Rate moderation and risk escalation with Alex Wells

Record date: 09/03/24
Air date: 10/09/24

Please note that this episode was recorded prior to Hurricanes Helene and Milton. 

“Much like the stock market day-to-day, people are looking for signs of what's going to happen into the future and markets respond accordingly. So, a hailstorm in Texas can have an immediate impact on some carriers thinking about where that's going to go and where the results are going to be. So, it doesn't take a lot to move the market right now.”

In the first episode of Zurich North America’s “Market in Transition” podcast miniseries, Alex Wells, Head of U.S. Middle Market, and Al Orendorff, Chief Communications Officer, discuss the fragile balance between rate moderation in some lines of insurance and the reality of intensifying risks such as extreme weather. The discussion delves into key dynamics in Property, General Liability and Auto coverages, including social inflation, and unique concerns for Middle Market companies.

Guest:

Alex Wells
Head of Middle Market
Zurich North America

Alex Wells joined Zurich North America in 2020 as Head of Middle Market and serves as a member of Zurich North America's Executive Committee. His 30+ years in insurance have spanned a variety of executive management and underwriting roles with leading global insurers including as Chief Underwriting Officer of Commercial Insurance in North America and Division President of Specialty Casualty. He is based in Philadelphia.  

Host:

Al Orendorff
Chief Communications Officer
Zurich North America

Al Orendorff is Chief Communications Officer at Zurich North America, where he is a member of Chief Executive Officer Kristof Terryn’s senior leadership team. He previously held communications leadership positions at Allstate Insurance, Aon Corp., Genworth Financial and Choose Chicago. Orendorff began his career as a journalist working in television and radio news, including stints at NBC-TV in Peoria, Illinois, Black Entertainment Television, and WBEZ and WGN radio in Chicago. He is based in Chicago.

(PLEASE NOTE: This is an edited podcast transcript, capturing speakers with natural speech patterns that may include incomplete sentences and/or asides, grammatical errors, verbal shorthand and some statements that may be less clear in print.)

Episode transcript:

AL ORENDORFF: Stability and volatility are in a fight for the future within commercial insurance. In some parts of the market, we hear calls for rate moderation, however, those calls collide with intensifying risks. What are the pressure points? How can customers work with brokers and carriers to optimize their position?

Welcome to Future of Risk presented by Zurich North America. We explore the changing risk and resilience landscape and share insights on the challenges that face businesses to help you meet tomorrow prepared. We're kicking off our podcast miniseries, "Market in Transition," where we'll dive deep into the shifting dynamics of the insurance market.

Today, in our first episode, we'll look at examples of where we see some tension in the market and offer some ways for customers to enhance their position.

I'm Al Orendorff and today I'm speaking with Alex Wells, Head of U.S. Middle Market at Zurich North America. Alex, welcome to the podcast.

ALEX WELLS: Thanks, Al. Glad to be here.

Property dynamics

ORENDORFF: Alex, the hard market in commercial insurance has been a force for the past few years, especially in property where we saw something like 25 quarters of rising rates. Then suddenly, in the second quarter of this year, we saw a change. Property rates moderated a bit, some sources predicted broader stability and predictability hit, but then we saw in Q2 that rates increased again. So, do you see stability or volatility on the horizon?

WELLS: It's a good question. I think you're probably going to have both. I think there are going to be spaces of the market that stabilize, but it doesn't take much right now to have a bit of volatility in rates and in particular in the property market.

As you said, we've seen several years of rate increases and we can get into the reasons for those rate increases. I think that broadly the market is optimistic that the rates have gotten to the point where there could be some stability in them.

But much like the stock market day-to-day, people are looking for signs of what's going to happen into the future and markets respond accordingly. So, a hailstorm in Texas can have an immediate impact on some carriers thinking about where that's going to go and where the results are going to be. So, it doesn't take a lot to move the market right now. 

Evolving weather patterns

ORENDORFF: You mentioned rate increases and every time I talk to you, I always learn something about the business. So, I'm always curious about why?

You mentioned the rate increases and the fact that there's been a history of that in the past. What drove those rate increases that brought us to where we are today?

WELLS: So, as you well know, our insurance prices are always modeled based upon past history. A few years ago, we started having an increase in losses, particularly in the property space and that made a lot of the insurance carriers nervous about where their historical results were and where their future results were going to be relative to losses.

You compound that with the reinsurance marketplace that also is looking at everything that's happening and you start to wonder whether you're priced adequately for what might be the new weather patterns of the future. So probably about five years ago, we started to see an elevated level of storm activity; in particular… hurricanes. Which hurricanes then also can breed severe convective storms.

