In The Public Eye: Emerging Risks and What's Next for the Liability Market in 2021?

Intro (00:00):
Welcome to the Alliant In the Public Eye podcast, a show dedicated to exploring risk management topics and challenges faced by today's public sector leaders. Here are your hosts Carleen Patterson and Justin Warrick.

Carleen Patterson (00:18):
Welcome back everyone to another episode of In the Public Eye. Our last podcast featured Kevin Williams, who leads the Genesis Underwriting public energy group. He joined us to talk about the liability market from a carrier's perspective, and we covered a few issues driving the liability market. So, today we want to focus on the market from a broker and client perspective. Talk about the historical liability market, as well as what our public entity, clients and prospects can expect in the coming months. To do that we'd like to welcome Daniel Howell, executive vice president, and managing director for the Alliant public entity group. We're really happy you could join us today, Daniel, but before we start talking about this liability market, can we take a few minutes to learn a little bit about you and your background?

Daniel Howell (01:09):
Well, thank you Carlene for having me join you and Justin on the podcast. I'm not so sure people want a few minutes of my background, you know, a long time ago sounds like it could be a long story, but we won't go there. I started out at a firm called Fred S. James right out of college. Got sucked into the business because I didn't have a degree that would help me get a job. I was a history and art history major, so that's how a lot of us got into insurance, but it got really interesting for me. I was doing professional liability, underwriting related activities at the time. Then I had the opportunity to start working with the public entity group at Fred S. James and that group also managed some joint pooling programs. So, it was a great start and I then stepped out for law school. I did pass the bar but the siren call of insurance drew me back in and, I've been back in the business ever since then joined Alliant from Sedgwick in 1998. And it's been now almost 25 years here at Alliant. So it's been a great run and I've seen a few different markets. So, lots of water under the bridge.

Carleen Patterson (02:34):
Is it safe to say that this is one of the toughest liability markets you've been through?

Daniel Howell (02:39):
I would say it's the toughest liability market that I've truly experienced. I joined in 87 right after the 86 horror show. But there were still battle scars and things going down in 87, 88, 89. So, it was pretty messy. And uh, this, this compares with that with some differences.

Carleen Patterson (03:04):
Okay. All right. Well looking forward to hearing a little bit about what those differences are.

Justin Swarbrick (03:09):
Yeah. Dan, thanks for joining us today. We talked to Kevin last week, and from the underwriting perspective, they're just seeing an onslaught of losses. Some of the things we focused on were what was driving things like social inflation, nuclear verdicts litigation trends. What are some of the emerging risks that you see on the horizon or already here for the public entities that you work with?

Daniel Howell (03:37):
Well, we're sitting in the middle of a pandemic, of course, and we just don't know how that's all going to play out. If we're just talking about liability. The first part of the pandemic was all about property and physical damage or not of losses. And now we're talking about whether these return to work, and return to school are going to result in liability claims. There’s a lot of uncertainty, there are clashes between the employees who are concerned about returning to work and a safe environment and the employers who want to reopen and, and reopen schools. So, I see that creating uncertainty and conflict, and that's just beyond the worker's compensation side of it, another area that's kind of been on the side, but it's still really growing and becoming a problem in my opinion, is the cyber liability exposure. So, when you look at a cyber policy, there's kind of some first-party coverages like property insurance, and then there's these third-party coverages. And we're seeing so many claims increasing year after year. It's doubling, only it's doubling now six months, the number of notices. They may not be actual breaches, but they're incidents. And so, cyber is becoming just an essential part of our client's liability portfolio. I think that will continue to be an emerging and developing risk.

Carleen Patterson (05:21):
Yeah. And we're definitely going to explore cyber specifically in some upcoming podcasts, but you're right. When you're looking at casualty and liability as a whole, it's got to be part of the conversation. What are some of the trouble spots that you're seeing on the horizon when it comes to our clients, whether they're airports, pools, or higher ed, we've covered them all and work with them all, what are you seeing

Daniel Howell (05:50):
Well beyond the financial concerns that so many of them have because their budgets have been severely impacted, right? As we're in a hard insurance market. I think one of the issues that needs to be addressed is public trust and credibility. There's certainly a lot of mistrust out there. And I think one of the things that I've seen in recent claims relative to public safety and police professionals, is that the tables have turned in the sense that, in prior times, when we went into court with a police officer involved in a use of force claim, almost certainly the jury would start from a point of trusting the officer. Then the plaintiff would have to work them back to a different version of what happened. And even if perhaps the actions in the law enforcement might have been seen as being aggressive, they would tend to side with the police, or the public safety officer.

