subprime meltdown and the credit crisis that continues to work its way through the courts.


Given everything that is going on, it is hardly surprising that the D&O insurance carriers are taking a more defensive position. Indeed, many companies – including both public and private companies – have seen the cost of their D&O insurance increase at their most recent renewal. The pricing increases are more concentrated in the primary D&O insurance policies and lower attachment points. In addition, in at least some cases and for some kinds of risks, carriers have started to try to restrict terms and conditions as well.

Generally speaking, D&O coverage remains very favorable to most Insureds. And pricing, while increasing, is still well below the highs witnessed during the last hard market ten years ago. How all of this ultimately will play out remains to be seen. The one certainty is that the World of D&O will continue to be interesting to watch.

Pricing should be flat to +5%.

Property InsuranceMost shared and layered accounts were over-subscribed in 2013 due to the oversupply of capacity in the market. This trend will continue in 2014 due to the capital commitments from a leading U.S. carrier, Chinese insurers, broker facilities, and capital markets infiltrating the traditional Property market more than in years past, a trend that is expected to continue to exert downward pressure on rates.

However, in 2013 there have been a number of catastrophic losses. The EF5 tornado that hit Moore, OK caused losses estimated at $3-5 billion. Floods in Germany caused losses of $3-5 billion. Catastrophe modeling firm AIR Worldwide estimates that total damage to residential, commercial, and agricultural properties from the most powerful storm ever Super Typhoon Haiyan will range between USD 6.5 billion and USD 14.5 billion. Last Sunday’s storms in the Midwest United States have not been measured.

The four major types of natural environmental hazards that can result in property damages or lost lives are (1) geophysical events, such as earthquakes, tsunamis, and volcanic eruptions; (2) meteorological events, such as hurricanes and tropical storms, typically generated in the Caribbean Sea and Atlantic Ocean; (3) hydrological events, such as floods; and (4) climatological events, such as extreme temperature, drought, and wildfires. Economic losses (both insured and uninsured) from natural environmental hazards, especially from meteorological and climatological events, have increased in recent decades and have occurred with large spatial and inter-annual variability. For example, 8 of the 10 most costly catastrophes in the United States have occurred since 2000, including Hurricane Katrina (2005), which caused more than $80 billion in economic losses (both insured and uninsured) to private property and infrastructure and, more recently, Hurricane Sandy (2012), which caused more than $65 billion in economic losses.

Most observers agree that it is highly likely that the United States will continue to experience increasing losses from natural catastrophes and that those losses will place increasing fiscal pressure on federal, state, and local governments as well as private risk transfer markets, which are currently responsible for a sizeable share of the total cost of financing recovery and reconstruction. The rising cost of financing recovery and reconstruction following natural disasters, reports of the nation’s increasing vulnerability (and resilience) to coastal hazards, questions concerning the capacity of state and local government


officials and private insurers to deal with the rising costs, and disagreements concerning the appropriate role for the federal government in dealing with these costs have all become major topics of congressional debate.

The financial consequences of severe natural disasters, such as Hurricanes Katrina (2005) and Sandy (2012), are largely a result of increasing population growth and the rising concentration of property assets in vulnerable disaster-prone areas, such as coastal regions exposed to windstorms, river basins exposed to floods, and urban areas exposed to earthquakes.

Moreover, the hazards posed by extreme weather-induced coastal hazards—namely individuals and businesses, but also for affected state and local governments, especially given concerns about private insurers’ ability and willingness to manage and finance low-probability, high-consequence events. For example, New York and New Jersey—two of the nation’s most populous states—were especially affected by Hurricane Sandy-induced storm surge and coastal flooding. Sandy triggered a sustained and heightened policy interest in the potential effects of climate change and population growth in coastal areas for the National Flood Insurance Program (NFIP), the feasibility of innovative public-private sector initiatives for managing and financing catastrophic risks, and consideration of cost-effective and practical adaptation strategies to make society more resilient to damages from natural environmental hazards.

Some of the risk-financing options include state-sponsored loss-sharing financing mechanisms and private ART methods, such as insurance-linked securities (e.g., catastrophic bonds and contingent capital securities). For example, H.R. 737, the Homeowners’ Defense Act of 2013, would establish a National Catastrophe Risk Consortium to facilitate both multistate pooling of catastrophic risks (covering a variety of event probabilities and types) and natural disaster-linked securitization, thereby strengthening the financial capacity of these programs. H.R. 240, the Homeowners Insurance Protection Act of 2013, would create the National Commission on Catastrophe Preparation and Protection with the authority to establish a federal reinsurance program to make reinsurance coverage available to eligible state natural catastrophe insurance programs to improve the availability and affordability of coverage for homes and the solvency and capacity of homeowners’ insurance markets. H.R. 549, the Homeowner Catastrophe Protection Act of 2013, would allow insurers to make tax-deductible contributions to a tax-exempt policyholder disaster- protection fund established for the payment of policyholders’ claims arising from certain catastrophic events.

