Choose your broker well – don’t leave it to chance
You may have heard that the insurance industry is entering a “hard market” period, but what does that actually mean? Insurance is cyclical and is very much impacted by supply and demand, just as any industry is. The market fluctuates, and with each insurance ‘cycle’ typically lastsing anywhere between two andto 10 years – but various factors influence the cause and effect of changing conditions.
Unfortunately, as is common in our industry, the scaremongers make the most noise. If you have read any of the commentary, you’d be forgiven for thinking you should be braced for a business challenge like no other, — just what you need when you might be quite rightly focussed on Brexit impacts, Covid-19 impacts or just bog standard “worst of a generation” recession impacts!
At Gen2, we don’t scaremonger. We try to provide relevant, informative content and practical steps / solutions to help you navigate the world of risk. We also aren’t scared to say the things that don’t usually get said by our peers – you’ll get the truth from us, regardless of what that means for us because it’s not about us, it’s about YOU.
What is the difference between a hard and a soft market?
In a soft market, you are likely to see:
- Downward pressure on price, meaning lower premiums can be achieved
- Broad appetite and availability of cover from insurance companies
- Increased capacity, meaning insurance companies will –
- underwrite a high volume of policies
- be more accommodating of the type / standard of business they underwrite
- give higher cover limits on policies
- generally, underwrite higher levels of exposure
- be more flexible and competitive with the premium they expect for the risk
- the majority risks can be accommodated by a single carrier
- Lots of insurance companies competing for your business – including short term opportunistic insurers
- Brokers find life very easy as placing business is much more straight forward – even the least capable brokers can compete and provide solutions
In a hard market, you are likely to see:
- Upward pressure on price, meaning higher premiums can be expected
- Less appetite and availability of cover from insurance companies
- Reduced capacity, meaning insurance companies will –
- underwrite a lower volume of policies
- be more selective of the type / standard of business they underwrite
- give lower cover limits on policies
- generally, underwrite lower levels of exposure
- demand a greater amount of premium for the risks they do choose to write
- a larger number of risks will require multiple insurers to co-insure the exposure
- A much-reduced number of insurance companies competing for your business – longer term, stable and reliable insurers will trade through cycles
- Brokers will find getting solutions really challenging. A flight to quality will occur as only brokers with the best insurer relationships and the best technical brokers will provide the right solutions for clients. Gen2 is very well positioned for this.
Why are insurance premiums rising?
We mentioned above that in a hard market you typically see higher insurance premiums. Why? During a hard market, insurers place more stringent limits on the cover they can write, which automatically lowers their appetite. This in turn means they are writing less policies and deploying less capacity.
As the insurers’ capacity is lower, it can be more in difficult to find insurance solutions and that leads to an increase in demand for cover, all of which drives the premium prices up.
Why is the market hardening?
It’s NOT because of COVID-19!! Well, not solely, anyway. Do not accept from anyone that it’s because of the pandemic because it’s not – a hard market was inevitable after 15 years of a soft market with depressed pricing. If your broker can’t articulate why it’s hardening, then they are unlikely to be tuned into the tactics in navigating it.
The truth is there are a number of reasons why we’re heading towards a hardening market, and they combine to create the most unique perfect storm our industry has ever seen. We’ve listed the core issues below, so you can see for yourself how this pressure has arisen.
Increased Solvency Regulations – As we’re still part of the EU, the Solvency II law continues to apply. This regulatory regime was introduced in 2016 to harmonise EU insurance regulation and to provide policyholders across the EU with more protection, regardless of where they purchase their insurance, and to reduce the amount of insurer failures which were prevalent in the 1980’s and 90’s. However, it has resulted in major investment requirements as insurers need to bolster their solvency margins. In turn, some insurers have had to leave the market, while others have reduced their capacity considerably as it costs them so much in terms of new capital they have to deploy as solvency margin.
Ogden Discount Rate – The Ogden Discount Rate has changed; this is a government enforced calculation used to work out how much compensation insurers should award someone who has life-changing injuries to cover them for loss of earnings and any care costs. The rate changed from 2.5% to -0.75% in 2017 and then from -0.75% in 2017 to -0.25% in July 2019 in England and Wales, which has resulted in insurers paying out dramatically more on personal injury claims, so insurance prices need to rise as a result.
Property Rating – After 15 years of downward pressure on property rates in particular, this key class of business was already in the grip of poor profitability. There was already a key need for rates to start increasing in 2020 and, in addition, it was really hoped that large claims activity would not arise ……
UK Storms – Storms Ciara and Dennis waswere the worst possible start to 2020, as property insurers suffered a combined c£500m claims event just when they needed the weather gods to be kind.
COVID-19 – Undeniably has compounded issues that were already there. John Neal, CEO of Lloyd’s of London, told the Financial Times back in April that the pandemic is “no doubt the largest insurance challenge the industry has ever faced”. Which is true at a very macro level, but the reality on the ground is that c95% of UK businesses had no cover for COVID-19, so we understand why it’s hard for business owners in the UK to join the dots here.
But the facts are that in May, Lloyd’s forecast that 2020 insurance losses will cost the industry $203billion (£166billon) worldwide and has recently announced that Lloyd’s of London alone expects to pay out £5billion in Coronavirus-related claims. It is, therefore, likely that COVID-19 will extend the length of the hard market, as the insurance industry tries to recover from the impact of the crisis.
