Recognised as a driving force within insurance since the 1920s, many argue that the cycle is inevitable, primarily because it is impossible to accurately align pricing to future losses – with all the data in the world, the process still amounts to a very sophisticated guessing game.
Yet, the insurance cycle is logical. In a soft market, new insurers enter the market, and wordings widen; consequently, competition increases and premium rates decrease. Then, at some (often) indiscernible point, loss ratios rise and profits fall, leading to insurer exits and reduced appetite, increased reinsurance costs, restrictions in cover, capacity reductions and price increases – which collectively combine to usher in a hard market.
Current state of play
In Q4 2018, the market transitioned from the longest-recorded soft market after a series of severe natural catastrophe events, and by 2020 the hard market was firmly upon us. At the top of a hard market’s arc, insurer profits begin to rise.
After a string of insurer profits over the last two years, competition has started to return to the market. Gallagher is beginning to see a more flexible approach as insurers strive to meet ambitious growth targets. There is now a more consistent approach to risk sharing among multiple insurers.
Most insurers’ profitability is where they want it to be, and their messaging is for ambitious new business-driven premium growth whilst protecting their underwriting profits. We have seen empowerment of regional offices by an increase in underwriting authority, more aggressive new business pricing and bolstering of regional distribution resource. All signs of a growth drive, which will increase competition.
Bucking the general market trend mentioned above, fleet insurers are seeking premium rate increases and higher deductibles as claims costs continue to rise.
Following a period of low road usage throughout the COVID-19 pandemic, where loss ratios improved dramatically, profitability has now suffered as a result of increased claims frequency. Further, modern vehicles are more expensive to repair, exacerbated by the supply chain issues (causing delays and increased credit hire costs) and a higher inflation environment. Beyond deteriorating 2022 performance and claims inflation (both personal injury and repair costs), an emerging risk pushing up rates is the increasing number of electric vehicles, which are expensive to repair, so attract higher premiums.
Increasing costs and delays have led to some insurers writing off vehicles which would have previously been repaired, causing difficulties and additional costs for clients.
There isn’t any shortage of capacity in the motor market; with that in mind, alongside the rating pressure on insurers’ existing portfolios, this is leading to “dual pricing” in the market.
Post-COVID-19 renewal retentions were at an all-time high in the motor market, but with rating pressure alongside the desire for insurers to write new business, we anticipate a fair amount of case movement in the second half of the year.
The two-tier market we mentioned in our last market update still subsists: competition for low-hazard risks, with high risk management standards and good claims experience vs low insurer appetite and/or demand for high premium rates for high-hazard trades with poor protections or non-standard construction.
A further complication is, whilst many insurers have remediated their book, some are still undergoing this process. Most insurers are still increasing renewal premiums and in some cases continue to reduce their capacity on individual exposures.
Reinsurers keenly feel the impact of natural catastrophes around the world. The rate increases they apply to the cover they provide for insurance companies inevitably flows through to the commercial insurance market.
This market remains relatively stable for both employers and third-party liability. Although, with higher inflation, we would expect to see loss ratios increase, unless premiums increase to compensate for higher claims payments.
Market conditions for directors’ & officers’ liability insurance over the last two or three years have now reversed, and rate reductions are common. This vibrant market has been driven by new entrants and insurers who exited returning aggressively with rates and retentions that are significantly less than the beginning of last year.
Some insurers who exited the market for employment practices liability coverage have now indicated they may return, which will bring welcome additional capacity and competition.
While difficult conditions for cyber insurance buyers continue, new capacity entering the market has driven competition. This has produced some easing of insurers’ risk management requirements and a small improvement in market trends.
Successful ransomware attacks are starting to decrease as businesses have improved IT systems; but if an attack occurs, it’s still expensive to manage. New threats are also emerging, including fraud and the impact of a cyber-attack on a supplier.
The market is past the peak of the hard market and is moving into the transition towards a soft market. Rate softening is expected towards the end of 2023, along with defensive moves from insurers keen to hold on to business that falls within their underwriting appetite.
Nevertheless, within general market commentary there will always be sector segment distinctions. Claims inflation is still significant in property and motor, and there has also been no noteworthy widening of wordings and no major new entrants or influx of capacity. The market cycle is often shown as a smooth line – when in reality it’s a series of judders that eventually arrive at the same conclusion, but there is no way of knowing how long this transitionary shift will last.
Managing risk is always complex. Gallagher is on hand to support businesses as they navigate the nuances of the insurance market; we are positioned to leverage the best outcomes for our clients. Contact your local broker if you would like to discuss anything raised in this article further.