Nowadays, it's almost exactly the opposite. They're going to start assuming the worst. And then we're going to have to rehabilitate as it were the defense because of just the perception and the lack of trust. So, when you overlay that with social inflation, claims that are valued at 300,000 to 500,000 are now three to 5 million. As a result year over year, this is the time of year when we get the updated loss reports for the July 1 renewals, we get the December 31 loss data. So when we keep seeing claims incurred reserves up 30%, year in and year out on certain classes of business, the underwriters are pulling their hair out because they then trend that increase out for several years. And the current trend factors, it used to be that they might use 4% inflation, but with social inflation now they're using seven, eight, I've seen 10%.

So you take a $2 million verdict or settlement in 2020, and you trend that out for a renewal this year. And they think they're going to pay that claim in four years or so. And you add a 10% inflation factor to it. You could have pierced 5 million dollars when all is said and done based on the underwriting. And that's why we're seeing pressure on self-insured retentions as well. And I think we're also seeing these aggregate limits and obviously underwriters putting out shorter lines, the amount of limits they're willing to put out on any one risk.

Justin Swarbrick (08:41):
Yeah, that's a really great point. I think we see the pressure on the police mistrust across the country with things like qualified immunity, in Colorado, they completely overrode that legislation. We see defunding the police and a lot of this social unrest arising out of exactly what you talked about for 2021. As we kind of put 2020 in the rearview here, we're starting to see some carriers, as you mentioned, pull back on capacity, but we're starting to see some carriers pull out of public entity entirely. Do you think this is a trend for 2021? Or is this going to be an outlier?

Daniel Howell (09:25):
I think that there will be some underwriting adjustments. They're going to be firms that pull back from public entity and when I include public entity, I think of the cities, the schools, the counties, the states, the airports, seaports, you know, they're restricting capacity, but I also include higher education, which looks a lot like municipal corporations. So, we're seeing smaller lines. We are going to see some underwriters leave, but we're starting some underwriters coming in. And if you recall that they called it the class of 2001 there were a lot of insurance companies formed in Bermuda. And what have you in 2001 to take advantage of a hard market then, certainly some new underwriters came out of the 1986-87 non-renewal season. But also in the meantime, I think public entities are in a better position to somewhat weather the storm because the infrastructure to retain risk is a lot more mature than it was back in '86 - '87.

That's when the pools and the purchasing groups and the consortiums started coming together. You know, those days there was nothing available. And so, they basically self-insured in many cases, a hundred percent of the risk. Now I do think that those groups are going to have to be prepared to retain more risk and be a little more creative and get it back a little bit towards some of those roots to be able to weather it. And we just have to remember, we're coming out of a very long, soft market where it became relatively easy to buy, certainly 50 million, a hundred million in limits, and those limits are now be becoming more difficult and very much more expensive. So, we have to get our heads around the fact that programs that we're at 50 million might be at 35. And it may be that only 25 is affordable for the short term. And we have to manage our expectations and do what's best for our organization and our clients.

Carleen Patterson (11:39):
That's a really good point that you make about the public entities being in a good position when it comes to being prepared for taking on retentions and really looking at what they're paying out. What would put one entity in a better position than maybe another one, even if it's like counties or states, it doesn't matter. What do you think would put them in a better position for this renewal cycle?

Daniel Howell (12:03):
Well, certainly knowing your losses and where you stand and having a really good handle on what you've got and actuarial work, helps you understand what those projected losses look like going forward. Obviously, it'd be nice if you came into this with a healthy self-insured fund, because you know, these new liabilities that you may be taking on will take three to five years usually to pay out or more. And so I think that if they can have that long-term perspective you can rebuild your loss fund over time, as long as you have management support and communication internally, this is where we are in the cycle. This is what makes sense and is prudent. Just keep in mind that there, this is a cycle now, there should be a soft market at some point. And when that comes, then you can take advantage of it and potentially slough off some of those liabilities that you took on when the market was hard, you can do a portfolio transfer and get them off the books again, once the pricing goes on, and maybe that's at a point when insurers are seeing a higher return on investments and are looking for cashflow more than, right now, the technical pricing that's driving up rates.

Carleen Patterson (13:27):
Are there certain pieces of information that talked a little bit about some of the individual types of exposures, whether it's law enforcement or what have you, are there certain pieces of information that our clients should start looking for within their organizations? So that way, when their brokers come asking for that information, they know where to find it, whether it's SAM coverage and, looking for what are their abuse, molestation policies and procedure, that kind of thing. What would help from gathering submission information?