Different weather patterns drive wildfire risk as well. If we've got more of a drought, as we saw in the West for quite some time, you get to have a different pattern than the historical results would indicate you should. Then you start to say, well, that must be the “new norm,” and we need to get more premium for the exposure that we're accepting.

So, each year there was a gradual but very definitive move to higher rates in that property space. Every year you thought maybe it had stabilized, but every year we would have a historically high number of named storms, a historically high number of wildfires, a variety of things flooding, severe convective storms that all fed into what turned into historically large losses for the insurance industry, particularly in the United States. But this is a global phenomenon. Don't get this wrong; we just see it in the microcosm of the United States in a very specific way.

Unique Middle Market challenges

ORENDORFF: Your answer alluded to the fact that the picture obviously differs by line of business, but does it also differ by the size of the business?

As Head of Middle Markets, you work with companies that are defined by a certain revenue. What dynamics do you see with them that may differ from the large global corporate companies that Zurich Insures?

WELLS: You're absolutely right, Al. The basic exposures are very similar. Change in the weather pattern, a change in the tort laws in different states, they impact everybody doing business in those states or those geographies.

But the middle market in particular has some very unique challenges. Middle market accounts tend to be big enough to have very complex risks, but they tend not to be of size where they can spread those risks out across a big geography across a lot of customers.

And so, a middle market customer for instance, might have a single manufacturing plant that it depends upon for a lot of its income. If that manufacturing plant happens to be in a place that has severe weather, it could have a bigger impact to that type of account or that size of account than you would see on a large global account that might have spread of risk across a lot of different manufacturing facilities.

So, that concentration of risk… and frankly, there's almost an inability to spread that risk within its own operations… means that it needs different mechanisms in order to protect its balance sheet against a bad situation.

And I think, [that is] what insurance is ideally, there for. I mean, large global accounts often can take risk on themselves and find a different way to fund that risk and manage into it. And they, they use the insurance marketplace in a very different way than middle market accounts do. 

Mitigating risks

ORENDORFF: Yes, I want to talk about middle markets for a second and the characteristics around them. So, a couple questions there.

First question is, what are some of the key risks that are, if not unique to middle market, maybe priorities for middle market?

WELLS: They are concerned about the state of their marketplace, the protection of their assets, their property, protecting their employees and making sure that they have a safe place to work and that they're being taken care of.

In the case of workers' compensation, if they're injured, you go across all of these kinds of exposures that a middle market client would deal with. The underlying concern is whether they have the expertise, in-house, to understand where that risk is coming from and what the best way to mitigate that risk is or provide that risk into the insurance marketplace to be taken care of differently.

So, when we talk to our middle market customers, it's oftentimes about taking these macro issues that everybody's dealing with in the economy. Whether it's inflation or exposure to weather or social inflation that they're concerned about or having their employees driving vehicles all over and having distracted driving; a lot of things that you hear about on the news.

Everybody's concerned about taking these macro issues and being able to talk to them and their broker partner about the right solutions to those questions and issues; really being that partner in that conversation, being able to bring what we do and the expertise that we have into their business. The very best clients that we work with understand what they know and understand where they need professional help in understanding it and exploring their options.

That's the fun part of doing what we do as an insurance carrier. It's being that trusted advisor and someone that can work with the customers and the brokers to find the optimal solution, because their individual circumstances might be very different than the next client that we're working with, even though the macro issues that, that are impacting them are probably very similar.

Supporting growth 

ORENDORFF: I would think one of the other fun parts of what you do is to be up close and personal with businesses and industries that are growing rapidly. So, you are kind of really up close with and seeing that growth up close and how that's kind of manifesting itself in the market.

But I would also think that the growth within those industries that make up middle market, probably presents special risks. Is it true that one of the things that you do and your folks do is counsel those industries, those customers, on what they need to know as their industries are expanding?

WELLS: Absolutely. A lot of the growth in the economy comes in the middle market space. It's oftentimes insureds that have moved from being small businesses and have proven themselves to be an organization that can grow, that has a marketplace that is dynamic enough to need them. Our ability to support that is a big part of what insurance does.

It takes risks away from those kinds of clients and allows them to put their resources into what they do well, which is operating their business and moving forward without having to protect themselves as much against the risk. They've laid off that risk through an insurance product.

Zurich in particular, has a particular focus in certain industries that are very high growth. We like to pride ourselves on being an insurance carrier that is very forward looking into the economy and understand the places that need us the most and are growing the most.

We've built very deep expertise in the technology industry space, in life sciences, in professional and financial services, in private equity, all very, very dynamic parts of the economy that really doesn't want to have to worry about their insurance. We've been able to grow with those kinds of customers over time and bring that expertise that they need.

