There has been much talk of increasing premiums, unfavourable terms and conditions as well as difficulty placing certain risks. We thought we would give a summary of a hardening insurance market to try and help you make sense of it.
Like many markets, the insurance market is cyclical, typically described as a soft market or hard market.
• Soft market – Insurer charges lower premiums and increase willingness to accept risk
• Hard market – Insurer charges higher premium and reduced willingness to accept risk
What part of the cycle we are in depends on many factors including but not limited to interest rates/investment returns, on premiums collected, claims paid and the insurers ability to retain risk.
Claims
Whilst not the only reason for increased premiums and excesses, claims play a large role due to:
• Increase costs defending claims
• Large settlements to claimants
• Claimants propensity for litigation
• Application of consumer law result in claimant friendly outcomes
Reduced Capacity
Currently, there are fewer insurers willing to cover many hard to place risks due to:
• Fewer insurers taking on more risk
• No appetite for high-risk loss-making portfolios
• Insurers have imposed stricter constraints on themselves and requirements on new applicants
Low Interest Rates
Until recently, insurers could rely upon favourable interest rates to cover loss making portfolio where claims paid exceed premiums received. With the current environment of low interest rates, this is no longer possible and striking the right balance has become increasingly difficult.
Trends
Trends are increasing towards litigation, couple that with increase application of consumer law, we are seeing an increase in claimant friendly decisions being handed down.
The Bigger Picture
Catastrophes can drive the cost of reinsurance up for the insurer and to maintain their financial health and ability to pay claims, premiums are on the rise, a trend seen in markets worldwide. Insurance is a community pool of premiums, so it is affected by the volatility and profitability results not only in your industry.