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The Insurance Market 2021 – ‘Hard’ market conditions bite…

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:-

  • Solvency II – launched in 2016 this placed a requirement on UK Insurers to more than double their spare capital requirements. This has led to a number of Insurers leaving the market or at the very least reduced their capacity and appetite to write business.
  • Ogden Discount rate – Again in 2016 the Minister of Justice changed the Ogden Table rate. The Ogden discount rate is a calculation used to determine how much money insurance companies should pay as compensation to people who have suffered life-changing injuries so that it will cover all their predicted future losses. What this has meant is that insurers had to pay out far more on larger personal injury claims and reserves on serious injury claims have doubled in some cases. In catastrophic cases even worse.
  • Loss Ratio increases – Insurers have been reporting escalating loss ratios and reduced Combined Operating Profit ratios for many years. Property rates in the UK were already far too low as we entered 2020 as soft market conditions had basically driven these to an uneconomic level.
  • Floods and Storms - With property accounts already losing money, the last thing UK insurers needed were floods caused by storms Dennis and Ciara, estimated to cost well over £400 million. Climate change is causing insurers to struggle with correctly predicting floods. Flood mapping tools are now an integral part of the Underwriter's tool kit. Insurers need to build reserves to  - pardon the pun – "ride the storm’’ for whenever the next series of serious storms arrive.
  • Reinsurance - Reinsurance drives the UK pricing and is key to how the rating models are built and the rates applied. The majority of reinsurance treaties are purchased at the beginning of the year and we heard from Insurers at the end of 2020 that these treaties were becoming difficult to negotiate. The Reinsurer's increased costs were going to have to be passed down the line to the UK businesses as Insurers were left with no ability to absorb these increases. Simply, if the Insurer reduces their own capacity, then they don’t need to purchase expensive reinsurance. The issue here is that risks become more difficult to place.
  • Interest rates - When interest rates are high, insurers can get away with a certain amount of underwriting losses as they generate substantial investment income. Unfortunately, this is no longer the case, as the current interest rates are the lowest they have been in recent years, Insurers therefore have no option but to increase rates to help balance their books.
  • COVID 19 – and finally, the Pandemic hit the World in 2019 and UK in 2020. It is estimated that the combination of Covid-19 insurance claims, reduction in business and investment losses will cost the worldwide industry in excess of £200 billion, making it the most expensive insurance event ever. Clearly the current FCA test cases will have a significant bearing on how much the UK insurance industry will have to pay out in Business Interruption losses relating to Covid-19; January 2021 has seen the Supreme Court pass judgement and this is likely to run on for many months yet before agreements and payments are potentially concluded. In the meantime, UK Insurers have been reserving for the potential payments and this is driving their desire to harden rates in anticipation for a rocky year ahead.

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.

Read more articles like this via our insights page.


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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