Global Impacts – It’s been another poor year for the global insurance industry, which does have an impact on you and your business insurance. Climate change is contributing to a worsening natural disaster landscape, which cost the industry $83bn in 2020 according to reinsurer SwissRe. A worse than expected hurricane season, plus further devasting wildfires across the world, were big contributors in 2020 – all have to be paid for and therefore impact on capacity and pricing across the industry.
Investment Markets – In a buoyant financial market, Insurers can utilise their enormous cashflow in investment markets for significant gains. In previous years (late 90’s, for example), investment returns were so lucrative that underwriting losses didn’t need correcting by premium rises as investment income would catapult the business into profit positions. There is no investment income to speak of now. Financial markets and interest rates are at low points, so underwriters have to write for profit – which is can only be done through careful underwriting decisions and pricing.
What does this mean for me and my businesses?
During a hard market cycle, it can be more difficult for businesses to find cover, and also to avoid substantial pricing increases. This cycle will be no different., Iin fact, it could will be possibly be the most challenging on record.
What it actually means is that your decision on who you choose to navigate you through these testing conditions has never been more crucial. Your “Trusted Partner”, your insurance broker, is a choice andthat deserves more of your attention than ever.
What role does my broker doplay for me and my business?
It’s the role of your insurance broker to guide you through the insurance landscape and achieve the best solutions for you.
To do this, crucially, they need to fully understand your business and be able to present you in a way that demands attention from underwriters and makes them want to write your business. The more interest they can create the better the solution they will be able to deliver.
They will be beholden to the variety, strength and quality of their relationships with insurance companies. Insurers have long memories – brokers who have deserted them in times when there is lots of choice will likely get short shrift when they come begging once things are tough. Likewise, when things are easy, some brokers under value the role of the insurer and treat them like suppliers, not partners – again, these things come home to roost when the market gets tough.
Brokers should also be more than just somebody that provides you with an insurance policy and an invoice once a year. Bringing more to the relationship, like risk management support, claims support and wider consultative support to assist your business.
Whether you already work with us, or whether you are new to us, we will dedicate ourselves to you at all times and we strive to give you the very best support and solutions. To this end, here is what we can practically do;
- We take the time to understand your risks completely
- Our risk presentations are often commented on that they are the most thorough, detailed presentations underwriters receive
- We also have invested in our thermographic drones and virtual reality cameras to present your risk to an underwriter in an entirely unique way – there is no other broker combining these technologies and the feedback from underwriters is outstanding and absolutely enhances our ability to get solutions from them
- We are engaging with clients between 6 to 12 weeks before renewal – time is our friend and will allow us to get optimum solutions, we will agree between us the right strategy for you and then execute
- We have widespread strategic relationships with our underwriting partners. These relationships have been cultivated over decades and we are known to be high quality, respectful partners who underwriters want to support
- Our risk management forward approach will help us improve your risk exposure and demonstrate to an underwriter that you are proactive in how you think about and manage your risk – we will help with things like H&S culture and processes, Business Resilience (continuity) planning, Cyber risk management as well as general processes, procedures and reporting in the business.
- Understanding your claims experience is also key, if you have had claims. We will ensure that all claims have been proactively managed and we know what the latest position is. If there are trends to spot we will work with you early to ensure these trends are proactively managed and understood. Claims will negatively influence an underwriter if they are not understood and presented informatively.
- We are an innovative, forward thinking broker who does the hard yards to get the very best for our clients – always. No short cuts, no easy options, just the right things to get the right outcomes.
What can you do to help yourself get the best solution?
We will help you with these, but things to consider would be; –
- Risk requirements – if you’ve had a survey, you will most likely have had some risk requirements to undertake. Ensure they have been done promptly and to a high standard.
- Following that, sometimes a surveyor would also make improvement recommendations that they don’t insist on – in these circumstances taking a proactive role to these recommendations would be seen favourably
- Understand from your broker where an underwriter might perceive issues, and work with them on providing a positive narrative
- Have a strong risk management story to tell – a tick box culture isn’t enough;, how are you embedding risk management controls and culture into your business?
- Avoid the temptation to cut cover – there could be downstream impacts of this, so work with your broker to understand the implications first
- Give yourselves time – restricted insurers doesn’t just mean pricing pressure, it means they will be inundated with opportunities, so time and proper engagement are essential. Last minute desperation will lead to desperate results – avoid at all costs.
- You need to invest more time and attention than before. A good broker will help, but you will get out what you put in – they can’t do everything without you. You need to be the most insurable you can be, it’s crucial to create competition to write your business if you want anything like premium stability.
Yes, it will be tough. No, you shouldn’t have budgeted for level premium spend to last year, or, worse, less than last year – in most circumstances that probably won’t be possible. Yes, you will need to spend more time on your insurance discussions this year.
You will have plenty of other external factors for you to be concerned about. Insurance shouldn’t necessarily be another – but without the support of a trusted partner, and, without some thought and attention, you run the risk of it being something that could really set you back.
Trust Gen2 Group to navigate you through. We won’t let you down.