The hard market: how it affects your insurance
You may have heard of “hard” and “soft” markets in the insurance industry. Insurance can be seen as running in a cycle, with upswings and downswings, and we are now entering a hard market. After many years of operating in a soft market, this can be perplexing for commercial and private insurance clients alike. During a hard market, insurers typically have selective appetites for risk and some will exit certain sectors. Customers are likely to find prices are less competitive across the board.
How did we get here?
A look back over the last two decades is useful for gaining an understanding of the way the market works.
- 2003: Following a hard market in 2001, the insurance market yielded good investments, so new entrants and an abundance of capacity resulted, eroding insurance rates for well over a decade.
- 2016: in response to the Financial Crisis, Solvency II was introduced, applying a set of rules which increased insurance solvency requirements
- 2017: the Grenfell fire increased awareness of consequences of flammable materials
- 2018: Lloyds of London reviewed underperforming lines of business to correct loss ratios and preserve financial rating. Other insurers followed suit.
- By 2019: the global insurance market had seen eight consecutive quarters of price increases.
- 2020: The hardening of the market accelerated as multiple wildfires, storms and floods around the world impacted further on loss ratios. Low interest rates could not mask underwriting losses.
What does the hard market mean?
All factors above have led to a reduction in capacity (meaning less insurance is available) with some insurers exiting some sectors or classes as insurers strive to reduce their exposures. Fewer insurers means less competition and less favourable terms for policyholders. The impact is not only higher premiums, but also less flexibility in underwriting decisions, more exclusions, increases in excesses, lower limits and less availability of long-term deals. There is an impact from Covid-19, however this is currently minor compared to the other factors accelerating the hardening market. The full impact of Covid-19 is yet to be known.
How could this impact on your insurance renewal?
Outstanding risk improvements previously proposed by your insurer are likely to result in reduced cover or increased terms, so early attention to resolving these is essential. In particular we recommend you carefully review the following:
- Fire protections. Consider upgrading or installing remotely monitored fire alarms or suppression systems
- Fixed wiring testing and upgrading. When was the last inspection, are there any outstanding requirements?
- Combustible materials and waste. This must be stored at least 10 metres from the building and all waste removed from the premises daily.
- Do you have any flammable panels in the construction of your buildings and is there a plan to remove these?
- Are all risk assessments complete and communicated to your team?
- Do you have a business continuity plan that is regularly reviewed?
The impact of the hard market will be hard to avoid, but it can be kept to a minimum by working closely with Howden to agree a renewal strategy early that reviews your insurance needs carefully and presents your risk to insurers as favourably as possible.