ORENDORFF: Just to satisfy my own curiosity — a sidebar, your Honor — what are some of those industries that would be in that column of kind of high growth?

WELLS: Sure. So, when we get into the financial institutions and professional services space… I was actually just talking to a friend of mine about the wealth transfer from the Baby Boomers to the Gen X, the Gen Z generations. There's an entire economy that's been put together to an entire industry to support that transition of wealth and an understanding of investment.

I mean, we've all been involved with this and your 401K and understanding where that goes. We specialize in helping all those asset managers and the advisors that are coming into place. It's a growth area.

In the technology space, if you can name a top 100 or top 500 tech business that's in the marketplace right now, Zurich is undoubtedly one of the carriers that has supported them in their growth trajectory. We are very active in the AI space, which is a fun buzzword right now that we're all getting to know a bit.

But there are a lot more tech companies that are the underpinnings of what all of the other tech companies are doing that you hear about all the time. They aren't quite as sexy. They aren't quite as well known, but it's a big space for us. Absolutely.

Auto fleet risks

ORENDORFF: Turning the page a bit. Looking at the casualty side for a moment, Auto [has] grabbed a lot of headlines. We're going to do a deeper dive into that line in an upcoming episode, but briefly, kind of what's going on here. If you could make one recommendation to your customers with auto fleet risk, what would it be?

WELLS: So, Auto's been a challenge for the industry since I've been in the industry — 30 years— I think it's such a ubiquitous exposure. Practically every client has an auto exposure that they have to think about.

I'd say the biggest thing you can do as an individual insured is to understand the basics of what it means to control your automobile exposure. You have to understand who you're hiring and what kind of drivers they are, even if you're hiring executives or salespeople.

Because loss experience and your individual experience matters a lot in your pricing for your automobile insurance. Where you do business also matters a lot. There are certain jurisdictions that historically have been very challenged from a lot of liability perspective. And you have to understand that no matter what you do, the vehicles that we drive are continuously improving, which makes them more complicated and harder to fix and more expensive to fix.

We saw this during COVID where we had a shortage of supplies. The supply chain was a real challenge for our insureds. And that made it very expensive… even on minor fender benders, to be able to handle the cost of that. I mean... <crosstalk>

ORENDORFF: So, they literally couldn't get parts. Is that the supply chain issue?

WELLS: Yes. As an example, we follow how long it takes from the date that we understand that there's been a vehicle accident and has some damage to the vehicle to when that vehicle can get it into the body shop to be fixed. Not when it's actually fixed, but just getting it in.

Pre-COVID, the average time to get it into a body shop was somewhere between five and six days. So, usually within a week you could get your car into a body shop and start the work. At the height of COVID, it was a month before the body shop could take you, so your car would sit in a lot somewhere, damaged, and nobody would be doing anything to it for a month. Now, we're somewhere around two and a half weeks and some of that is supply chain in terms of having all those parts ready and available.

Some of it has to do with availability of skilled staff. The actual repair folks. We saw during COVID there were a lot of folks in their 50s and 60s that decided that was a good time to retire. It wasn't worth going back afterwards. We had a lot of auto body shop mechanics who were in that position.

And frankly, we haven't fostered that industry very well relative to talent level. So, now there are just fewer people to fix our cars and more cars are requiring more work to be done with very highly specialized individuals.

So, it's still a challenge. For every day that that car sits unrepaired is another expense because many times you provide rental coverage and so whoever has been without their car has a rental car that the insurance company pays for.

If you take that across hundreds of thousands of accidents and every one of them takes a week or two longer to fix than it was expecting to, that's a lot of extra money. And that's just an example of the inflationary costs that we see in the auto space.

ORENDORFF: This is a great insight because I don't know how many people understand the role of the supply chain has and continues to play in the final denouement process of making sure that folks are made whole again.

The pandemic kind of bore that out and brought that to the fore. Let me ask a quick question about data, if I could, about customers with fleets. What's the role of data in kind of managing risks, and could that be done better? I mean, how are we counseling our customers and how to manage their data around risk management?

WELLS: This is something that is easier for insureds that are large and have large fleets and can hire external companies to come and do things for them, such as telematics, like large fleets tend to have. We certainly advocate for a telematics solution, which tracks where everybody drives in your fleet and how well they're driving.

You can even see it in personal lines now where we put a little chip into your car and it tells the insurance company whether you brake too hard or turn too fast or accelerate too hard. Those are all data points that can be used.

