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Hardening rates and the pandemic

09 November 2020 Gareth Stokes

Hardening rates and mistrust following non-life insurers’ handling of pandemic-related business interruption claims could make for tough negotiations when commercial non-life insurance brokers sit opposite their small and medium enterprise (SME) clients to renew policies. Recent news flows suggest that the next round of renewals could contain sharp increases across a range of insured perils. Global reinsurer Munich Re recently reported that the combination of a hardening insurance market, ‘lower for longer’ interest rates and larger than forecast pandemic and non-pandemic losses would make insurance covers more expensive, particularly for long term risks in third-party liability and other lines.

Profitable; but less than last year

Munich Re said that its Q3 2020 results, which contained €800 million in COVID-19-related reinsurance losses, was also impacted by above average losses from both natural and man-made disasters. “As a result of high losses from natural disasters, particularly several severe hurricanes and wildfires in the United States, and man-made losses, the largest of which was the explosion in Beirut’s port, we registered an above-average claims burden from non-COVID-19 major losses,” wrote the reinsurer, in a media release dated 20 October 2020. The group reported a €200 million profit for the quarter compared to a €865 million profit in the third quarter of the previous year. 

Reinsurer results matter to stakeholders in the insurance industry because they reflect the success or failure of historic risk pricing. A reinsurer assesses its future risk premiums based on recent profitability and the outlook for its business, including potential claims liabilities, over the longer term. As reinsurance profit margins come under pressure, and estimates for long tail claims increase, they are forced to tighten the terms and conditions they offer to insurers, who will, in turn, tap your policyholders for higher premiums. Munich Re observed that they “will consistently ensure that prices, terms and conditions are commensurate with the risks in the next renewal round”. 

Spike in premiums expected

The impact on your commercial clients could be significant. We recently spoke to a professional indemnity policyholder who was quoted a 70% premium increase to stay on cover for 2021, in part due to higher mandatory cover levels, but mostly because of a hardening market. Just imagine the premium adjustment that insurers will require from medium-sized businesses to achieve a like-for-like risk transfer, a policy covering similar perils and sums insured, in the coming year. A hard market, which has been threatened for some time, is the inevitable consequence of a multi-year misalignment of risk premiums for the risk on cover. 

The last soft market was exacerbated by lower ‘major loss’ expenditures in the years leading up to 2020 and an oversupply of yield-seeking capital. But insurers and reinsurers have other concerns. In a 19 October statement, Munich Re warned that low interest rates are placing severe strain on reinsurer profitability. The impact of falling interest rates must always be viewed in context. An individual homeowner with a large outstanding bond loves interest rate cuts whereas a retiree with a big slice of his or her annuity tied up in fixed income, hates them. Insurers and reinsurers generally despise low interest rate environments because they are not able to generate sufficient returns from their capital, which must be invested conservatively. 

Pandemic was a major curve ball. “Recent experiences following the lockdown of public life and the business world in many countries have been a wake-up call regarding the staggering potential for systemic risks to result in losses that subsequently trigger many different repercussions,” wrote Munich Re. The reinsurer observed that it was, by definition “impossible to insure against risks that led to losses everywhere at the same time” and that pandemic plus lockdown violated the fundamental criterion of insurability. And the warning, which non-life brokers and insurers must heed: “The [prevailing] circumstances mean that sustained profits, in long-tail business and elsewhere, will only be possible if prices match the assumed risks”. 

Expanding into the cyber liability realm

As your existing policyholders grapple with affordability, you may be forced to find additional sources of revenue. One option is to expand your solution set to include cyber liability insurance. This is an area that  many local insurers and underwriting managers are pushing of late, and their reinsurance partners are no different. “The market for cyber risks remains one of the most important strategic growth areas,” wrote Munich Re. They estimate that the global cyber insurance market could surpass current growth forecasts, from slightly above US$7 billion this year to around US$20 billion by 2025. 

The digital evolution taking place under the Fourth Industrial Revolution is introducing liabilities and risks that could harm the reputation of SMEs and impact their profits. “Small businesses often overlook these risks under the assumption that they do not need cyber liability insurance; however this has been proven to be untrue when considering the prevalence of cyber risk related incidents,” said Malesela Maupa, Head of Insurer Relationships at FNB Insurance Brokers, in a recent media release. He noted that cyber liability insurance compensated businesses for named losses incurred due to various cyber perils. “From an insurance perspective, it is treated as a sub-category of general insurance that covers businesses against the liabilities that may arise following a data breach,” he said, before offering four points for SMEs to consider.

Your cyber liability insurance does not replace cyber security. It is a non-life insurance solution that will protect policyholders against liabilities that may arise if they are exposed to cyberattacks.

  1. The monthly premium on a cyber liability policy varies depending on your client’s business sector; type of recovery services offered under the policy; their data risks and exposures including data security and data control policies; and their annual gross revenue, among other factors.
  2. A cyber liability insurance policy includes both first party and third party cover. The former includes direct losses to a business or individual and the latter extends to claims and legal action taken by customers or business partners and suppliers.
  3. Cyber liability insurance would typically cover legal fees for the cost of defending lawsuits following a data breach; the costs related to recovering compromised data; the cost of repairing systems; and the cost of restoring personal identities of affected clients. It is also possible to include loss of business income following an insured cyber event. 

In-person, trusted advice for the win

Commercial non-life insurance brokers will have to work hard to retain business this year. Make sure you leverage the advantage of in-person, trusted advice in structuring sensible risk mitigation and risk transfer solutions. It should be possible to cushion the impact of a hardening market by realigning an overall risk portfolio to the prevailing market trends. 

Writer’s thoughts:
Those tasked with renewing non-life insurance policies during and immediately following pandemic will have to scrutinise policy wordings carefully. Your job will be to ensure that any adjustments to your client’s insurance premiums are fair, in the context of past versus ongoing cover. Are you concerned about the premium increases that insurers are likely to push on to your clients at next renewal? And do you expect an erosion of cover to be a hidden component of 2021 premium negotiations? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]a.

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