At any point during the year Insurance markets will either be witnessing ‘hard’ or ‘soft’ market conditions.
So what is the difference?
In a ‘soft’ market Insurance Company strategy is to expand their market share. They offer cheap rates, attractive policy wordings and reduced excesses all in the search of growth. In the extreme cases there will be a bidding war for business and Brokers have a number of Insurers desperate for new business which gives Brokers a good choice of who to place risks with. However, inevitably during a soft market underwriting standards will drop or at the very least become relaxed which means that over time loss ratios increase because essentially there is insufficient premium in the pot to meet spiralling losses. At this point, if other economic factors come into the fore then the cycle has no option but to move towards a hard market position
In a ‘hard’ market’ premiums begin to increase and the capacity for most types of insurance decreases. Insurers’ desire for new business reduces, they turn inward and take the time to re-evaluate their books of business and seek to use market conditions to re-underwrite the terms they have applied through the soft market period. There is a lack of interest in new business, capacity for risks reduce and therefore the market drives rates upward. This doesn’t just apply to property and business interruption insurance, but also to Liability covers and limits of indemnity – at this time these will reduce and the ability to obtain excess layers will reduce too. So, during a hard market underwriting returns; policy wordings will tighten, excesses will increase and also claims management will become stricter in the application of strict policy wordings. During a soft market there may be a more lenient approach to claims payments and application of policy endorsements.
Over the last 16 years UK businesses have benefited from a ‘’soft market’’, in fact the longest period of soft market conditions on record. During this time we have seen low rates, high limits of indemnity, excess layer capacity, flexible policy wordings and high availability of policy cover with competition high. At the end of 2020 we began to see a change in these conditions; Insurers had talked about the hard market returning, however, as a broker we were still able to obtain competitive premiums and were only beginning to see more stringent underwriting emerging. From January 2021 we are now seeing a move towards tougher conditions and for the first time we are beginning to see the reality of the hard market return. We are now in the midst of very challenging trading conditions which haven’t been witnessed by Insurance underwriters or Insurance Brokers in the last 15 years. Here are the 7 major contributors to why we are seeing the move to increased rates:-
From a property perspective in hard markets the value of block policies comes to the fore, particularly for building and rents exposures, as group policy premiums result in greater purchasing power than individual placements. Individual property premiums can also be price-checked against the open market to provide clients with the satisfaction of a competitive price alongside a wide policy wording.
Moreover, an uncertain UK economy means that there may be more periods of unoccupancy in the investment; Insurers are becoming stricter in their underwriting of unoccupied risks and application of policy conditions in relation to unoccupancy – but the scale of block policies means that they can be negotiated to be unoccupancy condition free.
Hard market conditions may be here to stay during 2021 and difficult trading times too. In periods of uncertainty the power of partnership is more real than ever; and is sure to deliver all of us the best results.
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About the author
Jo Andrews, Co-Director, Hettle Andrews
Jo Andrews is co-director at Hettle Andrews, a specialist insurance broking and risk management firm based in Birmingham. Jo began her career as an insurance underwriter with Royal Sun Alliance and then ACE Europe before moving into Broking 18 years ago. Jo is a Chartered Insurance Broker in her own right and a specialist in Real Estate, and brings this expertise to the placement of large property portfolios.
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