Advocates of federal intervention in catastrophe insurance markets argue that an inevitable mega-catastrophe event will exceed the financial capacity of private insurers and reinsurers, as well as state insurance programs. Thus, they argue, the federal government should consider proposals for improving insurers’ access to capital in the reinsurance, banking, and securities markets to ensure adequate capacity and solvency of the industry to meet consumer needs. Opponents of federal intervention, on the other hand, argue that the insurance industry has withstood unprecedented recent natural disaster events with minimal disruption and insurers have the financial engineering tools and instruments to transfer insurance risk to investors in capital markets.


Recently, after losses in the Philippines, insurance companies indicate a reduced appetite for taking on risk, which could help sustain future rate improvement as they anticipate slightly higher severity trends and exposure trends for the remainder of 2013 and 2014.

Despite reduced risk appetite, some insurers have reported a modest slowing of rate increases in certain lines of business, most notably commercial property. Expect 0- 15% increase.

Professional Liability (Errors & Omissions) InsuranceRisks for large claims and litigation will continue to see upward pressure on rates. Accounts with poor loss experience are facing significant price and deductible increases. For accounts with good loss experience or a significantly improved risk control regimen, competition can be robust, yielding decreases in the 5% range and sometimes higher.

Excess markets have seen more competition and rates have been flat, with savings often available. Wording enhancements continue to be available.

Insurers continue to add or enhance Network Security and/or Privacy Liability coverage and provide broader terms for First Party Cyber exposures. Insurers will closely manage their capacity, often reducing their capacity commitments, but capacity reductions have been offset by additional players entering the marketplace.

Good risks should see flat renewals or a few % reductions.

Fidelity InsuranceThe recently released 2012 Surety Association of America loss results for the U.S. Fidelity market reflect a modest improvement from 2011, but four of the top 10 markets have significantly higher loss ratios than they would like. These four markets write 68% of the total premium written by the top 10, so any pricing or coverage changes implemented by these carriers will have a meaningful impact on the overall market.

While the causes of Fidelity loss continue to be quite varied, vendor fraud involving company employees remains the most prevalent. Worth noting, however, is the growing number of wire fraud losses by non-employees impersonating senior managers and initiating fund transfers via email, telephone or written/fax instruction. Not all FI bonds and commercial Crime programs afford coverage in these cases.

In response to the increase in wire fraud losses, some commercial Crime markets are now adopting a warranty requiring the use of internal controls, most notably those in the 4/12 edition of the Surety Association Crime Protection Policy.

We expect flat renewals.


Environmental InsuranceThe rapid rise in the number of Environmental markets since 2009 has slowed, leading to an overall flattening of mono-line pollution marketplace rates. We are also seeing the beginning of market hardening for combined products (Environmental + Casualty).

Greater competition in the marketplace has inspired innovation and specialization, as carriers target preferred sectors. This may lead to reemergence of the Cost Cap market to address potential overruns of expected remediation project costs. Carriers are also increasing efforts to cross-sell environmental products when they write other Property and Casualty lines.

Premium increases have mainly been a result of rising client revenues rather than rates. Premium decreases have mostly been limited to cases where carriers offer substantial decreases in policy term (i.e., 10-year term renewing at a five-year term).

Newer carriers are beginning to decentralize their underwriting to support regional field operations and compete against established markets on a local basis.

Contractors Pollution Liability Continued entry of new capacity is creating downward pressure on rates.

Requests for project-specific placements are expected to increase. In some cases, carriers are reducing their appetites for specific sectors (i.e., habitational).

Site Pollution Liability: Pollution Legal Liability (PLL) & Environmental Impairment Liability (EIL) Carriers will be looking to reduce their exposures by reducing policy periods whenever possible. When longer terms are offered, carriers will seek a higher rate.

Greater underwriting scrutiny is being applied to sites with known conditions and less desired classes of business. Carriers are considering limiting their capacity exposure to certain sectors (i.e., energy). Carriers are maintaining lower limit capacity, creating the need/opportunity to create layered programs involving multiple carriers for larger capacity placements.

