Hardening market… a challenging environment
The hardening insurance market creates both threats and opportunities for brokers. FAnews recently spoke to a few industry representatives about the hardening market cycle, and its effect on the relationship between insurers and brokers.
The market cycles
“Following a buyer-friendly cycle of some 20 years, the reinsurance market continues to harden into 2021, which ultimately has a knock-on effect on the overall market. Rates have been increasing for the past three years and are expected to continue increasing in 2021,” said Alicia Goosen, Chief Broking Officer at Aon South Africa.
“The market cycles are determined by insurer profitability and availability of capacity. As profitability reduces, markets attempt to increase pricing and either reduce capacity or withdraw from certain classes of business, which means there is less competition and rate increases are achieved. Rates have been rising in the market, and we are starting to see some new capacity coming into certain lines of business internationally, but it will take some time for this to influence South African markets. The COVID-19 losses currently being settled will also have an impact on the market in terms of profitability and pressure on rates,” said Jane March, MD Placement for Marsh South Africa.
“A combination of reducing premiums over a prolonged period, together with increasing losses, both man-made and natural, have led to insurers revenues and margins reducing to unacceptable levels for shareholders and the investment community. The global pandemic and the resulting historic low interest rates and stock market fluctuation has only served to further exacerbate the situation,” added Goosen.
“Many insurers are taking measures to improve their financial results which will include increasing premiums and deductibles, exiting certain lines of business or portfolios, reducing cover and limits they provide, and above all, asking for more risk information than required in recent times,” continued Goosen.
“As more capacity comes into the market, competition increases and this starts to drive pricing downwards as companies compete for business,” added March.
Broker challenges and opportunities
“We believe that there will be renewed focus on intermediaries on the advice given to clients. Many clients have been disillusioned with the industry following the hard market and the insurers response to the COVID-19 business interruption claims,” said Goosen.
“The challenge is to understand your clients business and how it could be impacted by catastrophe losses, understand how wordings have evolved following hard market conditions, pandemic exclusions and issues like silent cyber and in managing client expectations, given the volatility of the market,” added Goosen.
In terms of the challenges March said, “there has been a sustained soft market for more than 15 years, this is the first major correction many clients have experienced. Another challenge is trying to explain price increases to clients whose risk has not changed, or in a lot of instances has improved, especially in a constrained economic environment. There is also pressure on clients to accelerate capex spend to improve risk protection, again in a constrained economic environment.”
In terms of the opportunities for brokers, March said, “Conversations have shifted from transactional insurance to overall risk discussion, therefore assisting clients to understand market requirements and how to meet these presents an opportunity. Insurance discussions have also been elevated within companies.”
“There are opportunities such as discussing uninsured risk with your client base. In our view many SMME markets are not necessarily buying products to protect their directors and officers liability exposures, for eample. Recent large claims in this space have highlighted the need to investigate additional covers. There is also the opportunity for full business interruption reviews and loss calculations on simulated claims,” said Goosen.
A seemingly inevitable cycle
“As profits and capacity change, the market will continue to adjust, however, the length of the cycles may differ. The current challenging market is the first we have seen for more than 15 years. From a client perspective, managing physical risk and building some form of self-retention are key, with risk being transferred to the external market for major loss events only. This will enable clients to smooth the impact of the market cycles on their business,” added March.
Goosen put together a few recommendations to clients and brokers to successfully renew insurance programmes:
- Differentiate your risk profile – tell your story;
- Leverage strategic market relationships;
- Geographical diversity – relocate insurance capacity from volatile regions;
- Promote active loss control across portfolio of assets;
- Strategic remarketing and introduction of new global capacity; and
- Consider timing of renewal within broader marketplace headwinds.
2021 and beyond
Whilst the hard market gathered pace towards the end of 2020, Goosen believes these conditions are set to stay for the remainder of 2021.
March also agrees. “The insurance market moved quickly to working online and has settled into a new normal. Business has continued, and while there is less face-to-face negotiation, we are still able to engage in different ways, including accessing and presenting to international markets. We do not see the South African market shifting significantly in 2021, and the paying of COVID-19 losses will have a further impact.”
“The courts have now given clarity on the handling of pandemic related losses; insurers have already settled a large number of claims and continue to work through the balance. The overall losses paid by the market will have a further impact on the current challenging market. Also, key is the coverage being offered for the premium paid, not all policies provide the same coverage, while infectious diseases were covered under some policies, no-one foresaw the extent of the loss we have just experienced,” concluded March.
“There has to be absolute contract certainty and brokers need to equip themselves to understand pandemic exclusions and the full implication thereof,” concluded Goosen.
Writer’s Thoughts
The hardening insurance market creates opportunities for brokers. The challenge, like Goosen mentioned, is to understand your client’s business and how it could be impacted by catastrophe losses, understand how wordings have evolved following hard market conditions, pandemic exclusions and issues like silent cyber and in managing client expectations, given the volatility of the market. Do you agree? If you have any questions please comment below, interact with us on twitter at @fanews_online or email me - [email protected]
