Commercial Lines Not at Top of Cycle; ‘Thieves’ Fuel Social Inflation: CEOs

It’s not waning market discipline but the scourge of social inflation that industry leaders of commercial lines insurance businesses see as a potential threat to future profits, a trio of property/casualty chief executives said recently.

Reviewing the landscapes of personal and commercial lines insurance, and their individual business strategies in both segments during the Standard & Poor’s Global Ratings Annual Insurance Conference in June, the CEOs agreed that commercial lines has been a bright spot for their companies in recent years.

Answering questions posed by S&P Managing Director John Iten, Elizabeth Heck, CEO of Greater New York Insurance Companies, Jack Roche, CEO of The Hanover Insurance Group, and Joe Lacher, CEO of Kemper, also said that industry leaders are putting up a united front to attack against legal system abuse—making their voices heard on Capitol Hill to combat the problem.

Market Discipline Remains

Contrasting the situation in personal auto and homeowners, Iten noted that commercial lines insurers have posted combined ratios around the mid-90s during the last two years. “Having said that, there was a point of deterioration last year in the combined ratio, and it does seem that rates have been starting to ease up a little bit. [That] has raised the question in people’s minds as to whether we’re perhaps at a cyclical peak and starting to see a decline,” the S&P executive said, asking Heck, whose company doesn’t write any personal lines, for her take.

“We don’t think that we are near the top of the cycle at all. We’ve definitely seen a little bit more competition, but the market has really seemed to be maintaining discipline,” Heck asserted. “Rates are definitely going up in line with loss trends, but it does vary by line of business.”

“We don’t think that we are near the top of the cycle at all. We’ve definitely seen a little bit more competition, but the market has really seemed to be maintaining discipline.”

Elizabeth Heck, GNY Insurance Companies

Noting that “a lot of surgery” was needed on property, she said, “We hit that business pretty hard and have gotten double-digit increases and pushed up deductibles, done a lot with tightening terms and conditions. But the market seems to be continuing to accept rate increases.”

“On casualty, general liability, we’ve seen that line has really been suffering from social inflation, economic inflation, and there’s really a lot of room to grow there just in terms of getting rate. It feels like that’s nowhere close to being at the top of the cycle,” she said, adding that GNY is seeing a lot of opportunities in the excess liability and umbrella lines, which have seen contraction in response to social inflation.

The Hanover’s Roche said, “I don’t really think we’re going to go through a traditional cycle anytime soon. I think we’re going to have to look at the business more fundamentally around what are the loss trends telling us. In an aggregate, what they’re telling us is the world’s getting riskier,” he said. He went on to talk about weather volatility, emerging liability trends and “potentially the gift that will stop giving in workers comp,” where favorable loss trends have kept overall combined ratios down for many years.

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“You have to be forward-looking vs. just thinking about this in terms of some traditional cycle view, especially as the business has gotten more specialized. You’re talking about a whole different set of businesses now that have proprietary underwriting and proprietary pricing that don’t really follow a cycle. They do have an economic issue: When you have high margins, you’re going to have competition. That’s always been true. [But], particularly since the loss trends have been disrupted over the last three or four years, the [real] question is who’s assessing those loss trends accurately? How well did they reserve through this really unpredictable period? And what is their business mix?”

“If you’ve had property in your mix over the last couple of years, you’ve been disadvantaged. The courts were closed and the liability claims weren’t really coming through. If you look out over the next two years, there’s likely a changing of the guard there. And so the question is: What’s your mix? How good are you at predicting those loss trends, and are you adjusting your pricing and terms and conditions appropriately?”

Confronting Thieves

Taking a cue from another P/C insurance industry CEO, Chubb’s Evan Greenberg, who had spoken at the conference a day earlier and described the litigation industry as a “tax on society,” Iten shifted the conversation to the social inflation topic and specifically asked Lacher to weigh in on the impact of litigation financers.

Going a step further than Greenberg, Lacher said litigation financers are “thieves.”

First, Lacher said, “If somebody’s got a legitimate injury, our job as an industry is to respond and fix that injury, pick them up and help restore them. None of us argue against this.”

Jack Roche, The Hanover

Continuing, he suggested that “social inflation” is a term that downplays what’s going on. “What it actually is is litigation abuse…We actually should talk about it that way more [often]. It’s not only a tax on society, ….It’s actually basically a theft from consumers. And when you start thinking about litigation finance and you’ve got somebody that’s coming in from a private equity firm or bringing in money to finance this process, what they’re doing is saying, ‘How do I squeeze more dollars out of this settlement, not to help the consumer but to make a return on my investment in that process?'”

“Ultimately, we can deal with it. We’re going to raise prices. And we’re going to pass that loss cost on to a consumer or to a business. [A business], ultimately, will then pass it on to their consumers,” he said.

Kemper is actually a bit insulated from the broad impact of social inflation on its commercial book, Lacher said noting that the company tends to sell lower limit policies. Still, litigation abuse “is a societal problem…As a society, we ought to push back against it,” he said.

Roche mentioned other factors driving social inflation, including increased income disparity, and the industry’s concerted effort to push back against litigation abuse. He said that almost 70 percent of the industry is part of the American Property Casualty Insurance Association, and that litigation abuse is the No. 1 issue being tackled by the APCIA for the third straight year.

“Every insurance company that’s part of that, including the best in the land, have said that’s where we want our dues and our advocacy dollars to go—to go after this.” Reiterating Lacher’s point, Roche said the idea is not to abandon the job of insurers, which is to “pay for bad injuries. It’s to get at this core of where does the legal system of abuse exist? How do we bring transparency to litigation finance, and how do we make sure that ultimately consumers are being addressed and not investors or plaintiff attorneys?”

Roche reported that APCIA members recently spent time with a number of senators and Congress people in Washington, D.C., and “the ears are wide open. People are seeing it, they’re understanding it, and they’re connecting it ultimately to the consumer and the businesses that are being dramatically affected at this point.”

GNY is also participating in the lobbying efforts. “The thing we hear from Congress [is that] they’re getting calls from their constituents [who are] complaining about the high price of insurance,” she said. APCIA’s push for legislation around transparency and disclosure of litigation finance “at least gives them a way to be able to respond,” she said. The litigation finance industry “just sort of popped out of nowhere, and there’s absolutely no regulation. There’s no disclosure requirements. You can’t even necessarily find out whether or not there’s a loan during discovery. It makes these cases just unsettle-able, and it’s just driving up the severity a lot across the casualty space.”

Roche reported, “The No. 1 issue that got some of our politicians’ head[s] in the game is when they find out an increasing percentage of the litigation finance dollars are coming from foreign entities and wealth funds.”

“That’s just wrong,” he said, noting that a number of states that are now considering transparency laws and that one such law was adopted in Montana last year.

“It’s an industry and a business that provides no societal benefit—because it doesn’t add, its subtracts,” Lacher said. “It sucks away. And that’s in some ways reprehensible.”