The market cycle has been in its “hard” phase for some time, characterised by:-
- Significant reductions in insurer capacity and appetite for risk
- Narrowing of coverage that insurers are prepared to provide
- Very significant rating/premium increases (increases well in excess of 50 percent for many insureds)
- Imposition of higher deductibles
- An underwriting need for significantly wider information in respect of Property construction, operations, protection and exposure
All of the above can lead to a lack of certainty and control and this is the new reality for Risk Managers as they renew their Property insurance programs.
Increased frequency and severity of natural catastrophe claims
News bulletins regularly report destructive events such as wildfires, tornadoes, floods, tropical cyclones and earthquakes in various parts of the world.
As the UK battled with the Beast from the East in the first quarter of 2018, Property insurers experienced a significant peak in claims and Property premiums started to climb.
Weather-related claims worth £328 million came in to insurers in the first quarter of 2018, of which £193 million came from domestic weather-related escape of water claims. While insurers are geared up for large scale weather events, the Beast from the East caused some insurers to use up their weather reserves for the year in just the first few months.1
In our experience, rates for Property insurance have been loss-making for some time and in 2019 we saw it was accepted by most insurers that an increase of 10% on rates was necessary, just to break even. Therefore, even before COVID-19 was on the far horizon, the Property insurance market was going to harden.
Insurers’ hopes for a benign winter to help restore the Property sector to a stable footing were dashed very early in 2020 with Storms Ciara and Dennis. As at March 2020 Insurers were expected to make payments of over £360 million.2
Impact of reduced investment returns and low interest rates
Historically, insurers have used investment returns to offset underwriting losses. This hasn’t been possible since interest rates have been at the low levels seen in recent years. Insurers are therefore seeking rate increases to achieve underwriting profit.
Reduction in market capacity
Insurers withdrawing capacity to de-risk their book forces up pricing and can make terms more restrictive amongst insurers still willing to provide cover.
Increased cost of reinsurance and restrictions imposed by reinsurers
Reinsurance is a key component of an insurer’s pricing model. Reinsurance rates are increasing significantly and commercial insurers will have no option other than to reflect these increases in their rates.
According to forecasts from Lloyd’s of London, COVID-19 will cost the insurance industry more than $200bn. Over half of the $200bn (£156bn) loss will relate to claims, with insurers expecting to pay out for events cancellation, business interruption and trade credit cover. Another $96bn (£74.3bn) comes from investment losses, where turmoil in financial markets has hit the assets insurers hold to fund claims.3
Options for clients
Working in close partnership with a good quality broker, who has a strong presence in the insurance market and is well respected by underwriters, will be crucial to ensure that you are well represented and obtain terms to reflect your risks.
Providing full details of your business well in advance of renewal date is essential, in order that underwriters can fully understand and evaluate your risk.
Also, as a client, being prepared to consider various options such as a maximum loss limit and higher excesses will also mean that you have the ability to maximise the cover available to protect your greatest risks.
This kind of approach is beneficial if:-
- A risk managed approach is fully embraced
- Claims are well controlled
- Property maintenance and upkeep is given the level of importance needed
- Insurer survey risk improvement requirements are implemented
Presenting your risks
To a point, Risk Managers can control their total cost of risk. Underwriters are now requesting, in a far more granular way, technical data from businesses such as:-
- Structure of buildings
- Intruder/fire alarm specifications
- Evidence of current fixed wiring/electrical installation inspections
The need for such extensive and detailed technical data highlights the need to engage with your insurance broker at least 6 months out from renewal (sometimes longer). This will allow your broker to prepare and publish as detailed an underwriting presentation as possible.
Gallagher Risk Services Management team have for many years been supporting clients by preparing specialist Property underwriting reports outlining the above key elements, as well as calculating and detailing Estimated Maximum Losses / Probable Maximum Losses and also where required, providing Risk Control recommendations.
Increased deductible or excess
The simplest and a common way to retain more risk is through a higher policy deductible or excess. In exchange for this, insurers may give a premium discount to recognise that there is no longer a risk for lower level losses.
In a hard market, however, an insurance buyer may find insurers impose a higher deductible without a premium reduction as part of their renewal offer.
Viable alternative risk solutions outside of the confines of the traditional insurance market
Gallagher has access to products which offer businesses protection that is not available as part of the traditional perils covered under their insurance programme.
- FloodFlash – this is not a traditional insurance policy but a parametric solution predicated on certain parameters being met for a pre agreed payment to be made. Parametric weather related solutions have been used extensively across the world for many years, but the innovative approach here is the use of mobile connected sensor technology which is attached to one or more buildings to measure the depth of water during a flood incident. As soon as the sensor detects water levels above a pre agreed level a payment is made, which can be used however the policyholder sees fit. There does not need to be any damage to the Property nor the need for any water to have even entered the premises. Policies can be customised for Property portfolios or single properties allowing both large and small entities to benefit.
- Flood Excess Infill Insurance – This is a more traditional insurance solution which provides cover for a flood excess of up to £100,000, imposed by the main Property insurers. This facility has been warmly welcomed by Gallagher as it is offering protection to our client base who may not have the resource to deal with such large uninsured losses. An ideal solution for the smaller organisations such as Parishes and Community councils but relevant for larger local government and educational establishments also.
Both products provide innovative solutions for those clients impacted by the changing climate.
Captives are traditionally viewed as a risk transfer alternative used by only large global businesses, however Gallagher has developed captive solutions for businesses of all sizes.
In a distressed insurance market cycle, captives can be an attractive solution as they;
- Mitigate market-imposed rate increases by retaining higher per-loss deductibles across their various lines of cover;
- Fill gaps in capacity shortages across different insurance classes, be those shortages as a result of uneconomically available capacity, or simply insufficient capacity at any price;
- Reinstate coverage breadth that has been removed from certain (or all) policies as a result of market dynamics;
- Increase the captive’s profit potential by including new covers for non-traditionally insurable risks
ARTEX, Gallagher’s wholly-owned subsidiary for alternative risk and captives, can assist businesses in controlling costs and volatility with their innovative captive solutions.
Captive insurance entities
ARTEX have developed Cell solutions for organisations of all sizes
- Purpose built facilities for alternative risk transfer
- Rent a captive concept within a legally segregated framework
- Known as Protected Cell Companies (PCC’s) or Segregated Account Companies
Captive insurance types
- Pure captive primary purpose is to insure the risks of its parent organisation
- Affinity captive insuring the risk associated with a related product or service, for example a Property holding company receiving premium from tenants
1. ABI Report - UK Insurance and Long Term Savings, The State of the Market 2019
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 15/02/21, 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.