Financial lines insurance: the changing claims landscape

Financial lines insurance: the changing claims landscape
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With the frequency of claims increasing and insurers focusing ever more on margins, five key steps could make all the difference for insurance buyers.

The frequency and severity of claims in financial lines of insurance (directors’ and officers’ liability, crime and employment practices) is only increasing.

An increase in claims has occurred across all sectors, from the high street through to global pharmaceuticals.

It is not unusual to see claims running into tens of millions of pounds. This increase in claims has occurred across all sectors, from the high street through to global pharmaceuticals, placing strain on the portfolios of almost all insurers.

Compounding this difficult situation is the associated cost of claims, which have risen. For example, law firms’ rates are rising year-on-year, as is the frequency and length of litigation (with increasing instances of cross-border litigation, or “jurisdictional creep”). 

The market collectively is not returning a profit. As a result, some insurers (and Lloyd’s syndicates) may be partially or completely exiting the market and therefore being left with legacy-only books. This can increase their focus on margins (ie, absolutely squeezing as much margin as possible out of the run-off book), potentially removing other, longer-term considerations from claims negotiations.

Many Lloyd’s syndicates have also been placed under pressure from some of the broader reviews and changes that have occurred and continue to take place within the corporation.

In an attempt to improve underwriting results, Lloyd’s initiated a market-wide profitability review in the first quarter of 2018, asking syndicates to review the worst-performing 10% of their portfolios and to provide remediation plans. Such plans might involve underwriters increasing premiums and/or attachment points and reducing capacity in volatile sectors, such as oil and gas or pharmaceuticals.

More generally, the increasing underwriting transparency required within Lloyds, while bringing many benefits, arguably does constrain underwriters in some instances, and reduces their discretionary decision-making.

As a result of the tight margins, and these broader pressures, some insurers and syndicates have made corporate decisions – for example, a reduction and/or change of workforce – that have affected or could affect claims capabilities, such as service and speed of turnaround. 

In some cases there can be a reduced desire to consider long-term relationships when settling claims. 

Industry consolidation is also affecting claims. For example, in 2017 Axis Capital bought Novae, transferring much of the Novae book into run-off with Enstar Group. In 2018, Axa bought XL, Apollo bought Aspen, and Hartford Financial Services Group bought Navigators Group. Meanwhile, Advent and Brit recently announced that they will merge parts of their businesses in response to the challenging marketplace. 

Following such consolidation, margins often become even more of a focus. In some cases there can be a diminishing desire to take a commercial view and consider long-term relationships when settling claims. 

Tips for buyers

As a result of this difficult claims environment, some increase in rates is possible, and is already being seen in some cases. On the upside, there remains plenty of excess capacity, though not always at the competitive levels we’ve seen over the past few years.

It is recommended that financial lines insurance buyers take the following steps:

  1. Use a strong lead insurer with a well-established claims function and a proven track record of claims settlement.
  2. Establish claims protocols that provide the lead insurer with the authority to conduct claims handling for smaller follow-market insurers. 
  3. Maintain access to decision makers within each of the lead insurers. As claims resource contracts, often there will be a higher level of internal referral before settlement.
  4. Keep front-end client executives/placement brokers and underwriters involved throughout the claims process.
  5. Seek to clarify ‘intent’ on policy forms at contract formation, to avoid disputes post notification.