Which coverages will lead brokers out of the hard market?

For several years, Canadian P&C insurance brokers climbed through a hard market in virtually all commercial specialty lines.

Now, industry analysts have told Canadian Underwriter, that climb has plateaued in both the cyber and directors and officers (D&O) lines.

“Now it’s a little easier,” reported Denise Hall, national broking director at Aon Canada. “The market’s a bit more transitional. We have some more tools in our tool belt…. It feels like we’re in a more profitable, competitive market right now.”

Commercial brokers particularly see opportunities in the cyber and D&O lines. “Those are the most boomeranged of segments over the last three years,” said Dane Hambrook, head of specialty at Zurich Canada.

Cyber: opportunity knocks

At COVID-19’s peak, the industry experienced what one Canadian P&C cyber insurance executive called ‘the insanity’ of cybercrime ransomware claims.

Canadians were suddenly working from home as many industries implemented remote work and IT security protocols. Employees were separated from one another, which led to social engineering cyberattacks in which cybercriminals hacked executives’ information, and then tried to dupe colleagues into moving money into their accounts.

Ransomware attacks also exploded. Cyberthieves encrypted company information and demanded a ransom to release the data.

Cyber liability claims spiked. In the first half of 2020, Canada’s P&C cyber insurers reported a 498.9% loss ratio, meaning they paid out almost $5 per claim for every premium dollar they received in cyber lines. The year before, the loss total was unprofitable, but still at only a 153.7% loss ratio.

“I think the hard market [in cyber] was propelled because of catastrophic loss experiences for which insurance hadn’t necessarily priced,” Katie Andruchow, senior vice president and national cyber broking practice leader at Aon Canada, told CU.

“We’ve spent the last two years significantly adjusting those portfolios, and underwriters [have been applying] rigour in their pricing models in order to realign profitability through the end of 2022.”

What kind of re-pricing? “The premium increases we saw over the last two years were substantial,” Andruchow observed.

“In the first year of the hard market, we probably saw an average premium increase over 100%. And then we saw a second year of [cyber premium] increases probably sitting somewhere between 60% and 80%. The hope is that cyber premiums are now at a place where they can support the loss experience the average insurer is going to see across their portfolios.”

Relative to those hikes, any increase below 60% would feel like a ‘softening’ market. But many cyber insurers and brokers resist that terminology. Hambrook said the latest figures show price gains in the range of 20% to 30%.

“I’m not sure I would say that the cyber market is softening — I will not say that,” Ilan Serman, president of Ontario at Gallagher Canada, told CU. “What I would say is the cyber market is not hardening at the same rate as it was a year ago. The rate of increase has slowed down. But are we seeing significant decreases in the cyber rating? Not really….”

From a broker perspective, the initial transition from a soft market to a hard market exacerbated the impact of the labour shortage currently affecting brokerages, said Joe Vachon, senior vice president of commercial lines at Tokio Marine Canada. And a return to the way things were probably isn’t in the cards.

“Three to four years ago, pre-COVID, brokers had a run of renewals ‘as-is,’” Vachon recalled. “And brokers actually staffed their offices on that model. Then the market hardens and, all of a sudden, the brokers do not have the resources they need to constantly seek new markets. This sort of escalated the hard market a little bit. They’re not back to the level of as-is renewals, and they still have to market a lot of renewal business.”

Changes to D&O

Pre-pandemic, D&O loss ratios were already on the uptick. Already high at 66.6% in 2019, the D&O segment’s loss ratio hit 73.9% in the last part of 2020.

The pandemic sparked uncertainty. Insurers worried about how much blame corporate boards would take for financial losses and employee safety during COVID-19.

“What caught up to everybody was some prior-year developments in the D&O space and that created this profitability issue,” said Hall. “And then you layer on the concerns around the pandemic. Are we going to see systemic bankruptcies that could hit the D&O policy? Are we going to see employees suing for health and safety violations? Will employees be suing for mass layoffs [or] for severance?

“And then there were concerns around the volatility of the stock market. Were we going to see a whole raft [of securities actions]?”

Hambrook described the pandemic as less of a loss event for D&O, and more of an ‘uncertainty event.’

“For an underwriter, if the uncertainty window you’re looking at is opaque, then you’re going to take the worst-case scenario,” he explained. “You’re going to put up less capacity…and that’s what the market did. So that drove the hard market [in D&O lines].”

Which meant the pandemic became an especially frustrating time for board directors seeking coverage.

“Clients felt powerless….” Hall observed. “They were not feeling [like their risks were being] differentiated and therefore they had no ability to impact the [hard] market.”

But now profitability’s reappearing. Aided by reserve releases, federally regulated D&O insurers in Canada reported a very profitable loss ratio of 40.7% in 2022 Q4. Many of the class action lawsuits anticipated during COVID-19 didn’t materialize, which renewed confidence among D&O underwriters.

“We’re operating in a much more favourable market for clients today, because [underwriters’] concerns around those pandemic claims didn’t happen,” said Hall. “With all the government subsidies in Canada, we did not see the level of bankruptcy we anticipated….

“The corrective action [D&O insurers] took during the pandemic over the past three or four years has corrected the book. Today, insurers appear to be more comfortable about the profitability of the [D&O] book and that’s creating some competition.”

Feature image by iStock.com/Wirestock