Balancing Costs and Coverage

It's no secret that litigation has pushed up claims costs in the industry: in 2023, 27 verdicts in the United States awarded more than $100 million each to plaintiffs, according to Swiss Re.

The trend drove social inflation to 7% that year, the highest level in two decades.

The premises liability space has been particularly affected by this trend, says Kelly Adams, vice president of E&S Brokerage Excess Casualty at Nationwide. Additional data from Swiss Re shows general liability claims costs—which include premises liability—rose by 15% in 2022, well above the 4% average rate of economic inflation.

“We continue to see carrier appetites changing, especially in the premises liability space—with some carriers completely getting out of the habitational premises space. They’re moving to higher attachment points, lowering their capacity, increasing rates, and tightening up terms and conditions,” she explains. “Litigation costs, the severity of losses: The overall elevated costs of slip-and-fall, assault and battery, and sexual abuse claims and claims handling is what’s driving carriers to exit this space.

“We are also seeing more of this business moving from the admitted markets to surplus lines,” Adams says, “because we can get the rate and terms and conditions that we need to be able to write the risk profitably.”

To navigate the excess market, Adams believes carriers must know how to specialize, which she defines as having a clear and defined risk appetite, ensuring underwriting guidelines are up to date and reflect market dynamics, and possessing sufficient understanding of the risks to make informed decisions when it comes to attachment points and limits. “Every state is different, so you need to understand the exposures specific to each state and how best to address them.”

Understanding Your Clients’ Risks

The utilization of third-party data is essential in helping us make better underwriting decisions when writing premises liability, according to Adams. “Historically, on risks with large schedules of locations, we would inspect only a small handful of the locations, leaving us unclear on potential exposures,” she says. “Now with third-party data, we can obtain detailed information on every location—business information, crime scores, property conditions, social media, and lawsuits. Now we’re not underwriting with a percentage of knowledge, we’re able to underwrite knowing exactly what we have on our schedule.”

This data can also help an insurer refine their policy terms and conditions, while improving customer service, Adams thinks. For example, having up-to-date data streams on global trends, such as the COVID-19 pandemic, can help an insurer determine if a communicable disease exclusion is necessary, she says. And having detailed information on a specific property eliminates the back-and-forth with the customer for more data, allowing underwriters to focus on underwriting and saving time on both sides of the transaction.

Adams adds that third-party data also empowers another key piece of navigating the premises liability excess market and other markets more generally: the actuarial team. Actuarial can use third-party data to keep up with current loss trends and analyze market data that will help us better assess risk.

“We work closely with our actuarial partners to obtain profitability studies, rate monitoring and pricing adequacy of the book. They also loss rate our larger accounts to ensure we are getting the appropriate premium to match the loss potential at our attachment point,” Adams says.

“The biggest thing we do is identifying how we can put ourselves outside of the exposures in a way that we  can offer a product to our customer that we’re comfortable with, that continues to keep our organization profitable, but that also provides our customers with the service and coverage that they need,” she notes. “It’s a fine balance.”