For the vast majority of insured, these changes in market appetite & pricing in the cycle had started well before the onset of the global Coronavirus Pandemic. However this event didn’t help and may have expedited the speed of the turn or even the severity of the turn, but current market conditions cannot solely be laid at the foot of the Pandemic.
The changes and challenges being faced have been driven by factors relating to the broader global insurance market, a number of specific issues relevant to classes of insurance as well as general economic head winds.
Our view of the current market
We are in the hardest general insurance market for more than 20 years, not just for the public sector but across all sectors. AIRMIC recently described the market conditions as a “harsh market” rather than a hard market.1 Their surveys not only demonstrated the challenges, but that these undeniably apply to the commercial world as well as the public sector.
Indeed, the market conditions are affecting organisations in multiple ways: -
- By class of insurance. Policies such as Directors & Officers Liability, Professional Indemnity and Cyber, & Construction, have all become harder and harder to place with multiple insurers withdrawing from these lines of coverage.
- By sectors. Areas such as Public Sector are finding insurers – even long-standing insurers are changing their appetite in terms of risks.
- By loss history. Sectors or individual clients with poor loss histories are becoming ever more difficult to place with competition reducing and incumbents either withdrawing or requiring significant changes to premium, but also to limits, excesses and policy wordings
Over the past 20 years it has been incredibly rare for any public sector or education client to have limited or no response to requests for quotations, but more recently we have experienced occurrences of single bids for tenders happening and sometimes no quotations being provided at all. Where procurement rules are being applied rigidly, or without consideration of how to create more favourable conditions, these outcomes have become even more prevalent.
The situation isn’t just unique to formalised procurements – commercial broking projects for standalone D&O, Professional Indemnity, Construction and more latterly Cyber have resulted, on occasion, with little to no market response. Albeit there may be unique risk factors at play which have exacerbated market concerns.
An example of the market change includes insurers wanting to limit their loss exposure by either reducing their limit of indemnity (liability) or putting on a loss limit (property) that may be lower than applied before.
Previously, excess layers could be sought fairly easily and for relatively low rates – and this enabled clients to purchase a good level of coverage for a competitive price. The reduction of the primary layer market and the number of significant losses has hugely reduced the appetite for excess layers. Oddities of the market can see excess of loss cover costing more than the primary in some classes of business namely PI and FG/Crime.
Key drivers
So why is this happening now?
The insurance market has been considered ‘soft’ for at least 15 years. The COR (Combined Operating Ratio) of insurers has often sat around the very high 90% margins and in some areas exceeded 100% more regularly than any of them would like.
Historically this had less of an impact as insurers could invest the billions of pounds of premium that they received and earned good investment returns before they would have to return it in the form of claims payments. Since 2007 though, interest rates and market returns have been minimal. Therefore this method of making a poor performing book profitable simply has not been possible.
The overall claims performance of certain sectors and certain classes of insurance have not been good. The pandemic seems to have set off a domino effect that was already happening in some classes (D&O/PI) so that underwriters have increased the speed and severity of them walking away, or just pushing rates to a much higher level.
Lastly, and possibly most significantly, reinsurers have become a lot more assertive in directing what `retail` insurers can offer. Previously reinsurers were fairly passive in terms of data and even loss history and the market was very competitive. Partially driven by the pandemic, as well as the historic loss history, they have pushed for a change to premiums, to coverage and to limits of indemnity. They have also been the main drivers of greater data in order to bind the reinsurance. Reinsurers are adopting a much stronger position where they will no longer provide that reinsurance backstop for insurers without the data. This is driving insurers to change their policy terms and reduce limits – as noted above – otherwise they are taking all of this risk entirely on their balance sheet. For smaller insurers this drives their behaviour even more than the larger ones, as they become much more vulnerable to larger losses that are not reinsured. This has been one of the main reasons for the pullback on communicable disease cover.
Other Considerations
Layering
A concern for some insurers is the higher end of liability claims – i.e. those claims in excess of £10,000,000. Some insurers will insure these to full value. Others will reinsure, but the attachment of reinsurance will vary from one to another.
In more recent times there has been a greater reticence particularly from some insurers to offer high limits on property insurance – either due to large individual buildings or aggregated exposure.
Large commercial organisations would regularly use excess layers or coinsurance layers as a method of reducing the exposure of insurers on their programme and because it can offer a more competitively priced solution.
We feel this is something that should be considered by public bodies and will be discussing how this can be done with our clients on upcoming tenders. This should increase the competition for public sector risks whilst also helping to ensure costs are mitigated.
There has to be consideration given to procurement but Gallagher have strategies and policies to navigate clearly through those potential issues.
Tender data
The data required for renewals has increased significantly in recent years, as insurers seek to better understand your organisations. This applies equally to tenders and 100 or more ‘clarifications’ on a tender are not unknown.
To some degree an underwriter will ask more questions the more data you include, but ensuring your ITT is as good as it can be is very important to help you secure the best possible terms.
We would highlight claims data as most significant. Ensuring this data – yours and insurers – is correct is hugely important. Highlighting claims relating to services no longer delivered will help, as will providing information on larger claims – what happened, what have you done to prevent recurrence – can help an insurer choose whether to include a claim to full value or reduce it when reviewing their actuarial analysis. One insurer has recently advised us that all claims over £50,000 attract actuarial review.
Procurement Legislation
Following the UK’s withdrawal from the European Union under the process colloquially dubbed `BREXIT` the future of how publically funded bodies are to procure the goods and services they need is under government consultation. The requirement to publish tenders in the Official Journal of the European Journal (OJEU) via Tenders Electronic Daily (TED) has been replaced by a UK system called Find a Tender (FTS).
The government are currently reviewing the feedback provided during the consultation which will then hopefully allow them to draft legislation to assist in their stated aim of “to speed up and simplify procurement processes”.2
Gallagher responded to the Consultation and we await the updated legislation with interest.
Conclusion
Conditions in the market are difficult – but it’s important to remember there is still good appetite for well managed risks with a coherent claims experience. Having claims isn’t the problem in most cases (they are expected) but having good data and narrative on the large claims on the circumstances and actions taken to reduce reoccurrence is paramount.
In summary to keep as far ahead of the game as you can we would recommend: -
- Plan early, prepare often.
- Know your claims experience and be prepared to share it.
- Consider when and how to tender.
- Engage with potential bidders.
- Ensure you have considered the most effective programme structure.
- Alternative Risk Transfer (ART) considerations.
- Risk management.
- Utilising the knowledge and expertise of a proven Public Sector and Education insurance broker.
The sole purpose of this content is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
1. https://www.airmic.com/technical/library/harsh-market-focus-claims
2. https://www.gov.uk/government/consultations/green-paper-transforming-public-procurement
