Challenging conditions expected to continue into 2022
The past year has brought incredible turbulence to every aspect of our lives. For those of us in the risk community, there has been plenty to do. First in navigating the pandemic, secondly in managing renewals and claims in incredibly challenging market conditions, and finally, as the dust begins to settle, looking ahead at how we adapt to new risks and reappraise our approach to better known ones.
In this market update we share a few brief thoughts and insights on what we’ve seen and what we think might happen next.
The state of the insurance market:
- Rates remain high, but we feel that the rate of increase is slowing slightly. This is borne out by the quarterly survey data we see in the market, however the situation is still in a state of flux and subject to constant change and unpredictable application from case to case.
- Losses accruing from Covid-19 are largely ‘baked-in’ and therefore, likely to have a minimal impact on pricing going forward. However, medium term pressures such as concern over historic D&O, PI and cyber insurance remain significant, causing capacity to be restricted on these lines.
- Looking further out, central banks are indicating that they are likely to reduce asset purchases before looking to raise interest rates. The implication is that insurers’ investment income may remain low while asset price inflation may also be reduced. As a result, many insurers may look to increase underwriting profits to offset reduced investment returns – continuing a long-term trend in the market.
- In short, we are not expecting an imminent return to soft market conditions, instead insurance prices will remain high with extremely limited capacity for lines and sectors that are deemed high-risk.
Wordings:
- In line with diminished competition for policyholder business, we expect the quality and expansiveness of wordings to continue to be eroded in the coming months. The FCA’s Business Interruption Test Case has made insurers’ leadership teams particularly aware of the dangers of loosely worded policies and exposure to unexpected risk. At the macro level that may lead to increased focus on tightening wordings, but also even further reduced willingness to adapt standard wordings to individual client requirements.
- As we mention above, we are also witnessing an increasing feeling that classes that were once deemed to be attractive, such as D&O and Cyber are much harder to assess than was previously thought, leading to retrenchment and in some cases, abandonment of entire lines of business. As the threat of the pandemic continues to evolve policies in areas such as Employers’ Liability may also be heavily restricted.
- Individual industries may find it difficult to place risk at a viable price. Chief amongst these is the construction sector where the insurance industry still feels it is filling in a regulatory gap in the aftermath of the Grenfell tragedy and subsequent focus on paneling and fire safety.
Broking:
- Consolidation remains a major theme in the market, despite the collapse of the Willis Towers Watson/Aon merger.
- There is still considerable appetite for buying broking assets with much of the activity being driven by private equity capital. In practice, this means reduced competition for policyholders and may mean that brokers increased pressure to maximise yields in the short term by ramping up their insurer remuneration arrangements in the hope of either reinforcing their defensive positions or increasing their valuations with a view to imminent sales or debt-financing.
- We expect a number of long-term trends to continue, these include the use of panels and facilities, standardised wordings and the sidelining of technical expertise as brokers focus on their insurer relationships (and remuneration), data and the effectiveness of their sales organisations.
Claims:
- With diminished underwriter competition and a desire to reduce losses from historic coverage, we expect insurers to take a more aggressive stance on claims – both in challenging coverage and adjusting loss value. This is a trend that our own claims resolution practice is already witnessing.
- A critical issue for an increasing proportion of claims is claims handling, as more restrictive wordings make it more difficult to comply fully with policy conditions during the testing early stages of a large loss where mis-steps can prove extremely expensive.
- A second emerging key battleground is disclosure. While this was a major source of disputes prior to 2015, the implementation of the Insurance Act and its rules around Fair Presentation, has seen a reduction in disagreements about disclosure reaching the courts but a flow of new questions being asked at the claims stage about placement. As such, the new rules are largely untested, making the way in which they will be interpreted in light of underlying market practice hard to predict.
For more information on our view of the market and to discuss your insurance challenges, contact Heidi Carslaw, Managing Director:
E: heidicarslaw@mactavishgroup.com
T: +44 (0) 207 046 7974