Daniel Howell (13:59):
I think that there, especially for an organization that may have some recent claims activity, you need to help your broker by helping give them the story of what happened. And what's changed potentially within your organization. Sometimes there's a fluke and something bad happens, and it's a one-off situation, but if there is more than one, or there's a trend, we need to be able to get out in front of that and show underwriters, that something has changed within the organization. For example, people used to take things to trial and win and defend them so that maybe they couldn't run the risk of not defending them. And that may require some internal conversations because a lot of the settlements don't take place because there's pressure to back up the people who are involved in the claim and show them that we support them and have their back even where we know we might have some challenges in the jury room.

But we may have to make some hard decisions that we just can't afford to try these claims in certain situations. So I would say preparing your story for the underwriters and having really good loss data and really good notes and having a full story for underwriting is going to make the difference. Underwriters are going to be inundated with some, and they're not going to want to work on ones that are incomplete, hard to follow. Don't have all the data in the right format, for their own actuaries to crunch the numbers. And also, we do have the old claims coming in on these reviver statutes for the abuse and molestation claims. I think that organizations with that exposure need to start digging out old policies and registers and creating a policy register so that they can find the insurance that may have been in place in the seventies and eighties and nineties. Because those claims are coming in.

Justin Swarbrick (16:10):
Yeah. Dan, I was actually going to bring that up. Can you explain what some of those revival statutes are attempting to do and what they've done in states that have successfully passed them.

Daniel Howell (16:23):
Well to speak at a truly generalized way. What they've done is they've opened a window to allow adults who may have been victims decades ago to bring forward claims that otherwise would've been barred by the statute of limitations. So, in some states they've given them a few years, four or five years where they can bring forward those old claims and file a lawsuit that would otherwise be barred. And that's especially challenging when the witnesses may have long gone, passed away. And, obviously as I mentioned, finding old insurance policies may be really difficult. And the limits that were in place in those old years may be inadequate for today's related claim values. So pretty difficult times, particularly for the K through 12 schools in those jurisdictions that have revived those claims. And it's going to remain that way for a while until that kind of flows through.

Carleen Patterson (17:30):
Are you seeing any kind of a trend in the insurance, in the insurance industry from carriers and trying to handle those types of exposures differently? You mentioned going back, 20, 30 years to older policies and, back in the day when they were written on an occurrence basis and we've seen certain types of coverage move to claims made. Do you see any kind of trends in that perspective?

Daniel Howell (17:54):
I do. And I think more and more we're seeing schools have to carve that out. The abuse and molestation on a claims made basis, and the carriers are concerned about stacking of limits and they want to try to prevent stacking of annual limits over multiple policy years. So there's, a lot of movement there. And again, as I mentioned, this is kind of what happened in 86, 87, there was exclusions of coverage. Then it came back on a claims made basis for abuse and molestation and employment practices. And then it came back on occurrence with nose coverage to convert the old claims made. So, I think if we can get through this period, there may be some new normal where there'll be an opportunity to tidy up some of the placements that maybe aren't as ironclad during the current cycle which is such a be patient in some respects and write it out, but communicating certainly between the broker and the client and then the client internally giving them the ammunition to explain what's going on internally is really important.

Justin Swarbrick (19:03):
We've talked about those internal communications being key. Any comments Dan, as we wrap up here?

Daniel Howell (19:10):
Well, I think the one thing that I'm seeing that might be a little different from the class of 2001. Is that the new insurers that seem to be coming in right now, don't really represent a silver bullet for this situation. They're being very conservative from what I can tell and the amount of limits that they're going to be willing to put up initially seem to be short lines, but you know, in a lot of respects, it's a great time to get in the market. If you're not picking up the old X and you're getting onto accounts at new higher rates with shorter lines put out, it's probably a good time to get into the space for the markets compared to maybe the rates that were in effect two, three years ago. So there'll probably be a bit of opportunism and hopefully that'll balance out over time. And then we can start rebuilding the market and rebuilding the limits and the coverages, but in the near term, it won't go away until we see the claims stabilize. And this year over year incurred loss development has to stabilize or the underwriters will just be forced to keep increasing the premiums and rates because the losses are increasing.

Carleen Patterson (20:37):
Well, thank you very much, Dan really appreciate you joining us today. As we've said, we recognize this is a real challenging time for our public entity risk managers. And we are focused on trying to provide continued information and resources as we navigate 2021 and beyond. We hope you enjoyed the episode of In the Public Eye for more information and additional podcasts, please visit insurance.alliant.com/inthepubliceye or www.alliant.com.