Combined Form – Contractors Pollution or Site Pollution + General Liability Combined forms are seeing the largest rate increases in the Environmental stable of products.

Environmental claims have been increasing 20%-30% each year since 2009.

Insureds are becoming more aware of the reporting and cooperation conditions in their Environmental policies, positively impacting claim resolution.

Mold claims keep increasing, with claims commonly exceeding retentions.

Environmental claim management is becoming a key differentiator in the placement decision.

Contractors Pollution -10% to Flat

Site Pollution -40% to -25%

Long-Term Flat


Kidnap, Ransom and Extortion InsuranceRates in the U.S. Special Contingency Risks (Kidnap & Ransom) market remain stable, with higher cost for companies with significant exposures in the hot spots of Latin America, Africa and the Middle East. Buyers with exposures in the U.S. and low-risk overseas locations can expect flat renewals. Egypt remains unstable and continues to undergo a transition process that may endure for years. Civil unrest and terrorism pose significant risks to companies operating there as well as expatriates and business travelers. Anticipate increased rates due to ongoing security evacuations and potential political detention claims.

The political and security situation in Syria is extremely volatile. External conflict, internal conflict, civil unrest and terrorism pose major risks to all foreign companies involved with Syria. Since the beginning of the uprising, kidnappings have increased in Syria, both by government forces and the opposition, who hope to use kidnapped individuals to bargain with the government for the release of political prisoners. Kidnappings have targeted Syrian nationals of various sects, as well as foreign nationals involved with media and Non-governmental organizations (NGOs). Insurers are scrutinizing all exposure in Syria because of the likelihood of a loss.

Mexico, Venezuela, Nigeria, Pakistan, Afghanistan, Philippines, Iraq and Somalia continue to be additional areas of major concern, as do several more recent hotspots for kidnapping, including Mali, Mauritania, Niger, Sudan, Malaysia and Kenya.

Insurers are maintaining greater scrutiny of exposures across the Maghreb and Sahel regions of North Africa in the wake of incidents in 2013 in Algeria and Mali.

With the risk of political evacuations high in places such as the Middle East, carriers remain cautious in their approach to Emergency Political Repatriation and Relocation coverage. Limits are commonly reduced and certain North African and Middle Eastern countries are frequently excluded.

Somali piracy remains a problem, despite the declining number of successful vessel hijacks. Underwriting of exposures in impacted waters is still cautious. Continued increase in the number of pirate attacks in the Gulf of Guinea has led insurers to rate exposures in these waters more punitively.

Pricing in 2014 will be flat to +10%

SuretyRevenue for the Surety industry has been shrinking over the last six years, with gross written premium for the entire industry down 15% from its peak in 2007. The steep decline in public works contracts, where bonding is mandatory, has clearly impacted top line results. Improvements in the private sector have not been enough to offset the severe reduction in public works.

New capital continues to enter the Surety market where returns are higher than those offered by traditional Property and Casualty lines. In the last two years alone, seven sureties have entered the market and more will follow over the coming year.


The general uptick of surety claims and losses continues. We are seeing more losses in the subcontractor market, where balance sheets face a great deal of stress. This makes subcontractor pre-qualification and bonding requirements more important than ever. Sureties seem to be paying out more claims under payment bonds than performance bonds, which is not surprising given the cash flow issues and payment disputes we are seeing in the construction industry.

In 2014, the Surety industry will struggle to grow while experiencing more claim frequency as the construction economy accelerates. However, given the amount of capital the Surety industry has accumulated over the last six years, thanks to strong underwriting results, we believe the overall industry will remain stable, with more capacity now being offered than ever before.

TerrorismCapitol Hill debate and ongoing uncertainty over the extension of the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) will influence Property and Casualty market strategies into 2014.

Anticipation of sunset clauses or reduced availability of embedded terrorism capacity will turn attention to alternative market solutions, including stand-alone terrorism insurance options.

New entrants into the stand-alone terrorism insurance market have increased terrorism capacity, except in highly concentrated risk areas – New York, Chicago and San Francisco, in particular.

Refinement of deterministic terrorism models is providing a more granular view of potential Property and Casualty losses from a range of attack scenarios, facilitating more informed security and risk transfer purchasing decisions.

Captives continue to provide access to otherwise unavailable capacity, including coverage for nuclear, biological, chemical, radiological and cyber terrorism. Captives may be vulnerable to changes in the TRIPRA backstop after 2014.

