As a responsible and committed business, we believe that it is important to keep our valued clients informed about the insurance market, especially where events are likely to have a significant impact on overall insurance costs. Like any industry, insurance is subject to periods of expansion and contraction, usually driven by external influences both globally and nationally. Those influences can take many forms, including financial uncertainty, natural disasters and other major events.
These phases of expansion and contraction occur within what is known as the insurance cycle, and they are referred to within the industry as hard and soft markets. A soft market can be recognized by the following conditions:
Lower insurance premiums
Simpler underwriting due to a relaxation of criteria
Expanding capacity that means more polices and higher limits from insurance companies
More competition between insurers
Customers enjoy a wider range of coverage as a result
A hard insurance market is signified by the following:
Higher insurance premiums
Challenging underwriting as criteria become more stringent
Contracting capacity that means less polices and less generous limits
Customers see a shrinking range of coverage as a result
The Insurance Cycle
Before we talk about the market as it is today, it is important to understand a little about the insurance cycle and how it functions to create hard and soft market conditions. The cycle begins in an expanding market, where there are many competing insurers with excess capacity, providing customers with low premiums and a broad choice of policies. This soft market will transition to a hard market during periods where claim numbers rapidly rise, as this causes lower-capitalized insurers to fail as businesses and cease trading.
With less insurers operating in the market, there is less competition and lower capacity, which in turn allow insurers to raise premiums and introduce more stringent underwriting criteria. This improves the financial results of those surviving insurers. With increased profitability in the industry, new insurers emerge to take advantage of that opportunity, increasing competition. In this increasingly competitive market, premiums are lowered, and underwriting criteria becomes more relaxed as insurers seek to claim there share of the market, completing the cycle until the next spike in claims starts it all again.
A Hard Market
Right now, we are operating within a hard market. Significant events include massive bushfire damage at the beginning of the year, directly following on from major storm events at the end of 2019, both of which resulted in a huge spike in claims across the industry.
Throughout 2020 COVID-19 has also impacted every facet of life, and it has had a particularly strong effect on the investment markets too. The result is that insurers are suffering from both sides of the balance sheet, with higher loss ratios on their underwriting and lower returns on their investments.
With the Australian Dollar stubbornly low against the US Dollar, the financial consequences of that spike in claims at the beginning for the year has been stronger than initially predicted too, with an increased cost of imported materials, particularly within the vehicle and building repairs and industrial equipment. This has caused many local insurers to endure larger losses throughout the year.
The result of this industry shakeup will be seen in premiums. With the last year showing increases averaging 6-8% increases, the next 12 months are likely to see continued rises of between 9 and 12% according to the APRA statistics released recently.
Overall, we believe that the next year will be signified by a period of increases in premiums, harder to obtain insurance coverage through tighter criteria and reduced capacity, higher excess requirements and more time needed to secure the cover you need.
Within these difficult conditions it is important that we maintain effective communications and continue to work together to maintain the coverage you need, as any marginal rise in costs is dwarfed by the potential damage of uninsured loss.