In The Public Eye: Episode 1
Carleen Patterson and Justin Swarbrick, Alliant Public Entity, discuss the current market and explore risk management and challenges faced by today's public sector leaders.
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 Swarbrick.
Justin Swarbrick (00:18):
Welcome, everybody, to episode number one of In The Public Eye Podcast. My name is Justin Swarbrick, I'm with Carlene Patterson and we both are insurance brokers at Alliant, that serve Public Entity clients all across the country, and if you're not familiar with In The Public Eye, that's a newsletter that we have sent out for a lot of years, through email and as the world changes in ways to share information changes, we thought we would try a podcast. And really the goal of our podcast is to get good information into the hands of Public Entities. We are in the midst of a very difficult insurance market, probably the most difficult market we've been in since the eighties and there's quite a bit of change happening. So, we don't just want to focus on that and give you more information about why the market is doing what it's doing. We also want to talk about ways to combat the market forces that are happening around us and give Public Entities some ideas around that. And we're going to have a number of other industry specialists and really get their expertise on the different factors that are playing a big role in the current marketplace, but also how we can work to improve your situation in such a volatile time. So, Carleen, the insurance market's been cyclical since the beginning. What is different about this hard market cycle than cycles we've seen in the past?
Carleen Patterson (02:10):
You know, Justin, I think there are a couple of things that are driving this very difficult market. You have traditional risks that we've been dealing with whether they're property related, liability, workers comp. But then you add so many emerging and changing risks, whether it's cyber, challenges around police professionals, diversity and inclusion, and then you add in the pandemic and the civil unrest and budget constraints. And a lot of that is really driving what's going on today. But to really understand because the market was hardening even earlier than 2020 when the pandemic hit, we have to go back a couple of years and even look from a historical perspective on what was impacting the insurance market in the last 5, 10, 15 years in order to understand where they're coming from today. We have underwriters on a daily basis telling us that they are looking to be profitable and their carrier performance their management is looking. Lloyds of London, they're coming in and looking and saying how can return to profitability, and when the insurance market is investing their premiums and you're not getting their dollars back in by investing those, the only other way they can look to improve carrier performance is to look at it from a premium standpoint. So really going back and looking at how they've been performing the combined ratios over the past few years is really what's driving it today.
Justin Swarbrick (03:42):
Yeah. I think that's a great point. When you look at the combined ratio for the industry, really since 2016, it's operating at about 100%. So essentially what that means is every dollar an insurance company collects, they're paying out a dollar for premiums, expenses, overhead, et cetera. And there was absolutely a time that was okay. And in fact, that may have been the goal because you could make so much money on the investment returns from the premium, from investing the premium that you collected, but those days are gone and for instance, the yield on a 10-year treasury bond is currently less than 1%. So, it puts a ton of pressure on the underwriters to make a profit. And I think that's what - that's exactly what you're talking about. It's hard to believe where we're at today. When you think back to just 2015, 2016, we were in the softest market for a long time. And as brokers, we were upset when we weren't bringing our clients bigger reductions. And it’s just amazing how quickly it's changed, but even through the change with the premium increases, we are hearing and seeing the carriers continuing to hover around that 100% combined ratio, which has led to some more dramatic changes with limit structures, deductible structures, as well as continued premium correction.
Carleen Patterson (05:16):
And looking at the insurance market, I mean, you're right, going back to 2015, the number of carriers that we had, the ability to access from 2015 to 2020, the number of competitive markets has gone down because, you know, carriers have merged. Certain carriers have pulled out of certain markets as they changed their capacity in trying to be profitable. And so that impacts how we are able to negotiate with less markets to compete. But you know, when they're concerned about profitability, we're concerned about making sure we're getting the most competitive terms and conditions, but we need those insurance markets, and we need them to be there for those catastrophic losses. And so, it is a concern.
Justin Swarbrick (06:05):
Yeah. I think probably the biggest difference between now and the ‘80s was there was a sense that Public Entities just could not buy insurance. There weren't carriers around that would offer them. And out of that came Public Entity Pools, which by every measure had been a huge success for cities and schools and other municipalities. Since then, we don't want to get back to that point to where there just are no insurance carriers to offer coverage to our Public Entity clients.
Carleen Patterson (06:37):
And I think, you know, there are so many different things that are impacting, you know, not only what they're charging on the premium side, but looking at what they're paying out on the claim side. An average claim 5 - 10 years ago was much smaller than they are today. In 2019 we had over 14 different catastrophic losses that resulted in over a billion dollars in losses each. And that was just not something we saw, you know. Contributing to that is, where we're developing, you know, urban development, the cost of reconstruction is going up. And so those losses are just bigger than they used to be, right?
