In the last year, the UK has experienced a return to, if not normality, then a rhythm and way of working; this momentum has been an important milestone towards recovery for many businesses.
The headwinds businesses face remain broadly the same as economic uncertainty permeates every facet of public life. Inflation may have peaked late last year, but we expect to be operating in a shallow recessionary environment for at least the next 12 months. Settling claims is more expensive, and insured values are increasing, which is becoming a pressing issue for property owners.
Yet, the most significant change to the financial challenges businesses face in 2023 may come from reinsurance after what has been described as a complex and frustrating renewal process.
The reinsurance impact
Reinsurers effectively insure insurance companies and help them manage risks by absorbing some of their client losses. As this largely operates with no direct involvement from commercial clients, the sector has not been particularly well understood in the past. However, over the last decade, its crucial role in natural catastrophe events and major disasters has raised awareness of reinsurance's importance and impact on premiums.
When natural catastrophes occur, they generally significantly increase the claims paid by insurers covering affected clients, meaning they far outweigh the premiums earned. In an already challenging economic environment, insurers may need to buy more reinsurance at a higher rate to mitigate the risk. Therefore, they tend to raise premiums to cover the increased costs.
1/1 is a key date for renewing and adjusting prices for 12-month reinsurance policies, and the outcome reverberates across the insurance industry. After years of steady premiums, the trading environment effectively turned on its head in this year’s renewal. Specialty classes of insurance (war, terrorism, aviation) saw sizeable increases largely due to losses related to Ukraine. In the soft market, reinsurers permitted insurers to put these classes in one programme, but now they are required to split the classes out.
Reinsurers were open to UK insurer risks, but generally at a higher cost – insurers that hadn’t taken sufficient action to counter inflation bore the brunt of these increases.
Interestingly, there was a marked difference in reinsurer reaction to the significant market changes, despite a universal ambition to grow premium volumes. These changing circumstances were predominately driven by a shift in supply and demand. Insurers needed to buy more reinsurance to offset the risk of inflation and geopolitical threat. Yet reinsurer capacity had reduced, and appetite also dropped after heavy losses from Hurricane Ian.
What does this mean for 2023?
Clients now face a bumpy year, as insurers may wish to pass on rate increases as they look to recover margins. Insurance buyers already faced a challenging market overall due to reduced insurer appetite, policy limits and cover, as well as higher excesses for clients and closer claims scrutiny.
For property and business interruption, the two-tiered market is set to continue: competition will exist for low-hazard risks with robust risk management and good claims experience, but high-risk trades or non-standard construction will likely face higher premium rates.
Yet, the forecast for the coming year is not all doom and gloom. Every insurer wants to grow its client base, which will generate more competition, fuelled by senior moves between insurers. There have also been new entrants in particular product segments such as D&O, PI and cyber who hold no legacy claims, further generating competition and providing rate reductions. This dynamic environment will be a natural market leveller of how much rate insurers can carry.
Preparing prior to renewal holds even more importance in a year that is set to be full of push and pull. Clients should engage early with their broker to ensure any difficult risks, unusual features and changes in profile are fully understood. Gallagher works closely with clients to ensure their presentation to insurers is insightful and meaningful. The greater the quality of information, the more likely the underwriter will prioritise this risk and offer the best terms. Gallagher helps clients outperform the market – wherever the market is in its cycle.