Specialty Insurers Are Responding to a Rapidly Changing Market


Specialty Insurers Are Responding to a Rapidly Changing MarketSpecialty insurers have traditionally made less use of automation than insurers in other sectors. They are now differentiating themselves in a competitive marketplace through investments in distribution (especially new business submission), product development, underwriting, and claims.

Specialty lines renewal rates are mixed.

Renewal rates are either flat or a mix of increases and decreases. The highest rate increases are in casualty excess liability, cyber, private and not-for-profit directors and officers (D&O), employment practices liability insurance (EPLI), excess construction (project-specific/controlled insurance programs), commercial/nonprofit fiduciary, and financial institutions fiduciary. D&O for healthcare, higher education, IPOs and special-purpose acquisition companies, life sciences, non-U.S. parents, oil and gas, and U.S. exposures are seeing large potential rate increases and retentions.

Regulations around data protection and privacy will only grow.

State regulations such as the California Consumer Privacy Act (CCPA) are driving the need for increased cyber risk coverage, especially for financial institutions and third parties doing business with them. These regulations continue to be clarified and modified.

Other states have passed or are considering data protection and privacy legislation. As of March 14, 2022, 22 states had active legislation, according to Husch Blackwell’s 2022 State Privacy Law Tracker. There has been no progress toward federal legislation, though that is a priority for RIMS in 2022.

The war in Ukraine is mostly impacting non-U.S. specialty insurers—for now.

The ongoing Russian invasion of Ukraine is largely but not exclusively affecting business written through Lloyd’s of London syndicates. U.S. insurers are expected to see less direct exposure than European and London market insurers. Aviation insurers may face substantial claims from aircraft-leasing firms seeing their planes held by Russian airlines and are also losing premium as they stop coverage.

Military activity in the Black Sea has led marine insurers not to offer coverage or significantly increase their rates. Shipping disruptions have knock-on effects on the rest of the supply chain. Many insurers issued notifications of war risk insurance cancellation for Ukraine and are declining coverage for calls on affected ports or greatly increasing premiums. Political risk insurance rates are likely to increase given the seizure of trademarks and some companies continuing to operate in Russia despite the risk to employees and operations. Sanctions are rapidly changing, requiring underwriters to check all parties involved in calls on Russian ports.

Other impacted lines include agriculture, energy, surety, and trade credit. The invasion is also driving inflation and market volatility, in addition to the direct impact on claims and premiums, which could pressure insurers’ capital and margins.

Cyber liability rates continue to soar.

Cyber liability rates depend on firms’ security practices and claims experiences. Employees working from home during the pandemic led to increases in phishing, malware, and ransomware. Willis Towers Watson reports 50%-150% increases in cyber rates in 2022, depending on industry exposure.

Large specialty lines insurers have experienced significant difficulty in profitable underwriting. Insurers continue to work on limiting their exposure via co-insurance, establishing sub-limits on specific coverages, increasing retentions, and offering more restrictive terms.

Climate change is impacting both claims and underwriting.

Changes in weather patterns mean that insurers can no longer rely upon historical data; they must modify catastrophe models. Climate change also increases the chances of tropical diseases spreading to new areas, so insurers must quickly decide how to handle future pandemics. The effects of climate change have already begun to affect shipping operations. The Panama Canal had to slow down operations in 2019 due to drought, and it cost the industry US$300 million.

Insurers have already begun to reduce or end underwriting for fossil fuel companies, a change led by European insurers. Activists, lobbying groups, and other businesses are pressuring underwriters to accelerate this process. Shipping is an important source of emissions from transportation. The war in Ukraine may be reversing the trend of moving away from the fossil fuel business as countries seek to diversify their sources of fossil fuels.

Specialty insurers continue investment in data and analytics and automation.

Specialty line insurers are prioritizing cloud data warehouses, reporting tools, and data science investments to optimize their portfolios and improve underwriting; upgrading to highly configurable policy administration systems to improve underwriting and enable product development flexibility to accelerate entry to profitable niches; and investigating automation support for ingesting new business application documents and building out broker platforms. Digital broker platforms and API catalogs are also assisting within automation.

If you’d like to discuss our key findings for the changing environment for specialty carriers, please read our new report Business and Technology Trends, 2022: Specialty Lines or contact Martin Higgins ([email protected]) or Eric Weisburg ([email protected]) to continue the conversation.