Why private equity firms are seeing premium increases

Big buyers of P&C brokerages — i.e., private equity (PE) firms — may continue to see premium increases for their own liability and cyber policies, albeit flatter than before, Matthew Studley, executive vice president of complex risk for Hub International, told Canadian Underwriter. 

Meanwhile, P&C brokerages have become safe haven investments for PE firms due to their “countercyclical” nature during recessionary periods, Studley said. Other PE investments will typically see a dip in profits during recessions.

According to its 2023 Outlook, Hub predicted financial services, including PE firms, would see premium increases of 5% to 10% across the board (although rates vary per firm and per risk). 

In particular, pricing in the liability line has increased dramatically in the last three or so years, and PE firms focusing on technology may be seeing higher-than-average errors and omissions (E&O) rates.

That’s because the public tech market has been valued at a much lower price in the last 12 months, Studley explained. And if the public tech market sells at a lower price, a PE firm that has a private tech company in their portfolio could see their value drop accordingly. That drop could be used to assert liability against the PE firm.

“What [insurers] are worried about is that if you have a technology-focused private equity firm, and everything is sold off within your portfolio, the (limited partnership) LP unit holders could come after you for basically mismanaging their money.”

However, over the past nine to 12 months, both directors and officers (D&O) and errors and omissions (E&O) premium increases have generally started to flatten out.

PE cyber policies were also affected by large increases when insurers were experiencing high claims ratios. And although clients may still see increases, the line is beginning to flatten.

“With cyber, especially, it was such an aggressive increase pattern for the last couple of years, largely because most of the insurers were not making money on it,” Studley said. “And so it was their acknowledgement that they needed more premium relative to the risk.”

Plus, financial services tend to be big targets for cybercriminals due to the sensitivity of client data. The sector is among the Top 10 affected by threat actors, according to PwC Canada.

Part of the reason why PE firms have seen higher premiums as of late is due to a simple supply-and-demand issue (i.e. decreased insurer capacity).

Over the past few years, M&A activity has ramped up in the P&C industry. Whether insurers were being acquired, or consolidated with their competition through PE investments, supply of policies began to contract.

Plus, D&O, E&O and cyber policies were at the tail end of a soft cycle, when rates were down and coverage was expanded. “It had just become completely unprofitable in some of these areas for insurers,” Studley explained.

“That led to several years in a row where it was very difficult to find capacity if you were putting together big insurance programs, just because there were fewer insurers to go to [and] insurers that were still there were all saying, ‘We’re not charging enough for this,’ or ‘Our coverage is too broad.’”

However, although several factors have converged to see PE firms face higher premiums recently, the rate outlook is positive.

“Certainly, rates are starting to come down, and you are starting to see underwriters…in the last three to four months [start] to wake up a little bit that this isn’t the same market as it was a year ago,” said Studley.

 And as rates come down, policyholders are beginning to see a better supply of policies, even if demand (and risk) is still high.

 

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