For many insurance companies, 2020 started off strong following favorable financial results in 2019.[1] Unfortunately, reality soon set in and the market took a deep tumble with the outbreak of the COVID-19 global pandemic.[2] The pandemic exasperated an already strained marketplace following tough years of catastrophic loss activity in the property and casualty space[3] along with rampant Directors & Officers (D&O) event driven litigation.[4] Overall, Insurer profitability is not expected for most of 2021,[5] which is bad news for insureds.
2020 was a difficult year for many insurers and insureds, and unfortunately 2021 doesn’t look much better for the insurance industry. As insureds begin to prepare for their various insurance renewals, they should be aware of the current market landscape and its outlook for 2021. Unfortunately, there are no signs that the hard market will dissipate. Insureds should expect to continue to face rate pressure and possible lost capacity across multiple coverage lines for 2021.[6] Moreover, companies should be attuned to growing cyber and data privacy concerns in the wake of COVID-19. Cyber insurance is now being viewed as a necessity rather than a luxury, given the virtual work environment many companies are now in and the rise of cyber-attacks.[7] These are unprecedented times and companies should recognize the challenging environment and expect to continue to feel the effects throughout 2021 and possibly beyond.
The Hard Market is Here to Stay
A hard market existed before the COVID-19 pandemic. The reality is that the market is worsening and many clients may struggle to navigate an even more challenging insurance landscape in 2021, while still meeting their corporate insurance objectives.[8] The insurance market is cyclical and a hard market occurs when premiums increase and capacity conversely decreases.[9] Essentially, the hard market is a seller’s market. The insurance industry is easing away from a lengthy period of a soft market, from which many clients benefited from favorable premiums and abundant capacity.[10] However, insurance companies are now driving double digit premium increases for limits deployed, following years of being in a buyer’s market—coupled with large industry losses, social inflation in damage awards and uncertainties surrounding COVID-19.[11]
The insurance industry has faced nine consecutive quarters of rate increases.[12] As Allianz, a leading global insurer stated in their 2020 outlook report, the COVID-19 pandemic will continue to put the insurance industry in “weak health” for much of 2021.[13] This past year put significant pressure on insurance companies’ books. Chubb, a leading property and casualty insurance company, reported $2.7 billion in catastrophic losses for 2020 along with a combined ratio closely approaching 100%, neither of which is a good indicator of insurer profitability.[14] Competitors, Markel and AIG, in the property and casualty markets are seeing combined ratios of over 100%.[15] While the current landscape is not ideal for insurers, it less than ideal for insureds because a poor combined ratio means that insurers will respond increasing insurance premiums or even vacate unprofitable lines of coverage in an effort to offset what is being paid out in losses.[16]
The coverage lines that may face the greatest challenges in 2021 from a pricing and capacity standpoint include: property, umbrella/excess liability, D&O, fiduciary and cyber. [17] Other lines like product liability—for life sciences companies, workers compensation, terrorism and product recall—are faring much better and could see flat renewals in 2021.[18] Apart from pricing, insurance companies are imposing exclusions on their policies, especially in regards to a pandemic or epidemic, while also conservatively determining each client’s coverage limit.[19] Furthermore, brokerage firm Aon commented, that in light of the increases being pushed by the markets, many clients were forced to change their limit and deductible structures to offset costs.[20] Thus, in some instances clients are paying more for less insurance coverage, compared to policies from prior years.
In response to rate and terms and condition pressure, many companies are turning to alternative solutions to meet their insurance needs, one of which is the use of captives to meet their insurance risk transfer needs.[21] A representative from the Marsh Captive Solutions group indicated that there was unprecedented global growth in captives in 2020 and 76 new captives were formed.[22] D&O insurance programs in particular are seeing a greater use of captive utilization than ever before.[23] As companies prepare for their 2021 insurance renewals, risk managers and executives should be prepared for difficult decisions between scaling back limits purchased due to cost or purchasing expiring limits at much higher premium costs.[24]
Growing Demand for Cyber Insurance
Cyber insurance is a type of liability coverage that covers first and third-party claims and expenses related to a data breach, virus or any other cyber-attack.[25] One of the many benefits of cyber insurance is that the policy is designed to cover expenses such as investigations, business losses, lawsuits, ransomware and privacy and notification.[26] While the cyber insurance marketplace isn’t as mature as the D&O or Casualty marketplace, it’s growth rate is accelerating.[27] In 2018—cyber insurance premiums written totaled $1.8 billion.[28] Whereas, in 202, total premiums underwritten totaled $7.8 billion, and by 2025—total premiums underwritten are expected to jump to $20.4 billion.[29] While the cyber insurance industry has promising growth, it’s also facing alarmingly increased loss activity. For example, Hiscox, a leading cyber carrier, showed $1.8 billion in cyber losses in 2019, which was up 50% from the prior year.[30] The COVID-19 pandemic is likely to have a significant impact on cyber loss activity.
