HARD VS SOFT
The insurance market is cyclical and at the moment it is firmly in the ‘hard’ stage. This means it is increasingly difficult to secure cover at renewal time or when taking out new policies. Despite the challenges, there are ways to help get the cover your business needs.
Caught between a rock and a hard (insurance market) place
Catastrophe losses. Recessionary economic conditions. Increased litigation. High costs in the reinsurance market. Increasing social and political unrest. Poor investment returns. Increasing concerns about climate change. COVID-19… All these factors have contributed to the hardening of the insurance market in recent years. And what this means for business is greater challenges to renew or expand their insurance cover.
The insurance market is cyclical, it goes through peaks and troughs.
When conditions are favourable for insurers (good returns, strong profits, low losses, capital flowing into the market), they tend to be favourable for policyholders. Referred to as a ‘soft’ market, it is an ideal time to buy insurance – premiums are lower, there’s more competition among insurers, broader coverage is available, underwriting criteria is relaxed, cover is enhanced, more policies are issued, and higher limits are offered.
At the opposite end of the cycle is the ‘hard’ market. When insurers face challenges to their profitability, they move to de-risk their portfolio. The fact is, insurance companies are businesses and they need to be profitable to be sustainable. What this means for policyholders is increased premiums, less competition among insurers, narrowing of coverage, toughening risk criteria, insurers exiting certain lines/classes, extensions being dropped, fewer policies being written, conditions and warranties being more onerous, and renewals taking longer.
While some insurance lines have been hit particularly hard by the current conditions (Directors & Officers, professional indemnity, construction, cargo, property, umbrella liability, financial lines), securing new policies and renewals across all classes has become difficult. According to Lloyd’s broker Howden, pricing for commercial insurance globally rose 16% on average in 2020. Market sentiment has been transformed by fear of ‘(un)known unknowns’ in a highly uncertain and volatile environment. As a result, higher-risk businesses are finding it increasingly challenging to obtain suitable policy wordings and adequate capacity.
So, what can business owners do to have the best chance of securing the cover needed?
Work with your broker
Tapping the expertise of a broker that understands the business, the industry and its insurance market is paramount. Your broker will help you to identify your risk appetite, which in turn will help ascertain what will be an acceptable renewal program in terms of retentions, co-insurance or exclusionary language. Your broker should also be well-resourced to handle the additional time renewals and going to market for new cover will take – and, it goes without saying, they should be experienced operating in a hard market and have excellent relationships with the insurers’ decision-makers. Ideally, your broker should have a strong network both locally and internationally, as a hard market means brokers need to be resourceful and look to leverage their international capabilities to place cover.
Have a clear strategy for what you want to achieve and start the process early. A three to four-month lead time for renewals is advisable and any request for new cover should be made as soon as possible. You should also have contingency plans in place well ahead of renewals falling due in case they are needed to avoid the risk of being uninsured. The sooner you engage your broker, the more they will be able to do in terms of program design, policy coverage, structure and choice of markets.
Choose the right insurer
It is important to work with an insurer or underwriter that understands your business’ risk profile and can help you achieve optimal terms. Your broker can guide you on which insurers are the best partners for your business. During a hard market, insurers are likely to impose restrictive terms and conditions on some insurance policy placements and place more scrutiny on policy responsiveness in relation to claims settlements. Your broker will be able to provide advice and guidance around any restrictions of cover, including offering insights into how particular insurers manage and settle claims. Securing cover is one thing, being able to successfully make a claim is another. Price should never be the only factor a business considers, the insurers’ reputation, ethics and claims treatment are just as, if not more, important.
Insurance is all about risk. You will need to demonstrate that your business is not too great a risk for the insurer to take on. Be prepared to answer in-depth questions about the business (and yourself) and provide the documentation to back up your position such as recent and accurate valuations/appraisals. Insurers will be looking at your risk management, so work with your broker to effectively present underwriting information. Consider involving the C-suite (CEO and CFO in particular) in risk profiling presentations to insurers.
In order to ensure they are looking at all available options to secure cover for your business, your broker will ask about new structures or program designs. There may be options to increase excesses, restructure a limit, consider a new market or structure (such as captives). The more flexible you are, the more likely they will be successful in obtaining cover on the best terms possible.
The extent that a new policy or renewal will be affected by the hard market will depend on your business’ risk profile, claims record, strategies for risk management, and the capabilities of your insurance broker. Working collaboratively with your broker, being proactive and involved in the process, and being prepared to answer more in-depth queries from insurers will help ensure your business is well placed to secure the cover you need. Your EBM Account Manager is an invaluable resource, get in touch.
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