The hot topic in insurance circles at the moment is the “hardening” market which is causing rising premiums and hardship for many business owners.
According to Marsh’s latest Global Insurance Market Index, all three major product lines – property, casualty, and financial and professional – are showing rate increases.
As of September 2019, there had been eight straight quarters of global insurance price increases reported in the brokerage market index.
So what is a hardening market?
The insurance industry capacity and price is cyclical and goes through both hard and soft markets depending on the economic prosperity of insurance companies and the wider economy.
The definition provided by the International Risk Management and Insurance Society (IRMI):
Soft market – This side of the market cycle is characterized by low rates, high limits, flexible contracts, and high availability of coverage.
Hard market – In the insurance industry, a hard market is the upswing in a market cycle, when premiums increase and capacity for most types of insurance decreases.
Why are we seeing a hard insurance market now?
The graphic below from Berkley Insurance Australia is a snapshot explaining the insurance cycle and the result.
In a hard market, the primary impact on customers is a rise in the price of insurance and sometimes insurers reduce or stop providing cover for certain types of risk. This can be caused by a number of factors:
- falling investment returns / low interest rates
- increases in frequency or severity of losses (increase in risk)
- rising cost of reinsurance
- regulatory intervention (Hayne Australian Royal Commission)
Insurance companies not only rely on the balance of income and expenses from premiums vs claims, but also on the income derived from investment portfolios. Insurers also “reinsure” their risk to limit their exposure to major losses. In much the same way that you buy insurance to mitigate the risks of your business, insurance companies also buy insurance to make sure they are able to meet their obligations to their clients when claims occur.
Which is why after a year of natural peril, an insurance company can still perceivably make a profit.
Actuarial firm Finity’s annual state-of-the-industry Optima report, published in October, found natural perils events, COVID-19, and plummeting investment returns saw industry return on equity (ROE) fall to 4%, down from 13% in the previous 12 months.
The report shows gross earned premium growth of 5%, reported loss ratio deterioration of 2%, a 1% increase in the expense ratio and a significant reduction in investment returns.
There is also a societal trend towards increased litigation, which has increased insurance costs and exposure for certain types of liability policies such as directors and officers insurance (Source: Insurance News).
Who will be most impacted by the current cycle and hard market conditions?
The Marsh Global Insurance Market Index found that “commercial insurance pricing increased 11% in the fourth quarter of 2019, while financial and professional lines rose nearly 18%” (Marsh Global Insurance Quarterly Report Q4 2019).
Directors in Australia are facing the most volatile and restrictive liability insurance market in history. Directors & Officers Liability policies are essential for any business with a board of governance.
Covers the assets of company directors and other individuals of a corporation against liability and legal cost of claims from various stakeholders including staff, shareholders and customers.
Willis Towers Watson in its July 2020 global construction rate and trend update noted rate increases and revalidation of previously quoted project terms, imposition of specific COVID-19 exclusions, difficult negotiations for policy extensions, and overall increased underwriting scrutiny.
“Previously available coverage enhancements such as guarantee maintenance and design exclusion are either no longer available or are only offered with increased rating and deductibles.
“Casualty markets are also reviewing their appetite for construction risks, with certain insurers reducing their primary capacity deployment for the sector and looking at increases in rating and deductibles. Of particular note is the increasing worker to worker deductibles being mandated by all insurers.”
Tourism Businesses including Caravan Parks, Hotels and Adventure Activities
The Australian Small Business and Family Enterprise Ombudsman called an inquiry earlier this year to investigate insurance practices and cover availability after receiving complaints about policy denials and soaring prices.
The enquiry has found that Caravan Parks, Hotels and Adventure Activity businesses are experiencing rises in insurance premiums of up to 150% and reductions in cover.
Small Business in North Queensland
The Australian Small Business and Family Ombudsman submission to government claims that “Some small business insurance premiums in the north and north-west Queensland have doubled and tripled following the Monsoon flood event, prompting many to self-insure due to insurance becoming unaffordable”.
“Some industries require evidence of insurance to maintain a licence to operate, rendering self-insurance unfeasible in many instances.”
Other impacts of a hardening market
A hardening market also makes it harder for new insurance companies to enter the market and results in reduced choice for consumers.
More mergers and acquisitions in the distribution channel to increase profitability can also reduce the choice of insurer for consumers and competition in the market.
Transfers and buyouts can mean that customers may be transferred to a new insurer and will be provided new terms on renewal.
What you need to do
- Shop around at renewal time. With a hardening market, it’s likely that your insurer will be raising the insurance premiums and you should get a comparison quote before renewing to ensure you are getting the best deal possible.
- Check your terms of renewal and read carefully any notices about any change in insurance security.
- Get professional help. Insurance can be complicated and time-consuming. A broker like Allsafe can help you navigate renewals and review your insurances.
The information in this article is to be regarded as general advice. Your personal objectives, needs and financial circumstances were not taken into account when preparing this website content. We recommend that you consider the suitability of this general advice, in respect of your objectives, financial situation and needs before acting on it. You should obtain and consider the relevant product disclosure statement and Financial Services Guide from Allsafe Insurance Brokers before making any decision to purchase a financial product.