24 Sep, 2020
You may find your business’s insurance facing rate increases as the insurance market becomes more challenging. Why? Insurers are looking to balance their books with either reduced capacity, pulling out of some risk areas, and/or revisiting terms and conditions. This is known as a ‘hard insurance market’, but what does that mean?
Duncan Sutcliffe, director, Sutcliffe & Co Insurance Brokers, explains, “Just like any industry, the insurance market goes through peaks and troughs. A ‘hard market’ is the upswing in a market cycle, when premiums increase and capacity for most types of insurance decreases.”
A hard market can be caused by several factors:
• Solvency Margins: Insurers are being forced to set aside more capital to satisfy Regulatory requirements restricting their liquidity.
• Increased reinsurance costs: Insurance companies buy insurance themselves; this is called reinsurance. The price of reinsurance is rising, and this cost is being passed down the chain. Reinsurance companies are also restricting what they let insurance companies insure
• Less competition: The number of insurers is reducing therefore the competition for polices is reducing.
• Poor Investment Returns: Most insurance companies invest the premiums they receive, in normal times much of their income comes from these investments. The current low interest rates and decline in investment returns means this income source has been lost.
• Increase in frequency and severity of claims: Catastrophic losses are increasingly common due to climate change. Compensation payments for injury claims are increasing sharply. Property, equipment and vehicles are becoming more expensive to repair and replace. All of these are factors that have led to insurers having to pay more in claims.
With insurers tightening their belts, this brings a more restrictive criteria for what they’re looking for and what they are willing to cover – with some insurers exiting certain areas entirely. Insurers will become choosy about what they insure, will insist upon strict conditions and will reduce the breadth of cover they offer whilst simultaneously increasing premiums.
You can no longer assume that your renewal will be secured easily, that cover will be comprehensive and that insurers are keen for your business.
• First and foremost, a good insurance broker will have anticipated the hard market and will be ready for the changes. They will work with you and underwriters to review the options and alternatives.
• A hard market makes underwriters cautious about who and what they will insure. So as a policyholder, you need to demonstrate a high standard of risk management that will convince an underwriter you are unlikely to make a claim and certainly not a big one.
• Your Broker will need to improve the quality of their presentations to underwriters; differentiating your Risk Profile. To do this you will need to devote plenty of time to work with your broker in order to give them the best opportunity of putting together a thorough case on your behalf.
• Brokers that have prioritised technical expertise and maintained strong ties with a range of insurers during softer market conditions are now better placed than those brokers that dumbed down and commoditised insurance.
Duncan concluded: “Our advice has always been to engage early for renewal, and this is even more important in a hard market: Insurers need more time to review all information and may have to refer some risks up their management chain. So be prepared to be proactive and involved throughout the renewal process, and ready to answer more in-depth questions from your broker.”