The hardening market – What it means for you

What is the difference between a hard
and a soft market? 

In a soft market, you are likely to see: 

• Low premiums 
• Broad appetite and availability of cover 
• Increased capacity, meaning insurers write a high volume of policies 
• Higher limits on policies. 
• In a hard market, you are likely to see: 
• High premiums 
• Reduced appetite due to stricter underwriting criteria 
• Decreased capacity, meaning insurers write less policies 
• Lower limits on policies. 

Why are insurance premiums rising? 

We mentioned above that in a hard market you typically see higher insurance premiums. Why? During a hard market, insurers place more stringent limits on the cover they can write, which automatically lowers their appetite. This in turn means they are writing fewer policies. 

As the insurers’ capacity is lower, it can be more in difficult to find insurance solutions and that leads to an increase in demand for cover, all of which drives the premiums up. 

The timing could not be worse for UK businesses, but we will have brace ourselves for the fact that prices across all insurance products are likely to increase 

Why is the market hardening? 

There are many reasons why we’re moving into a hardening market, from natural disasters to rising rates and reduced capacity in the reinsurance market. We’ve listed just a few of them below. 

At the start of 2020 storms Ciara and Dennis created widespread damage, which caused a rise in claims when insurers were already suffering reductions on property premiums. 

As we’re still part of the EU, the Solvency II law continues to apply. This regulatory regime was introduced in 2016 to harmonise EU insurance regulation. Principally, it aims to make sure policyholders across the EU have the same level of protection, regardless of where they purchase their insurance. It achieves this by increasing the financial resources required for insurers to trade, but this reduces the ability of insurers to underwrite business based on the same resources. It has resulted in some insurers leaving the market, meanwhile others have reduced their capacity considerably. 

Another factor is that the Ogden Discount Rate has changed; this is a calculation used to work out how much compensation insurers should award someone who has life-changing injuries to cover them for loss of earnings and any care costs. The rate changed from 2.5% to -0.75% in 2017 and then from -0.75% in 2017 to -0.25% in July 2019 in England and Wales, which has resulted in insurers paying out more on big personal injury claims. 

What is the effect of COVID-19? 

Even before the Coronavirus pandemic hit, the tides were changing. COVID-19 has naturally had an effect on the market, compounding everything. 

John Neal, CEO of Lloyd’s of London, told the Financial Times back in April that the pandemic is “no doubt the largest insurance challenge the industry has ever faced”.

In May, Lloyd’s forecast that COVID-19 will cost the insurance industry $203billion (£166billon) worldwide and has recently announced that it expects to pay out £5billion in Coronavirus-related claims.

Meanwhile, the Association of British Insurers (ABI) still envisages the UK insurance industry will have to fork out more than £900million for COVID-connected claims, as well as £275million to travellers who had to cancel their trips as a result of the pandemic.

This may seem strange to businesses which have not been able to make claims as a result of COVID-19, but the principle of shared costs and pooled premiums which underpins insurance means that it will have an effect across the market. 

It is, therefore, likely that COVID-19 will extend the duration of the hard market, as the insurance industry tries to recover from the impact of the crisis.

What does this mean for me and my businesses? 

The timing could not be worse for UK businesses, but we will have brace ourselves for the fact that, for at least the next 12 months, prices across all insurance products are likely to increase. 

Weald Insurance Brokers will do what we can by way of re-marketing to find the most competitive rates, but we will need to bear in mind that competitive alternatives will be less readily available, and that other factors such as the quality of the policy wording and claims service will play a part in our recommendations to you. We will also give you advice about ways in which you can minimise the inevitable impact of a hardening market, including providing details to us of all the measures which you take to minimise risk and mitigate its consequences. 

We have access to a wide range of insurance providers (including specialist schemes) that we can access high levels of cover at competitive rates, but in the current market, key factors for obtaining the best quotes will be the quality of information and timeliness. 

It is essential in a hard market that underwriters are given a full understanding of the risk which you pose, and therefore it is important that sums insured are accurately assessed, business interruption limits are properly identified, and full detail about your activities, qualifications, security measures, disaster recovery plans and any other factor which will influence an underwriter positively is set out to your broker and then to the insurers. It is also important to ensure that claims records are up to date, and any outstanding reserves are minimised as far as possible. If the market is hard for good risks, it will be extremely difficult for poorly managed businesses or those with heavy claims records. 

All of this has to be provided in good time. In a hard market underwriters are under more pressure to quote on more risks because competitive capacity is reduced, and therefore it is essential that you start your renewal process early. This issue is also exacerbated by the fact that even now, and going forward into early 2021 many brokers and insurers are working remotely (not least because this enables them to save some cost), and this will increase the time which you can expect to need to obtain terms for your insurance. 

The most important issue therefore is to engage early with your broker to ensure that there is sufficient time review your requirements properly, so that we are not trying to place high limits for covers which are not required for example, and to allow underwriters to respond properly to our presentation to them.