Recommendations to refine TRIA include:

• Specific clarification that coverage is provided by TRIA for all forms of terrorism — including nuclear, biological, chemical and radiological events — if coverage is afforded on the primary policy.

• Modernization of TRIA to reflect new terrorist threats that have emerged — in particular, the risk of cyber terrorism.

• Establishment of a 90-day time period for determining whether or not an act of terrorism is covered by TRIA

Expect a 10% - 20% rate increase.


Insurance Renewal ConsiderationsWith pricing in the property-catastrophe market flat to 10% increase, we can collectively strengthen negotiating positions by providing thorough and complete data and to drive better catastrophe model results.

• Understand the significance of catastrophe models on the renewal process. Catastrophe models play a significant role in the underwriting process and insurers often use more than one catastrophe model when pricing risk. Accounts that provide complete and accurate exposure (not only primary, but also secondary data), and engineering data will be in a position to drive better catastrophe model results. In a market where insurers have been holding prices flat or with a marginal increase, accounts can differentiate themselves and obtain favorable consideration from underwriters with a well-prepared submission.

• Be especially vigilant about property locations when it comes to flood insurance. Flood maps are being redrawn, and properties that once were outside of flood zones may find they are now located in critical flood zones – which could negate coverage if critical flood zones are excluded. The opposite also holds true. Properties that previously had been in flood zones may now be outside those zones and now may be eligible for standard flood coverage.

• Explain large claims and loss mitigation measures. In a market where insurers are resisting competitive pressures and maintaining underwriting discipline, they are closely examining each account’s loss history to determine pricing and the amount of capacity to make available. A large claim, or frequent claim activity, can be a red flag for insurers. Accounts should explain any large claims or unusual frequency, and discuss loss mitigation measures to reduce the risk of similar large or frequent claims in the future.

• Provide utterly complete renewal information.

• Avoid completing “warranty” Applications at renewal.

• Disclose any potential changes in operations/risk at renewal and avoid mid-term additional premiums. At renewal many anticipated changes can be negotiated into the renewal usually at little or no additional premium. If changes are made mid-term, especially requiring policy change/endorsement, Additional Premium is usually mandatory.

• Consider pricing objectives. While the market has been flat for many accounts, brokers may be able to negotiate lower prices by generating controlled competition. While incumbent insurers may hold the line on price, new unencumbered capacity may be willing to offer a better deal. Before doing so, however, consider the value of maintaining an existing relationship – especially in markets where capacity and carrier interest is limited and loyalty/partnership with an existing carrier could be the best long term cost decision.


• Start the renewal process early. While many underwriters may not be willing to negotiate programs until 30 to 45 days before policy expiration, we should still get an early start on the process – as early as 90 to 120 days before the current program expires. By doing this, we can obtain important preliminary information from insurers about rates, capacity and any potential issues regarding their program. This also allows for time to respond to questions from underwriters and develop strategies if there is a need to replace capacity.

• In difficult markets, it may be worth accepting higher deductibles.In the market, where capacity is limited and insurers are raising prices as well as deductibles, insurance buyers can take several steps to more easily obtain capacity and manage costs. By accepting higher deductibles, for instance, insurance buyers will have access to a greater number of markets and can better stabilize and control their premium cost.

• Deductible buy-downs may help buyers meet lender requirements.Insurers in the market for frame habitation risks have been raising deductibles sharply, but because of lender requirements, buyers sometimes need a lower deductible. Deductible buy-down and deductible reimbursement policies can help insurance buyers meet those lender requirements, but can also add greatly to the overall cost of risk transfer. Deductible indemnity agreements, though sometimes difficult to obtain from the carriers, provide another way to satisfy lenders.

• Consider self-insured annual aggregate deductibles. Insureds with difficult loss histories may be able to obtain significant premium savings and attract more competition by using a self-insured annual aggregate deductible. When it comes time to renew their policy, insureds with larger loss totals often end up paying higher premiums or are unable to secure capacity. With an annual aggregate deductible, the insured pays for losses in excess of the standard policy deductibles, retaining up to an “expected and capped” aggregate level of loss during the policy year. By doing this, insureds not only reduce their premiums up front but also have the chance to save those dollars going forward if loss experience improves and the self-retained loss aggregate is not exhausted. The alternative is paying out huge premiums up front with no chance of return for good loss experience. Along with this strategy, there are ways to fund for the aggregate, earn income, and issue certificates to lenders.

Sources:

The McCart Group, EPIC, Assurex Global, Willis Group Holdings, and Marsh USA.

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