Once the COVID-19 pandemic hit it transformed how people worked overnight; many organizations needed to shift quickly to a remote working environment in an effort to preserve business continuity.[31] This shift increased many companies’ costs, especially from a security standpoint.[32] Apart from costs, the pandemic and virtual work environment also highlighted flaws in companies’ cybersecurity plans and cybercriminals wasted no time in exploiting these flaws.[33] According to the FBI’s Cyber Division there was a 400% increase in cyberattacks per day once the pandemic started, which averaged 4,000 attacks per day.[34] Companies of all sizes faced attacks ranging from phishing and social engineering schemes to corporate ransomware attacks where the hackers gained significant control of major corporate systems and demanded large ransoms to return the systems.[35]
Firms continue to be vulnerable to cyber-attacks as employees work from home and the effects of the pandemic rage on.[36] Even smaller firms are noticing the current landscape; as noted by Cowbell Cyber’s research, 65% of small and mid-size firms expect to spend more on cyber insurance going forward[37] in an effort to strengthen their cybersecurity and resiliency in the wake of opportunistic cybercriminals and the growing importance of data privacy.[38] Given this, companies should expect to pay more for cyber insurance programs and consider expanding the total amount of limit they elect to purchase.
Given the increase in cyberattacks, brokerage firm Willis Towers Watson, predicts that cyber insurance rates are expected to increase between 10%-30%.[39] Those industries that are heavily exposed—such as financial institutions, healthcare and technology firms—are likely to see rates closer to 30%.[40] Much of the rate increases are a result of the alarmingly high costs of a data breach; according to IBM Ponemon Institute, the average cost of a data breach in 2020 was $3.86 million.[41] Additionally, ransomware payouts continue to skyrocket; most recently Garmin paid out $10 million after suffering a cyber-attack.[42] Without question, there will be a growing demand for cyber coverage from all companies, not just technology firms.[43] Even with increased demand, the unfortunate reality is that many insurers may look to scale back their cyber offerings and less fervently offer coverage solutions due to the uptick in attacks and the increasing costs of ransomware and data breach payouts.[44]
Conclusion
The hard market will undoubtedly continue throughout 2021. In these unprecedented and less than ideal circumstances, companies and risk managers should be aware of the market landscape, evaluate their budgets carefully and be prepared to consider alternative solutions to meet their insurance needs such as greater use of captive utilization. Years of catastrophic losses and uncertainty surrounding COVID-19 pandemic losses have crippled the insurance industry. Buyers should be prepared for another difficult insurance renewal cycle. However uncertain things may seem for 2021 and beyond, the good news is that the insurance industry was designed to find solutions for the unexpected and withstand disruption.
[1] See Jeff Rieder, US Property-Casualty Insurance Industry Trends and Outlook for 2021, Aon (Feb. 2021), https://rewards.aon.com/en-us/insights/articles/2021/u-s-property-casualty-insurance-industry-trends-and-outlook-for-2021.
[2] See The Impact of COVID-19 on the Insurance Market, The Wedgewood Team, (Oct. 28, 2020), https://wedgwoodinsurance.com/blog/commercial/the-impact-of-covid-19-on-the-insurance-market/.
[3] Id.
[4] See Denise Johnson, Corporate Culture, Cyber Risk Are Top of Mind for D&O Underwriters, Ins. J. (Jan. 21, 2019), https://www.insurancejournal.com/news/national/2019/01/21/511042.htm.
[5] See For Global Insurers, Pandemic Likely to Erase Profits Until 2021 Second Half: Fitch, Ins. J. (May 11, 2020), https://www.insurancejournal.com/news/international/2020/05/11/568137.htm.
[6] See Carolyn Cohn, More Companies Turn To Captives as Rates Rise, Terms & Conditions Tighten, Ins. J. (Oct. 26 2020), https://www.insurancejournal.com/news/international/2020/10/26/587924.htm.
[7] See Trent Cooksley, Cyber Insurance Trends to Look For in 2021, NU PropertyCasualty 360 (Jan. 5, 2021), https://www.propertycasualty360.com/2021/01/05/cyber-insurance-trends-to-look-for-in-2021/.
[8] See Amid Pandemic, Commercial Insurance Buyers Face An Extended Hardening Market Plus New Pressures on Coverage Terms and Conditions, CNN (May 7, 2020), https://edition.cnn.com/business/newsfeeds/globenewswire/7916718.html.
[9] Bethan Moorcraft, What Is A Hard Insurance Market?, Ins. Bus. Am. (Oct. 11, 2019), https://www.insurancebusinessmag.com/us/guides/what-is-a-hard-insurance-market-180382.aspx.
[10] Nicole Friedman and Leslie Scism, Insurers Drive Up Prices for U.S. Business, Wall St. J. (Feb. 11, 2020), https://www.wsj.com/articles/insurers-drive-up-prices-for-u-s-businesses-11581417009.
[11] Marsh & McLennan Companies, Is D&O Insurance Now the Most Important Cover You Can Have?, Marsh Com. (July 16, 2020), https://www.marshcommercial.co.uk/articles/directors-and-officers-series-three/.
[12] See supra note 4.
