Preparing for a hardening market
25 Jul 2017
As the corporate market looks to be hardening insurers and brokers need to be preparing for it now according to Tony Cope,
Managing Director at Risk Advisory Services.
Both insureds and brokers were incredibly unprepared for the extent of the price increases and the reductions in cover when commercial insurance market prices went up during the last hardening market. There was a sense of absolute chaos as brokers scrambled to hang onto their clients and those poor individuals responsible for the insurance budget had to explain why the price had suddenly increased dramatically.
Insurance market cycles are driven by supply and demand, the same as any other commodity. When there is plenty of insurance market capital, as there has been for many years, prices will only be slightly higher than the cost of claims (a soft market). In recent years the market has been so soft that some insurance policies have been priced well below the cost of claims.
However, all the ingredients are now present for a significant market shift. I believe some parts of the market will see substantial price increases in the near future and both insurance brokers, and those who spend a significant amount on insurance, are even less prepared than they were during the last sharply hardening market of 2002 and 2003.
Insurable risks that are difficult to transfer to insurers are already showing signs of hardening. A good example of this is Directors & Officers (D & O) insurance for ASX listed companies. D & O insurance for listed companies usually includes protection for claims made against a company as a result of the offer, sale or purchase of its securities. This is commonly referred to as “Side C cover”. In recent years there have been numerous D & O claims made under Side C, mostly associated with a breach of the continuous disclosure obligations of the Corporations Act.
This part of the insurance market is hardening and hardening quickly. I have seen several recent premium quotes for companies going through an IPO process, so just adding Side C to their existing D & O cover as a result of their ASX listing. Some of these quotes have been as much as 10 times the cost of the current policy. So a $40,000 insurance expense has become $400,000 simply by listing on the ASX. This represents a significant change to where the D & O market was less than 2 years ago and a very sharp hardening.
One of the most challenging issues insurance brokers face in a hardening market is explaining to their clients that some of the cost decreases achieved over the last 5 years were market driven, not clever broking. This is going to be very difficult for those brokers who have claimed the price reductions as all their good work.
The market has been so soft for so long that many buyers of commercial insurance policies have very little understanding of the market cycles. For insurance brokers to provide an insurance market education to their clients for the first time, in the context of some serious insurance premium bill shock, usually results in the client looking for a new broker.
That search for a new insurance broker in a hard market is quite different to a soft market. The soft market strategy of running an insurance broking tender can still work in a hard market but the insurance brokers are much less likely to invest huge amounts of their time in a prescriptive tender process. A symptom of the soft cycle is also insurance broker consolidation and that is exactly what has happened. The number of quality insurance brokers to choose from is at an all time low, in my opinion.
So I believe it is going to be a very challenging time for insureds with a complex or unattractive insurable risk profile but there is still some time to be better prepared. Preparation should include:
1) Allowing for appropriate cost increases in the budget process
2) Understanding the attitude of executives towards risk retention and their willingness to trade a deductible increase for a premium reduction
3) Investing in risk improvements that will provide a good return on investment
4) Reviewing policy limits to make sure they are appropriate
5) Making sure the current broking service contract is up to date
6) Explaining to executives how insurance market cycles work and where the current cycle is up to.
How much time there is to prepare before the market sharply hardens is very difficult to predict but all the signs suggest it is not far away.
-Tony Cope is the Managing Director of Risk Advisory Services (RAS), and has over 25 years of risk and insurance consulting experience.