What’s a harder insurance market got to do with your business?
The insurance market is a ‘hard’ or sellers’ market right now. So, what does that mean, and what’s the likely impact on your business. Think of the insurance cycle as a clock. At the top, the 12 mark, where we’re heading, is the hard market, when insurance premiums get pricey. At 3 o’clock, you’ll see insurers chasing market share; 6 pm it’s a buyers’ market with cheaper premiums; then, at 9 pm, insurers start to weed out the riskier activities and industries. Each cycle is unique but typically lasts between two and 10 years. Australia was pulling out of a five-to-seven-year soft cycle even before the pandemic hit.
What are the changes in a tough market?
This is what usually happens in a hard market for insurance:
Premiums will be significantly higherUnderwriting criteria will be stricter as insurer’s appetites retract
There’s less competition between insurers, so market forces won't act as a natural handbrake to rising premiums
Fewer insurers are available
The policies on offer will have narrower policy wording and more exclusions, so it will be more difficult to claim.
Insurers make their money mainly from underwriting profits – the difference between the premiums they charge and what they pay out on expenses and claims. They also keep afloat thanks to their investment income, such as from bonds, property, stocks, mortgages, bonds, and real estate investments. Insurance companies must have money reserves on hand to be able to pay claims.
Insurers reduce their risks through diversification across different products and geographies. What also helps is pooling, so individual risks are shared among a group of similarly exposed individuals and companies. When interest rates are low, such as now, insurers experience tighter margins. Hence, they look to raising premiums as one way to keep viable.
But don’t expect premiums to rise uniformly across industries – each will be affected slightly differently. The most affected insurance policies are financial and property lines, then workers’ compensation and liability.
For example, the Australian infrastructure insurance market has been hardening since early last year due to natural disasters and major claims. What causes premiums to rise and policy conditions to tighten is' a run of catastrophic events such as bushfires, floods, pandemics, and if they’ve experienced a succession of losses in the courts. For example, the number of average securities class actions lodged in Australia rose by 300% since 2011.
This is why the insurance market hardens
Australia operates in a global marketplace, so these current factors are contributing to a hard market:
Economic downturn or uncertainty
Volatility in the financial market
Reduced insurance capital and less competition
More claims due to catastrophic events
Global events – such as the pandemic and climate change.
The Australian insurance industry is also undergoing regulatory changes, is working through COVID-19 claims, as well as dealing with claims arising from increasingly more severe natural disasters. The pandemic’s impact means the hard market will likely continue into the 2021/22 financial year.
What your business can do
There are a number of things individual businesses can do in a hard market, including:
Start collecting and preparing data and evidence about your risk exposures and profile well before your renewal date
Review your policies now, rather than waiting until renewal
Revamp and update your integrated risk-management procedures and programs
Partner with a well-informed broker or adviser
It's important to use a broker or adviser in this hard market, as we know first-hand the insurer's requirements in respect of risk management and the insurance markets to approach different types of business and industries. That’s why we can guide you on finding the best offering now, which will hold you in good stead while the insurance market is at its peak ‘hardness’. Let us help you review your coverage and advise on reducing your exposures and risk profile. Options include consolidating all of your business insurance policies into one bill you can pay monthly instead of annually.