[13] Allianz Global Insurance Report Insurance Outlook 2020: A Lost Year, Allianz (July 1, 2020), https://www.allianz.com/en/press/news/business/insurance/200701_Allianz-global-insurance-report-outlook-2020.html.
[14] Courtney Carlsen, What Does 2021 Have in Store for Chubb?, Nasdaq
(Dec. 18, 2020), https://www.nasdaq.com/articles/what-does-2021-have-in-store-for-chubb-2020-12-18.
[15] Id.
[16] Id.
[17] See Insurance Marketplace Realities 2021, Willis Towers Watson (Nov. 18, 2020), https://www.willistowerswatson.com/en-US/Insights/2020/11/insurance-marketplace-realities-2021.
[18] Commercial Insurance Buyers Can Expect Hard Market Conditions to Continue Throughout 2021, GlobeNewswire (Nov. 19, 2020), https://www.globenewswire.com/news-release/2020/11/19/2130276/0/en/Commercial-insurance-buyers-can-expect-hard-market-conditions-to-continue-throughout-2021.html.
[19] Cohn, supra note 5.
[20] Alice Uribe and Leslie Scism, Companies Are Paying a Lot More to Insure Their Directors and Officers, Wall St. J. (June 21, 2020), https://www.wsj.com/articles/companies-are-paying-a-lot-more-to-insure-their-directors-and-officers-11592731801.
[21] Cohn, supra note 5.
[22] Cohn, supra note 5.
[23] Cohn, supra note 5.
[24] Cohn, supra note 5.
[25] See The global cyber insurance market size in the post COVID-19 scenario is projected to grow from USD 7.8 billion in 2020 to USD 20.4 billion by 2025, at a CAGR of 21.2%, GlobeNewswire (Oct. 21 2020), https://www.globenewswire.com/news-release/2020/10/21/2112099/0/en/The-global-cyber-insurance-market-size-in-the-post-COVID-19-scenario-is-projected-to-grow-from-USD-7-8-billion-in-2020-to-USD-20-4-billion-by-2025-at-a-CAGR-of-21-2.html.
[26] Id.
[27] See generally State of the Cyber Insurance Market-Top Trends, Insurers and Challenges: A.M. Best, Ins. J. (June 18, 2019), https://www.insurancejournal.com/news/national/2019/06/18/529747.htm.
[28] Id.
[29] GlobalNewswire, supra note 23.
[30] The Hiscox Cyber Readiness Report 2020, Hiscox Ltd., https://www.hiscox.co.uk/cyberreadiness (last visited Feb. 15, 2021).
[31] Mia Wallace, Marsh, AIG and Guidewire discuss the changing cyber insurance market, Ins. Bus. (Feb. 3, 2021), https://www.insurancebusinessmag.com/uk/news/cyber/marsh-aig-and-guidewire-discuss-the-changing-cyber-insurance-market-245429.aspx.
[32] Id.
[33] See generally Katie Dwyer, Looking Ahead: 3 Challenges and Growth Opportunities Awaiting the Insurance Industry in 2021, LegalNet Inc. (Dec. 22, 2020), https://www.legalnetinc.com/2020/12/22/looking-ahead-3-challenges-and-growth-opportunities-awaiting-the-insurance-industry-in-2021/.
[34] See Top Cyber Security Experts Report: 4,000 Cyber Attacks a Day Since COVID-19 Pandemic, Cision PR Newswire (Aug. 11, 2020), https://www.prnewswire.com/news-releases/top-cyber-security-experts-report-4-000-cyber-attacks-a-day-since-covid-19-pandemic-301110157.html.
[35] Id.
[36] Insurance Marketplace Realities 2021 – Cyber Risk, Willis Towers Watson (Nov. 18, 2020), https://www.willistowerswatson.com/en-US/Insights/2020/11/insurance-marketplace-realities-2021-cyber-risk.
[37] Cowbell Cyber Finds Small Enterprises (SMEs) More Likely to Adopt Cyber Insurance, Cowbell Cyber (June 18, 2020), https://cowbell.insure/2020/06/18/cowbell-cyber-finds-small-to-medium-sized-enterprises-smes-more-likely-to-adopt-cyber-insurance/.
[38] See Cooksley, supra note 6.
[39] Willis Towers Watson, supra note 34.
[40] Willis Towers Watson, supra note 34.
[41] IBM, How Much Would a Data breach Cost Your Business?, https://www.ibm.com/security/data-breach (last visited Feb. 22, 2021).
[42] Jon Porter, Garmin reportedly paid multimillion-dollar ransom after suffering cyberattack, The Verge (Aug. 4, 2020), https://www.theverge.com/2020/8/4/21353842/garmin-ransomware-attack-wearables-wastedlocker-evil-corp.
[43] Cooksley, supra note 6.
[44] See generally Tom Johansmeyer, Cybersecurity Has a Big Problem, Harv. Bus. Rev. (Jan. 11, 2021), https://hbr.org/2021/01/cybersecurity-insurance-has-a-big-problem.
