Riding the Hard Liability & Property Market
Author: Conor Boughey, ARM, Senior Vice President, Seth Cole, ARM, Senior Vice President
The liability market has been facing challenges for the last several renewal cycles, and signs point to a continued hardening for liability markets. The driving forces behind these conditions are increased claim expenses. Public Entities face a significant challenges due to the number of high value claims continuing to develop. These losses are typically a result of claims involving bodily injury with significant medical damages that may involve lifetime care plans, claims involving civil rights allegations that also include plaintiff attorney fees, and claims with facts that ignite juries. The results are a frequency of claims exceeding $1,000,000, and increasingly significantly higher.
Facing this challenging market is a budget challenge, and entities are seeking relief and justification of the high costs of coverage. For entities participating in a risk pool with a self-insured shared risk layer, typically the shared risk layer is the most expensive component of coverage, which is determined by actuarial review of claims expenses. For insured entities, most all placements are layered by multiple carriers to provide a high limit program, with the lead layer carriers having the highest premium. For both methods of offsetting risk, the largest share of premium is at the retention point.
If an entity wants to lower the cost of coverage, the most effective method is to increase retention. In doing so, the risk transfers back to the entity (the cost of that exposure should be evaluated by an actuary to guide proper long term funding). Increasing retention is the most likely way to see meaningful premium reductions, while also protecting the entity from shock losses by maintaining limits. Another beneficial narrative to increasing retention is the entity stands on its own loss performance.
If an entity believes they are a better risk than the premiums indicate, shifting a larger exposure back to the entity may be a wise decision during a hard market. In a soft market, when coverage is placed at a lower premium, buying down the retention may be a prudent decision, and the reverse is true in a hard market. Of course the risk of loss exists, but placing more risk in the self-insured program may pay the highest reward during a hard market. For this same reason, many risk pools are also increasing the attachment point to excess insurers.