Some of it is insurance related. The better you can show that you're managing your fleet and the folks that drive your fleet, that certainly helps us be reassured and give you a lower price. But many insureds are taking more risk on themselves. They're accepting deductibles and so this is managing their own risk. This is understanding their fleet makeup and the individuals that are driving it.

Oftentimes — and I know this is even for myself — when you know that someone is watching and you know that they're measuring it… I've done this before. I have a version of this in my vehicle and I brake more softly. I don't accelerate quite so fast when the light turns green. It reorients you to how you're driving. Just that in and of itself, even if there's no improvement in accidents, it just makes it a safer fleet to have out.

Impact of social inflation 

ORENDORFF: Got it. Let's talk about the transitioning market if we could for just a minute. Does, if we are in a transitioning market and it sounds like we are… does that [or] should that prompt moderation?

WELLS: Well, I think that the facts matter relative to the transitioning market and there isn't, as you alluded to this earlier, there isn't a single insurance market. There are markets by line of business, there are markets by geography, there are different markets by size of account.

And all of those things go into the mix to determine where that market is going and you as an individual customer, how you fit into all of those different markets matters. And so, at various points, I think we're having more or less transition. It's either going in one direction or the other. In the property market — everybody likes to talk about the property market — I think the transition is to stability.

I think there is a general consensus that we have arrived at a place that could achieve some stability in the property market. But we are probably only one bad storm season away from that going the other direction. And for a variety of reasons, we'll be keeping an eye on that in the Liability Lines, [where] I think, we're actually in a transitioning market, [in] the opposite direction. I think we're going to go from a place where COVID and the pandemic sort of muddied the waters around what was going on in social inflation and inflationary pressures in general from a liability perspective.

I think we've come out of that fog of COVID. Now we're getting a little more clarity and we're realizing that jury awards continue to accelerate, in fact, probably at a faster rate than they were even before COVID.

Tort reform has been put on a back burner for a number of years and so there hasn't been as much activity and drive to change some of the problems that we have in our judicial system that have led to outsized social inflation.

I think that in many cases insurance companies are reevaluating where they stand against their pricing mechanisms for the liability lines of business. In many cases deciding that the rates need to go up in order to keep pace with these social inflation changes and trying to figure out what the mitigations are that we can put in place to minimize that. So how do we talk to our insureds and make sure that we're advocating for the right things for them to do, to minimize the rate of change that we're seeing in that space?

Frankly, unfortunately, I think that there's more going in a negative direction than a positive direction right now and is probably going to lead to higher rates generally. There's good stuff happening, though, and I would be remiss not to talk about tort reform as something that Zurich has been very involved with and something that we're advocating for. I think, frankly, we're doing a better job of it now as an industry than we used to in that it used to be a thing that insurance companies did.

We would go and lobby the legislators in various states and talk about tort reform. I think now, there's a much better coalition of partners and that includes all of our insureds who are impacted by this. This is because I'm in business to accept risk of someone else and I make a little bit of profit on it if I do it well.

The real cost of social inflation goes directly to the insureds and then the insureds share that with all of their customers. So, it's an inflationary cycle that really is mostly impacting the downstream consumer. Tort reform can moderate that if we do it smartly and you're seeing it in some places.

We got to a really bad place in some states that they finally had to kind of flip a switch and say, “we can't keep going this way.” I mean, Florida enacted some really good reforms in the last year or so. We see it in other pockets around the country.

So, we're hopeful that we've started to change the dialogue about that. But it is probably the biggest single concern that we have. If you think about timing on those type of costs, when we talked about property before, it's very quick and easy to see the cost of property inflation. Every building that got damaged has to be repaired and fixed, and you know exactly how much that is going to cost while you're doing it and happens, right?

The problem with liability insurance is, I'm giving you a liability policy today and the claims that are going to come from that might not be paid for 5, 10, 15 or 30 years. So, the uncertainty associated with how much those are going to cost the insurance companies and therefore have to come through to the insured is a lot more uncertain. And so, that I think is going to take a bit longer for us to see exactly where the claims inflation goes with liability.

ORENDORFF: Outstanding. You know, this is just a brief example of the kind of guidance and counsel that our customers receive from Zurich every day. Thanks for joining us today, Alex. Appreciate it.

WELLS: Appreciate it, thanks Al. Take care.

ORENDORFF: And thank you also to our listeners. We hope you've enjoyed our deep dive miniseries into “Market in Transition” and discovered some takeaways to help protect your business as you navigate the transitioning landscape. If you like the show, leave a comment or review wherever you get your favorite podcast. Or you can drop us a note at media@zurichna.com. This has been Future of Risk presented by Zurich North America.