Posted on: 15 March 2022

The insurance industry, like many other financial markets, is subject to supply and demand fluctuations. It normally follows a cycle that alternates between soft or hard market conditions. The insurance market, generally, in the UK has benefited from an extended period of “Soft Market” conditions.

A soft market can be characterised by broader risk acceptance by insurers due to the higher amounts of capacity (how much risk an insurer can expose themselves to), wider risk coverage within insurance policies and more competition in the market, which usually dictate lower premiums. However, throughout the past few years, several factors have been contributing for the market cycle to change into “Hard Market” conditions.

Insurance Market Cycle – Explained

Over a period of time, one significant unforeseen event or a series of unrelated elements combine simultaneously which impacts the industry’s profitability collectively. Thereafter, customers experience stricter risk acceptance measures by insurers, limited risk coverage and reduced risk capacity. In perspective the insurer may not be able to cover a risk in a volatile market where there may be a previous history of claims.

Hence, there is less competition in the market between the insurers, keeping in mind the above factors, which results in higher premium rates compared to previous years.

What factors have occurred to create hard market conditions?

Solvency II

Solvency II is a European Directive adopted by the UK government and relates to the governance of the insurance market. It provides peace of mind to customers by ensuring that insurance companies have enough money in reserve to cover the cost of the claims they may suffer and more. This is done by setting the value parameters around their liabilities, assets and capital requirements (the amount of funds they hold in reserve to pay claims).

It also covers how insurers should be governed, how they manage the risks they take on and what information they must report to the authorities to ensure they continue to meet the requirements.

Supply Chain Disruptions

COVID-19 lockdowns throughout the world had already been playing a huge part in supply chain disruptions and production delays.

Add to that, one off events such as early last year when the ‘Ever-Given’ container ship blocked the Suez Canal for almost a week causing huge ramifications to supply chains across the world.

About 12% of global container trade passes through the Suez Canal. However, this single event resulted in severe price hikes of raw materials ultimately affecting all industries including the oil and insurance industry.

COVID-19

As the year 2021 came to an end, we were still witnessing rising COVID-19 cases, as the new variant at that time, Omicron, still persisted. Previously reported by John Neal, CEO of Lloyd's of London, the COVID-19 virus outbreak will be the most expensive crisis in insurance history.

The Association of British Insurers (ABI) have reported that the pandemic is likely to produce business interruption claims which are worth more than £2 billion. They further reported that insurers have already paid more than £200 million for Covid-19-related protection claims.

The effects of these insurance claims will ultimately have an impact on insurance premiums.

Ogden rate

The Ogden Rate is used to determine the amount of reimbursement that should be paid to a claimant who has incurred severe injury. On the other hand, the Ogden rate, is irrelevant for trivial injuries that have no considerable influence on a person's capacity to make a living.

Due to change in the Ogden rate back in 2016, insurers have paid more than they anticipated for serious personal injury claims.

For more information on this, take a look at one of our previous articles on the Ogden Rate increase.

Extreme Weather Events

Insurers were already having a difficult time in the UK property insurance market. However, this was impacted further when storms Ciara and Dennis hit the UK in early 2020.

Annually, insurers are hit by severe weather conditions, which cause storms and floods that cause severe damage to property. This results in insurers paying large amounts in damage claims and they were paid out relatively quickly in the two incidents named above. Aon reported that globally, insurers collectively paid out £31 billion during the first half of 2021 because of natural disasters.

Lower Interest rates

The ability for an insurer to write off a certain portion of their losses is affected by investment interest rates.

Since current interest rates on investments are very low, insurers cannot generate enough revenue from their investments to off-set some of the losses created by claims. This difference is therefore reflected by increasing insurance premiums to make up the shortfall.

Reinsurance

As the market hardens, insurers have a smaller capacity for absorbing risk, as do the reinsurers (who are effectively the insurance companies insurers use to protect themselves). The reinsurance policy aids insurers to be able to continue to provide cover to a customer. The rates for reinsurance are negotiated at the start of the year and reports have indicated an almost forty percent rate hike in 2022 due to current claims performance.

Now, if the insurer reduces their own risk capacity, they reduce the amount of reinsurance needed, which can help reduce costs. Alternatively, they may purchase more reinsurance to be able to maintain their book of insurance business which will result in higher costs.

Therefore, the extra costs incurred by the insurer is then passed on to the end customer, as insurers are unable to absorb these additional rate increases.

In conclusion, the factors mentioned above cause adverse losses to the insurance industry worldwide, which results in higher premiums across the board and stricter risk selection in insurance policies.

Good habits to practice during a hard insurance market

Make sure to undertake the following steps to ensure that your business/livelihood is safeguarded while dealing with the effects of a hardened market.

Speak to a professional insurance broker

The insurance advisors at Premierline will talk to you about your insurance needs to make sure you are getting the correct insurance cover at the most competitive premium. Furthermore, they will guide you through all the complex information for the most robust coverage you require with an easy and understanding approach.

Start your renewal process early

If insurers are applying stricter risk acceptance criteria, it is recommended to start your renewal process early to ensure you get the best deal, this will help:

a) Ensure that all relevant and additional information can be provided to the insurer, to promote the positive risk features of your business so they can continue to cover you.

Or

b) Provide enough time to look for alternatives if the current insurer is not able to continue to provide cover.

Be prepared to provide information about your business

You must always offer a realistic picture of your risk and disclose relevant information to your insurance broker/insurer. If the information you provide is favourable i.e., a business continuity plan, up to date wage roll and revenue figures, risk management practices and health & safety procedures this may assist to keep your premium low.

As it shows you’re managing your business well, taking into account the things that affect your business day to day and in the future.

Speak to a business insurance expert at Premierline

At Premierline, we are passionate about helping you protect the business you have built. Therefore, we offer a bespoke service, assessing your business needs and making recommendations on cover to ensure you are protected should the worst happen.

Furthermore, all customers are eligible for Premierline+ benefits designed to save you and your business money and provide access to unique business resources from insurance experts to keep you informed about the latest developments on all sorts of relevant topics.

As an insurance broker, as well as giving advice, we provide our customers with quotes generated from a selected panel of the UK’s most well-known insurers and have access to over fifty insurance providers. This ensures that you get the right level of cover at a competitive premium. We can also offer an account management service on a one-to-one basis where our clients require a more tailored approach for their business needs.

So, get in touch today and speak with one of our trained insurance experts to discuss your insurance requirements.


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