Justin Swarbrick (07:16):
So, yeah, there's no doubt. We're seeing changing weather patterns. And the point you made about the weather events that were greater than a billion dollars, unfortunately, that's becoming a trend. If you look back to the eighties and you were to measure how many events annually, weather events annually were greater than a billion dollars, we only breached any events, probably three or four times, every year since 2015. We have had 10 or more billion-dollar weather events in the United States, right? And as the population grows, development grows, as you said, these claims are just more frequent, more severe, and it all plays a role, it's happening in the property market.
Carleen Patterson (08:01):
Right. But a few years ago, the only thing we were looking to model were earthquakes and hurricanes, tropical storms, and when they would hit, and now there are additional types of catastrophic exposures. You've got the wildfires in the Western states, you have of the convective storms in the Midwest, where before we weren't having those same types of losses that we're having today, right?
Justin Swarbrick (08:29):
And I think infrastructure is playing a role in claim activity. And especially with Public Entities, as a capital improvement, budgets get delayed, it leaves the exposure open for additional claims, for instance, the dam in Midland, Michigan, this year, that failed, that was catastrophic for an area that I don't think was very flood prone. But when you have a dam that empties an entire lake into a region - that wreaks havoc, right? So, there's a whole lot of aspects to this, and as we go through this series, we're going to be bringing in underwriters and another specialist who focused on the property market. But unfortunately, it's not just the property market that we're struggling with. It's the liability market, I think some may argue is even more volatile right now. And continues to change pretty rapidly. What’s going on there, from your view?
Carleen Patterson (09:36):
Wow. You know, there are so many things that are driving liability losses, fortunately for many Public Entities, they have favorable tort caps, but you know, some of the things that we're going to talk about are the skyrocketing verdicts; you have so many unique exposures that Public Entities face. We're working with minors, K through 12, and a lot of the programs that our municipal clients offer. Public safety, so, you're dealing with, you know, the issues and the civil unrest around police professional liability claims. And, you know, with our K through 12 and colleges, you know, traumatic brain injury is an issue. And so, there are coverages that are very difficult to get carriers to sit on top of, there are exposures that more and more Public Entities are having to self-insure. And so, it's a difficult liability market.
Justin Swarbrick (10:30):
Yeah. I think what is interesting is the exposure hasn't necessarily changed. We've always had minors. We've always had contact sports. We've always had police, but what we're seeing is nuclear jury verdicts. We're seeing claim settlements higher than they ever have been. And it's been such an exponential curve. This has not been a gradual curve. It's been very rapid, very fast that underwriters and actuaries, they just priced the coverage incorrectly the past 10 years because they couldn't account for such, such big claims.
Carleen Patterson (11:10):
Yeah, absolutely, and you know, that's so you'd have these property claims, you have liability claims and what's being paid out and it's no longer a US insurance market, it's a global insurance market. And as brokers, you and I spend a lot of time individualizing our clients in the insurance marketplace and trying to make them stand out for good reasons and getting a lot of really good information to the underwriting community. But unfortunately, it's very difficult to keep our clients here, even if they don't have a cap issue or they do have favorable tort caps because of so much of what's going on in the insurance market and other places you've got us domestic carriers who are reinsured by global European carriers. So, their pricing is impacted by what's going on in Japan or what's going on in Europe or what's going on in the middle east. So, you know, you can take a clean loss to the insurance market, but that doesn't mean that clean loss or that, you know, the at clean exposure is going to have no rate increase or no changes in their terms and conditions. And it's something that I think we want to explore a little bit further and how, when there are so many things that our clients can't control, what are the things that they can control and what can they do to positively impact what's going on?
Justin Swarbrick (12:32):
Yeah, given the market right now, everybody is marketing their coverage. You almost have to, with some of the increases we're seeing as a good fiduciary and as a result, underwriters have stacks of submissions as high as their desk, and they can be very harsh as to what they want to work on. So, putting together good submissions, having good data, having good secondary characteristics so the modeling results are more favorable are all some things that, as you say, we can control because there are market forces we just can't. But if we can get our arms around what we can control, then we're going to; our clients are going to be able to have the best outcome possible.
Carleen Patterson (13:21):
That's absolutely the case. And so, I think we're looking forward to seeing what we are experiencing in the insurance market, seeing what some of our clients have done to differentiate themselves, and then communicating these tips and tricks to you, and it's all about communication. What you are communicating to your broker partners and what we're communicating to the insurance market. And then in turn what you're going back and communicating to your leadership because there are things internally that can be done to make your risk more positive in the insurance market as well.
Justin Swarbrick (13:59):
Right? Yeah. Good point. It's one of those things if the market hasn’t affected you yet, if you're listening to this, it is going to, and it's very likely going to in 2021, hopefully, the information that we share today was helpful. You know, really what we're looking forward to is getting a whole lot of great guests with great information to share so that when, when you have to deliver those difficult messages to leadership, you're prepared.
Carleen Patterson (14:28):
Absolutely. So, looking forward to next time.
Thank you for listening. And for more information, go to www.alliant.com
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