Just like any industry, the insurance market goes through peaks and troughs.
Hard Insurance Market

A buoyant market, also known as a ‘soft’ market, is an ideal buyer’s market – plenty of capacity, insurer choice, and broader coverage. In this cycle, insurers predominately compete on price as well as the breadth of coverage they can offer their clients. The enhanced level of market competition does breed innovation amongst carriers, but a prolonged soft market ultimately places the power of negotiation back with the purchaser, negatively impacting insurer margins and profitability.

At this point, surges in claims resulting from a less-stringent underwriting criteria will see insurers reduce capacity or even exit certain insurance classes – an emblematic sign that a hard market cycle has returned. As the market ‘firms up’, carriers will revisit their strategies by increasing rate, narrowing coverage and toughening risk criteria in a bid to regain underwriting profits. As profitability returns over several years, soft market conditions will then begin to return.

Principally driven by the London insurance market but heavily influenced by global market conditions – the UK insurance landscape is currently undergoing a hard market cycle across the majority of insurance classes. The impact of a hardening market has a profound effect on both large and small businesses in the UK, especially when preparing for renewal.

As insurers tightening up their criteria for coverage, and become more selective on risks – with some carriers exiting certain classes entirely – available capacity levels become squeezed, meaning some businesses may not receive the levels of coverage they had secured previously. Premium increases, extensions being dropped, conditions and warranties becoming more onerous, and renewals taking longer are all conditions synonymous to a hard market cycle, making it paramount for policyholders to know how to navigate these conditions.

In this article, we look at the current state of the market across the main insurance classes, and offer our tips on how you can best prepare for your renewal.

Spotlight on individual markets

A number of classes of insurance experienced a tumultuous time during 2019, with many symptoms of a hard market likely to continue well into Q1.

Directors’ and Officers’ Insurance (D&O)

The D&O market, encompassing Management Liability risks, Crime, and Initial Public Offering of Securities (IPO) insurance amongst others, will continue to see difficult trading conditions into the first half of 2020. A further deterioration in historical losses has been seen across the board but particularly in industries such as pharmaceutical and life science, natural resources, and technology. This deterioration combined with heightened notifications on new claims, has led to a further retraction of availability of capacity across the D&O class. This means that the renewal process for D&O risks is lengthier than usual and underwriters are being incredibly selective – making the renewal process fraught for those that start the process too late, or for businesses with a notable loss history.

Cargo and Stock Throughput

Towards the end of 2019, we saw the cargo market undergo a widespread hardening, with insurers realigning their focus to review each account and rate each risk as though they were presented as ‘new’ and not as a renewal.

For loyal clients of the market, especially those with a good loss record, this can be incredibly frustrating. Collation of information, well ahead of renewal, can really help; maximum stock values per location (to help establish policy limit), average values per location (used to rate the policy), Construction, Occupancy, Protection and Exposure (COPE) information, including addresses (to help insurers evaluate the risks) and any survey reports for large locations. Transit risks require information on incoming versus outgoing shipments, international versus domestic shipments, maximum values per shipment, average shipment values, and last but not least, detailed loss records and details of procedures implemented to mitigate future losses.

Construction and Professional Indemnity for Contractors

2019 can be summarised as a year of upward trends and pressures. The pattern of insurers exiting and/or reducing their capacity has continued across the Construction market, as losses continue to crystallise from risks underwritten through the last decade of a soft market. However we are starting to see the green shoots of new entrants coming into the depleted marketplace, allowing for some conservative positivism as we enter 2020.

In respect of the Professional Indemnity (PI) market, capacity has more or less halved in the last 18 months. It is difficult to forecast how long hard market conditions will continue; PI being by nature a long tail class of business, we expect insurers to remain cautious for the next twelve months. This, coupled with a changing regulatory landscape in the construction sector, and a recent a fire at a student accommodation block with an HPL façade system, could yet lead to more cladding and fire safety claims in the PI market. Construction professionals are the hardest hit by this market correction. Architects, contractors, engineers and, to a slightly lesser extent, surveyors are seeing big upward swings in premium; arguably construction professionals industries were more fundamentally under-priced from a rate perspective than other professions, so are experiencing the harshest correction.

Financial Institutions (FI)

Throughout 2019 and particularly in the final quarter, we observed a tightening of conditions in the financial institutions insurance market. As we predicted, this was not a blanket hard market as there was considerable variance in renewal terms across the full range of discounted, flat and increased premiums.

