It goes without saying, but 2020 did not go as planned. Who could have seen all of that coming? COVID-19 and its impact on our society and culture, locally, domestically, and globally, is nearly unprecedented.
One area where 2020 was a bit more predictable, however, was the family office insurance market place. Each year at this time, I write an article forecasting how family office insurance carriers will treat family office client business for the remainder of the year.. In 2020, the forecast for rate expectations were on point as were carrier appetite expectations. With the help of our carrier partners, factors leading to the prevailing marketplace environment were identified.
What we saw last year was a continuation of the previously developing hard market. What began in 2019 as small, single digit increases, developed into low to mid double digit increases by the end of 2020. This article will explore our expectations in 2021 for premium increases, anticipated changes to terms and conditions or retentions, the overall family office underwriting appetite, and the leading factors in carrier treatment for this segment.
The Market Place – 2020 on Repeat?
If you currently purchase family office liability insurance, you probably experienced a premium increase in 2020. The property and casualty insurance marketplace, over the past 18-24 months, has turned unfavorable to buyers in almost every sector, including asset managers. However, compared to the insurance marketplace at large, family offices and asset managers are still desirable classes of business from both a new business and renewal perspective. There have been no consistent loss trends over the past few years that could be categorized as systemic, particularly in regards to Directors and Officers Liability and Professional Liability.
One primary underwriting concern with family offices continues to be the uncertain economic outlook. Despite some volatility in 2020, over the past five years, most asset classes have performed very well. In 2020, the DJIA was up 7.3%, S&P 500 was up 16.3%, and the NASDAQ composite was up 43.6%. All this occurred despite a global pandemic, a presidential administration change, and rising global economic uncertainty. Frankly put, clients don’t sue asset managers as long as they are getting a positive return on investment. They simply open their reports, see positive growth, and are happy.
However, the prevailing question has been, will the good times last? Compared to this time last year, the overall sentiment regarding future investment performance is positive. Near the end of 2019, Legg Mason had downgraded the economic outlook from “expansionary” to “cautionary.” Seven of the previous 11 times this downgrade occurred, the U.S. entered a recession. However, in 2020, Legg Mason recorded shifts from “recession” to “expansionary” for the following indicators; Consumer Confidence, Business Confidence, Housing Starts, Credit Spreads, and Financial Conditions. So with all of the good news, why is the family office marketplace still hard?
Outside of the asset management space, multiple factors continue to drive the overall insurance market. The first concern is systemic property losses, led by a continued increase in catastrophic losses, such as wildfires, hurricanes, tornadoes, and so on, as well as pervasive distracted driving claims. Last year, I reported that in 2017 and 2018, catastrophic losses totaled $102B and $52B respectively in the U.S. P&C insurance industry. These were the two highest years since 2005, which was the year of Hurricane Katrina. In 2020, insurer losses from catastrophic events totaled over $83B, the fifth costliest year on record. Meanwhile, distracted driving is estimated to have an economic impact of $129B per year. More than 400,000 motorists were injured in distracted driving-caused accidents, leading to over 2,800 deaths in 2020. These negative underwriting results and increased losses have forced reinsurers to renegotiate treaties with carriers with less favorable terms, creating more pressure on insurers to underwrite profitably.
Just like in 2020, economic uncertainty continues to impact the insurance market as a whole. Underwriting or operating income – income earned from premiums charged minus losses and additional expenses – is typically not the largest portion of an insurance carrier’s income. The majority of a carrier’s bottom line comes from investment income. For example, for Chubb North American Property and Casualty, operating income was only 47%, 35%, and 44% of total income for the years 2016, 2017, and 2018 respectively. In 2019, $3.426B of a total of $4.454B of total income for Chubb Limited and Subsidiaries came from investment income (77.7%) With the possibility of reduced investment results, Chubb and similar carriers are placing an added emphasis on underwriting income in order to provide shareholders value. This means higher premiums, higher retentions, and stricter underwriting across all business segments.
