Today's Viewpoint: A MarshBerry Publication

WHAT COULD DRIVE HIGHER PRICING IN E&S IN 2022?

Although some companies in the property and casualty (P&C) insurance sector are seeing rate increases slow, there are areas that are projected to see escalating rates into 2022. This is driven by several factors, including rising inflation, higher demand for cyber insurance and social inflation.

The Excess & Surplus (E&S) sector is one area that is likely to see more prolonged rate increases and higher demand. CEO Pat Ryan of Ryan Specialty Group said in a December interview with The Insurer: “It is undoubtedly the hardest, the most robust and prolonged E&S market growth rate I’ve seen in my career. Now we don’t know how long it’s going to last, but it seems to have legs here.”

Here are several factors that are likely to contribute to the further rate increases in the E&S space:

Heightened interest in cyber insurance is lifting E&S demand.

According to Accenture, cyber intrusion activity increased by 125% year-over-year in the first six months of 2021 with extortion operations and ransomware accounting for a large portion of the increase. Global ransomware attacks in 2021 are projected to cost businesses around $20 billion, increasing over ten times to $265 billion by 2031.

IT vulnerabilities continue to rise as companies embrace digitization, automation and remote work. Since 2020, executives report that adoption of automation technologies and digitization has only accelerated, with COVID-19 spurring increased usage of technologies that enable remote employee interaction like filesharing and videoconferencing.

Remote and hybrid working environments appear to be here to stay. According to Gallup’s October 2021 survey, 76% of remote workers say their employer will allow a hybrid situation going forward with 61% of remote workers expecting to have hybrid work in the future and 27% expecting to be fully remote.

Rising inflation may impact the P&C space.

With the core Consumer Price Index (CPI) rising 6.8% year-over-year in November, inflation is rising at the fastest rate since 1982. Supply chain disruptions and labor shortages, combined with the low interest rate environment, are driving price increases. While these issues haven’t resolved in the near-term, the longer-term outlook on inflation is unclear.

In past periods of high inflation in the 1970s and early 1980s, P&C insurers’ results suffered. Some insurers had worsened performance during this time, impacted by volatile claims trends, reduced underwriting quality and value deterioration of fixed income assets.

This environment of rising inflation could further pressure the margins and profits of admitted insurers, leading them to rein in coverage and capacity, while being more cautious around terms and conditions. In turn, this may drive potential clients to look to the E&S companies for coverage.

Social inflation may push more business into E&S.

Social inflation is believed to drive hardening markets in various insurance segments including auto coverage, umbrella packages and E&S. Nuclear verdicts have been rising over the last decade, with verdicts with judgments of $20 million or more increasing by 300% from 2010 to 2019.

Social inflation and nuclear jury verdicts are showing no signs of abating, pushing up the costs of claims for insurers. This is leading some admitted insurers to increase rates, tighten terms and conditions, and pull coverage, limits and capacity at times.

In sum, companies within the E&S space could see beneficial pricing trends in 2022 due to both economic and secular changes. These companies are likely to see greater price increases compared to the overall P&C space, as these influences on pricing and business are unlikely to resolve in the near-term.

If you have questions about Today’s ViewPoint or would like to learn more about activity in the E&S market, please email or call Gerard Vecchio, Managing Director, at 212.972.4886.

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