The predominate trend, however, was that of modest premium increases typically between five and ten percent. Unlike our ‘sister’ classes of commercial Directors’ and Officers’ (D&O) and Professional Indemnity (PI), we did not observe a significant reduction in capacity, although a small number of Lloyd’s syndicates entered run-off around year end. For banks, lenders, financiers, and asset/hedge/investment managers, this means that a further exiting of insurers could unsettle the market – then again, this class, unlike many others, remains abundantly capitalised. Renewals therefore, may be more challenging than usual, but not to the extent seen in other classes, such as Construction.

What this means for UK businesses

Hard Insurance Market

Understandably, reduced capacity and diminished competitive tension has driven up rates, as insurers can increase premiums with less fear of being undercut by their

competitors. It’s no longer acceptable to assume that your renewal will be secured easily, or that your policy will have the same breadth or depth of coverage without a significant rise in premium.

For large or complex insurance programmes, brokers may have to lean on their international capabilities to place cover. In such a market, differentiation of risks will be fundamental in securing optimal terms. The hardening landscape is dictating the underwriting guidelines, so each risk quoted, be it new or renewal, must be fully modelled and internally rated prior to committing capacity. This has become industry norm; tolerance to deviation from these models is now non-existent, a key change from 18 months ago.

What actions can you take? Our top tips

In spite of the tough market conditions, there are actions you can take:

  • Teamwork: Work with a broker that understands what you do, is well-resourced to absorb the additional time that renewals will take, and that can leverage the insurance market - regardless of which part of the cycle it is in. Those brokers that have maintained strong, collaborative ties with insurers during softer market conditions, are now better placed than those brokers that slashed renewal rates extensively. While cutting rates during a soft market by 25-50% is seen as a phenomenal renewal result in the client’s eyes, in the long term, when the market shifts, it is often those same clients will then bear the brunt of the market’s correction –and will see their rates hiked considerably.
  • An early start: Start your renewal process early with a clear strategy for what you want to achieve and contingent plans in place, should the need arise. A three or four month lead time for renewal is highly advised. We cannot stress this point enough; insurers are referring some risks right up their management chain, they want more time to review all information, they ask more questions. Don’t risk leaving your renewal too late.
  • Insurer arbitrage: Not all insurer offices or individual underwriters behave in the same way. It is important that you work with the right underwriters for your business; those that understand your risk profile and can work with you to achieve the optimal terms. Be wary of those underwriters that are being opportunistic, or those where service levels have dropped in recent months. Are they being unresponsive? Have they let you down during a loss?Your broker will guide on which insurers are the best partners for you, as they will have noted any deterioration in underwriter behaviour on other client accounts.
  • Basis of valuation methodology: Underwriters are increasingly looking at implementing margin and co-insurance-style clauses due to fears of under-reported valuations by some clients. It is essential that you can demonstrate recent and accurate valuations/appraisals, in order to have the best opportunity of limiting the extent of any restrictive language being applied to their policy wording.
  • Be flexible: Your broker will ask you about new structures and programme designs to ensure they’re looking at all available options to secure your renewal. If there’s an option for greater utilisation for higher deductibles, or restructuring a limit, or considering entirely new markets, or structures (such as captives), discuss it. If you’re willing to take more risk on the balance sheet, let your broker know.
  • Worldwide marketing: For large corporates, particularly those with international operations and assets, the utilisation of the full gamut of international insurers can be vital at renewal. European markets, plus those in the US and Bermuda, or even Asia, can all provide options for certain risks. No stone must be left uncovered in the international hunt for available market capacity. Be flexible and ready to trade with new underwriters; all possible global capacity should be approached and all options sought out.

The extent that your renewal will be affected by a hard market will vary depending on your risk profile, claims record, strategies for risk management, and the capabilities of your insurance broker but in this current climate, the vast majority of organisations are likely to see sizeable raises in premium rate. Our advice has always been to engage early for renewal – and in a hard market, this is paramount.

Be prepared to be proactive and involved throughout the process, and ready to answer more in-depth questions from insurers. Work with your broker to consider and work through all options up front – well ahead of key renewal dates – as there will be more that your broker can do in terms of programme design, policy coverage, structure, and choice of markets - which ultimately will have a bearing on how much premium you will end up paying.