In 2021, we will be dealing with two additional factors that weren’t present this time last year; the impact of COVID-19 and a new administration in the White House. With the latter, we don’t expect direct impacts on the insurance marketplace. However, ancillary affects, such as economic outlooks, could have significant influence on underwriting. It’s still too early to determine how the Biden Administration’s $1.9 trillion economic rescue plan will impact the economic environment in the long term, but by adding it to the $2 trillion relief bill from March 2020 and the $900B relief bill from December 2020, the ratio of debt to GDP will be at its highest this century.
The global pandemic, COVID-19, has not led to many direct insurance claims. Most COVID-19-related losses are expected to be picked up by reinsurers. While the industry expects further litigation as a result of claims of business interruption, the current largest impact on the insurance marketplace has been in the additional risk created for the insureds. Loss of income, violation of debt covenants, employment-related claims resulting from work-from-home or return-to-work policies, and cyber losses as a result of the remote working environment are concerns across the management liability arena.
Impact on Family Office Underwriting
While asset managers, and family offices as a subset of asset managers, continue to be appealing risks to insurance carriers and underwriters, the segment will continue to be impacted by the surrounding environment in 2021. We ended 2020 with underwriters asking for 15%-20% rate increases in our family office book, and we expect that to continue into 2020. Q4 2020 marked the 13th consecutive quarter that property pricing increased. However, my expectation is that, unlike 2020, we will hit a plateau, and premium increases will flatten. In 2020, through Q3 and Q4, rate increases began to slow; while they still grew, it wasn’t by as much as earlier in the year. In 2020, we saw premium increases grow from 4%-6% in Q1 to 15%-20% in Q4. In 2021, much more market stability is expected through the year.
Another change anticipated in 2021 is more individualized treatment of each insured based on its own merits. In 2020, there was a very clear push from insurers to get increased premium across the book, regardless of individual factors of each account. The expectation is that this year, carriers will be making an effort to not paint the segment with a broad brush. The expected average rate increase should be 15%-20%, but there may be more variance around this target. Accounts with minimal changes in exposure, favorable asset classes and positive claims history may be treated more favorably than last year, while those experiencing large growth, having a significant shift in services or service models, or with more difficult assets such as direct investments or commercial real estate, may receive more punitive treatment.
In addition, underwriting intensity may continue to increase. Questions surrounding asset classes will get extra emphasis, especially any asset class that suffered a loss in value in 2020. Assets such as commercial and residential real estate will get particular attention regarding tenancy rates, forgiveness provisions, and valuation. Underwriting around employment practices liability, particularly downsizing or return-to-work policies, will garner increased questioning. Cyber liability policies will receive rate increases and underwriting commensurate with professional liability as well. Lastly, retentions that are considered low are seeing increases as carriers look to have customers retain more of the exposure.
On a positive note, any changes in the exceptionally broad terms and conditions are not anticipated. The most important and unique aspects of a well-managed family office liability insurance policy is its breadth of coverage and its malleability. With these policies, the intent should be to cover all advice given and services provided, and to cover all individuals and entities associated with servicing the family(ies) and perpetuating family legacy. While premiums, retentions, and underwriting stringency are increasing, there is currently no indication that carriers will be more restrictive in the amount of coverage offered and the flexibility of that coverage.
What’s it all mean
While none of us hope for a repeat of 2020 in almost any facet, wedo expect the underwriting treatment from Q4 2020 to continue throughout 2021. Despite all the pressures on insurance markets, including catastrophic losses, distracted driving, economic and investment uncertainty, administration change in the White House, and COVID-19, asset management and family offices continue to be a desirable class of business. While premium and retention increases and increased underwriting scrutiny are expected, compared to other industries, our market is responding favorably. Further, there is an expectation that the rate changes will level off and plateau at a level similar to where they ended 2020, and those accounts that are particularly desirable to have potentially a more favorable outcome in 2021 than the prior year.
The insurance industry continues to be cyclical, with soft markets typically lasting longer than hard, so once this storm has passed, the family office market segment should expect a return to a highly competitive environment with favorable treatment. If any questions arise, or you would like me to review your current risk management program, please do not hesitate to reach out.
This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency, LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affected if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change. Copyright © 2021 Marsh & McLennan Insurance Agency LLC. All rights reserved. MarshMMA.com