Why certain commercial sub-segments are facing pricing, capacity crunch

Today’s hard market is different not only because of COVID-19 but also because insurers are more granular in their approach towards specific segments within the commercial market, experts suggested Monday during a Canadian Underwriter webinar.

“In some industries [i.e. commercial classes of business], it is extremely hard even just to get the capacity, or just to get terms that clients are comfortable with, whereas in the past it would have been more of just a blanket approach,” said Steve Phillips, chief operating officer of Sovereign Insurance.

During the webinar, Commercial lines post-COVID: What the future holds, panelists were asked how the current hard market compares to previous hard markets.

“I think what is really different about this condition is [that certain business classes are] not just a blanket concern,” Phillips said during the webinar. “Now I think what we are finding is, you really need to think of the market almost as sub-segments – in a more detailed way.”

While underwriters still rely on their experience and judgment in the commercial space, what makes today’s hard market different is those underwriters have more tools such as data and analytics to help them underwrite.

“I think that means you are going to see some pockets of the market move very quickly versus the past,” said Phillips.

The insurers’ quick response to rising loss ratios in commercial market sub-segments may have taken some commercial clients by surprise, one broker on the panel suggested. Based on the fact that insurers took more of a blanket approach to rate increases in past hard markets, that left brokers at a loss during the recent hard market to explain the industry’s sudden shift to a hard market within specific classes of business.

Stéphane Lespérance, Aon’s president of commercial risk and health solutions in Canada, recalled a presentation he did to risk managers in January of 2020, a couple of months before COVID-19 was declared a pandemic.

At that time, it was hard to explain to risk managers why the market was shifting so rapidly, Lespérance said in reply to an audience member who asked panelists for their thoughts on the large increases in commercial loss ratios leading to quotes that some clients cannot afford.

“How can you explain to a CFO [why he has] a 200% increase on his portfolio when it has been the same sort of loss ratio for five years prior to that?” he said. “We were having [commercial premium] reductions being offered every year, even though losses were happening – and then suddenly, boom, a 200% increase. That is the part that was so difficult to explain.”

Then when COVID-91 hit, it was a “perfect storm,” said Lespérance.

Nowadays, underwriters are asking for different information compared to before the pandemic, said Richard Grant, chief operating officer of Trisura Guarantee Insurance Company.

“Underwriters are digging a lot more into files. [There is] a lot more back-and-forth with brokers, asking questions, getting answers. That has definitely added a layer of complexity to the situation.”

That said, brokers are now getting underwriters the information they need more quickly than before, suggested Grant.

“Brokers are getting us that data beforehand, ‘This is how the client has handled the pandemic, and this is their business plan going forward,’ which makes it a lot easier,” said Grant. “The pandemic has added a layer of requirements that underwriters need just to assess that risk and provide terms.”