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, we did not observe a significant reduction in capacity, although a small number of Lloyd’s syndicates entered run-off around year end.
This toughening of conditions is in some ways historically unique as previous changes to the market have been driven by significant macro events, for example, the global financial crisis combined with reductions in market capacity. Large claims combined with less insurers reduces the liquidity of the market and prices increase until more competing insurers emerge.
2019 had global capacity levels broadly in line with 2018 but interventions such as Lloyd’s Decile 10 - whilst not directly aimed at the financial institutions class - had the overall effect of reducing the amount of business that underwriters were able to write annually. This meant that insurers were able to grow their book of business by virtue of writing renewals at increased rate as opposed to targeting new business.
This reduction in insurer competition in combination with a desire from underwriters to increase profitability and thus premiums was successful, however, the challenging question is, to what extent will this continue into 2020?
Our expectation is that conditions should continue as they are at least until the third quarter of 2020. Having said that, there is a concern that the financial institution market place is delicately poised and could tighten further as we progress through the year, particularly if we see other insurers exit the class.
To counter this, we continue to point to a market which is still abundantly capitalised, and the fragility of any insurer’s growth strategy that is purely reliant upon premium growth as opposed to targeting new business. In truth though, this is a very difficult market to predict, although we can point to the following as highly likely:
- Different insurers approach and expectation from the same renewals has varied hugely and we expect this disparity of approach to continue and possibly to exacerbate. This will provide both opportunity when it comes to managing competing insurers but also increase the need to make use of BIPAR placements.
- Sectors such as corporate service providers, risks with notable outstanding claims, large limits of indemnity or banking entities will be more challenging to place. Differentiation of risks will be fundamental in securing the best terms.
- Commercial directors and officers insurance for US exposed entities has become a very challenging area of coverage and whilst this is a separate class of business to financial institutions D&O, there is some overlap. We expect to see increased focus and premium pressure from insurers for risks with US and listing exposures and possibly a disproportionate withdrawal of capacity with accompanying pricing implications.
- Where there is a disparity between buyers and insurers with regard to premium expectation, we would expect more financial institutions to consider greater self-insurance, the use of a captive or other risk financing options.
Finally, these are the actions you can take, to ensure the best available terms from the market:
- Work with a broker that understands what you do, is well resourced and can leverage the insurance market regardless of which part of the cycle it is in.
- Start your renewal process early with a clear strategy for what you want to achieve and contingent plans in place should the need arise.
- Devise a disclosure plan in conjunction with your broker that works best for your risk and allows differentiation from the market norm.
- Be cautious about accepting premium relief in consideration of coverage restrictions, it is unlikely to provide long term value.