Article provided by Sophie Kingwell-Meader, Account Executive at Estate Insurance Group, for Beacon Gainer private wealth advisory services group.
The insurance industry, like many others, is filled with acronyms, abbreviations and often incomprehensible jargon. In insurance, these are usually used by insurers and brokers alike to describe changes in the market and provide an explanation for why you are either paying less or more for your insurance than you did last year. The most common insurance market descriptor is whether the market is “hard” or “soft”. But what does that actually mean, where are we now and what are the effects of the current market environment for clients?
In its simplest form, the London insurance market is made up of insurers, brokers and insureds, whether these be private, commercial or consumer. Brokers are there to act on behalf of the clients to navigate the different insurers, policies and terms to ensure their clients have the cover that they need in place and insurers are there to provide coverage for the insureds, while making a profit. The profitability of insurance companies is vital to the long-term success of the market as major changes in capacity can affect the market as a whole. To maintain profitability and meet their regulatory requirements, insurers change their business appetites year on year along with their pricing models which creates a repeating cycle of market conditions.
Until 2017, the London insurance market had been operating under “soft” market conditions for over 10 years causing many in the industry to assume that this was the new norm and that the traditional market cycle had been broken. These “soft” conditions were mainly due to an abundance of capacity in the market and few catastrophic losses or events.
The emergence of InsurTech, yet another industry buzzword, also helped to more efficiently aggregate underwriting data to better target new areas of business. Online platforms for placing, binding and certifying simper policies also enabled huge cost savings for insurers which further contributed to the “soft” market pricing effect, characterised by static or decreasing rates year on year as insurers competed to win and retain business in a saturated environment.
In 2017 and 2018, the London insurance market was heavily affected by catastrophic events, resulting in aggregated market losses of £2bn and £1bn respectively. These losses and the need to improve performance heavily impacted the profitability of insurers and ended the extended “soft” market environment. The loss-heavy trends of 2017 and 2018 also continued into 2019 and, in January 2020, rates and prices increased again for the 8th consecutive quarter. At the time of writing, the insurance market is now firmly within the “hard” market cycle. Insurers across all non-life classes of business are significantly increasing their prices to continue their rate correction trend in response to previous losses.
Tightening of terms and a reduction in capacity is also an outcome of this hardening market as insurers re-define their appetites, restricting renewing business and often pulling out of non-profitable areas of business entirely. Some of the most currently affected lines of business are Property and Corporate Liability including Directors and Officers and Professional Indemnity – these lines are likely to continue to be affected by increases well into 2021 before rates plateau and the market cycle resets.
Although hardening markets present challenges to clients and brokers alike due to rate increases and lack of capacity, they also offer opportunities for a potentially overdue re-evaluation of insurances. Price increases create demand for a review of policies in place and insurance needs on a client by client basis. It also encourages clients to take more ownership of their risk and re-evaluate their risk management strategies to the benefit of all parties – a better risk for the insurer and price incentives for the insured.
In a “hard” market, sensible and data-driven underwriting is key, so it is important to maintain a flow of reliable and up to date information with brokers especially coming up to renewal. Brokers can help you navigate the challenges and opportunities, furthering their understanding of their clients and their risks to best present them to insurers, as well as maintaining a dialogue throughout the year and preparing their clients about what to expect at renewal.
If the last 13 years have shown anything, it is that, despite elongated environments whether they be “soft” or “hard”, insurance in London still operates as a cyclical market. When faced with higher premiums than last year, it is prudent to think long term – what goes up must also come down.