The insurance market has always operated cyclically and given nearly a decade of flat or declining premiums the Coronavirus (COVID-19) pandemic has acted as an accelerant to far more difficult trading conditions for financial institutions.
  • Premiums averaging 20% rate increase for financial institutions business
  • Directors’ and Officers’ premiums dis-proportionately affected
  • Some pressure on attachments when driven by claims history or growth
  • Policy wording coverage standing up well
Financial Institutions

At the outset of 2020, insurers were already seeking to increase rates as years of compounded premium discounts had eroded their premium base resulting in portfolios that were either loss-making or looking increasingly fragile. Upon entering lockdown, we observed an almost immediate deterioration in conditions, with insurers seeking and obtaining an average 20% rate increase in premiums across their renewal book.

There have been spikes of premium increases which exceed this amount, particularly some stand-alone Directors’ and Officers’ (D&O) policies which had historically benefited from very low premium charges and some areas of wholesale or emerging market business which already had limited amounts of available London market capacity. As is commonplace in markets of this nature, there is no single view across markets for price or appetite, with an increasing likelihood of insurers charging their own premium rather than following a lead.

It is too superficial to explain this shift as purely a result of claims arising or expected from the pandemic, particularly when we have seen virtually no direct COVID-19 financial institution claims and very few indirectly arising. We would also point out that overall capacity levels remain high. We have seen a few of the smaller and emerging MGA insurers fail to secure capacity, but this is barely a dent in the overall, and is arguably more than replaced by two new major carriers who have entered the market this year. So, why have we seen this transition to a harder market?

  • Insurers are nervous about the risk environment. They know that historically, recessions can lead to an increase in claims, so they are under pressure to underwrite in a conservative fashion and will only commit to new business on a relatively opportunistic basis.
  • Many insurers are restricted by the amount of premium they can underwrite this year, meaning they can afford to lose business that is not core to their own appetite as the lost premiums can be replaced easily from the balance of their renewal book.
  • D&O premiums, in particular, had reached exceptionally low levels and our sister class of commercial D&O has suffered from very significant claims causing a ripple effect into financial institution D&O.
  • We should not underestimate the ‘human’ aspect of underwriting. At a personal level, insurers have been willing a harder market for several years and it could well be argued that COVID-19 was the spur they needed to provide momentum.

Broadly speaking we are operating in a marketplace where insurers are content to renew or cut back their renewal book and/or are nervous to grow inorganically. This is compounded as they can generate the necessary returns from existing renewals, hence stifling competition. Naturally, this leads to two questions. What can financial institutions do to secure optimum results in this market, and how long will it last?

What should financial institutions do?

A simplistic response here is to start your renewal process early, but this alone is not adequate and underestimates what a capable broker can add to the process. We would recommend the upfront agreement of a realistic and thought through marketing plan, taking into account not only what the expected result is, but also secondary actions should an unexpected setback occur. You will be required to make increased and more detailed disclosure but the overall aim of differentiation should not be lost. Most importantly, your broker should have an accurate and specific knowledge of what is achievable from the market and what represents value. We believe these factors used in combination will ensure that, whilst your overall costs may increase, they can be budgeted and you should have the assurance that a favourable result has been achieved.

How long will this last?

Just as it was inevitable that the soft market would harden, the current insurance market will inevitably show signs of recovery. The more challenging question is when. Some observers will point to the sheer length of the soft market from 2010-2019 as reasoning for a prolonged harder market. They will also point to the consistent rhetoric from Lloyd’s of London with regard to syndicate performance as an additional headwind. These are valid points, but we should also bear in mind the fragility of this market. COVID-19 claims in totality are already being described as an earnings as opposed to a capital event (although we would comment it’s probably too early to tell) and this is against a unique dynamic whereby the rating environment across almost all classes of business has increased almost universally despite little or no capacity leaving the market.

We believe this consistent high level of capacity will come back to the forefront in 2021:

  • Insurers may struggle to justify a second significant increase.
  • The risk environment will be easier to navigate with financial institutions being able to clarify their financials following the lockdown period and their plans to recovery.
  • Insurers will be increasingly confident to take on new business and if their renewal books are levelling out face some pressure to grow.
  • Where there is a differential in market conditions across global markets, for example domestic US versus London, insurers market share may shift accordingly i.e London insurers may lose some of their renewal books.
  • New entrants will need to build a book of business.

Given these factors, we anticipate a limited recovery during Q2 of 2021. It is likely to be staggered with the initial signs being insurer target business and those buying smaller limits of indemnity renewing with expiring premiums. However, the more difficult to place risks or those requiring a greater degree of market support will lag behind and may not enjoy improved conditions until the following year.

Conditions and Limitations

This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at 1.10.2020 but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Gallagher.