Over the past 12 months, one of the most common questions we’ve been fielding from our commercial insurance clients is “why do my premiums keep going up?”.
All professional sectors experience cycles, and it’s no different for the insurance industry. Traditionally, these cycles typically last between 5 to 10 years and include an expansion phase and a contraction phase, which we refer to as “hard” and “soft” markets respectively. We’re currently in the depths of a hard market across most classes of insurance, with most industries impacted by a lack of insurance availability to some degree.
According to the most recent Marsh ‘Global Insurance Market Index’ report, commercial insurance premiums in Australia increased by 35% at the end of 2020, while professional risks premiums rose by more than 50%.
It’s predicted that there’s still a significant way to go before the market reaches its peak (likely some time in late 2021 or early 2022). It’s also important to note that the hard market conditions we currently find ourselves in have been further exacerbated by the impacts of COVID-19 and related lockdowns and restrictions.
Soft Market vs Hard Market: What’s the Difference?
During a soft market, insurers have a broader risk appetite, greater underwriting freedom, and are able to compete with one another on price by lowering premiums to attract more customers.
Throughout this time, insurance companies have high cash reserves and can make money from investments – such as the share market. As a result, insurance companies can lower their premiums to a point where they either don’t make money, or lose money when selling insurance.
A hard market is when demand for insurance exceeds the supply. During a hard market, customers will experience premium increases, and insurers will reduce their appetite for certain types of risks. They may also decide to withdraw support altogether.
In addition, a hard market is usually characterised by increased claim activity (both frequency or severity), stricter underwriting guidelines, a lack of capacity to support higher limits/certain industries, and fewer insurers competing in the market.
Why Are We Currently in a Super Hard Market?
Over the last few years, we’ve seen Australia gradually move towards a hard market. It was in 2020 when we saw insurance profitability take the biggest hit, reporting only $35m in profit for the calendar year. This was an enormous 98.9% decrease on the $3.1b that was reported in 2019.
This result was largely driven by natural catastrophe claim costs, provisions for business interruption claims, an increase in reserves for long-term large payout claims, and falls in investment income.
Natural Catastrophe Losses
Throughout 2020, as well as battling the impacts of the COVID-19 pandemic, Australia also suffered heavy catastrophe losses, including:
These natural disasters tore through much of Australia’s east coast, resulting in significant financial costs for the insurance industry. Insurers that have paid large claims for certain risks may be reluctant or unwilling to insure for those risks in the future.
The 2019-2020 Black Summer bushfires alone were unmatched in terms of scale and damage, and generated over 30,000 claims that left insurers paying out a total of $2.4b.
Falling Investment Returns
Investment income fell by almost 50% in 2020 due to lower returns in equities, fixed interest investments, and indirect investments. The COVID-related global economic downturn has caused interest rates to approach zero, eliminating the investment return income which insurers have traditionally relied upon as a key source of profit.
COVID-19 has further heightened the hard market conditions due to significant claims losses under Management Liability, Employment Practices Liability, Event Cancellation, and other insurance classes.
During this same period, we’ve seen a trend of increased litigation, plaintiff-friendly legal decisions, and larger rewards – all of which affect insurers financial performance.
Big banks and financial services firms continue to face a litigious 12 months, with the Hayne Royal Commission hearings of 2020 providing regulators, consumers and shareholders with the confidence to take them to court.
Rising Costs of Reinsurance
Insurers also buy insurance – this is known as reinsurance. Reinsurance premiums are steadily increasing due to the large number of catastrophe losses around the world. When reinsurers increase their costs, insurers react by passing this cost down to the consumer.
Australian agreements on reinsurance pricing for the first half of 2020 saw increases in the range of 10% to 20%.
How to Navigate the Hard Market
While the hard market is going to impact insurance availability and premiums, we have some simple recommendations to help you mitigate the impact on your business insurance spend.
Step 1: Plan Ahead With Your Insurance Broker
Stay ahead of your renewal process and communicate early with your broker to help you identify how your business will be impacted by the increased cost of insurance.
Step 2: Be Prepared to Provide More Detail at Renewal Time
Due to increased underwriting diligence, you may need to:
- Provide additional information
- Complete additional proposal forms
- Supply additional financial documentation
More information will generally provide an underwriter with more confidence and thereby improve your chances of obtaining a reasonable solution.
Step 3: Partner With a Specialised and Trustworthy Insurance Broker
With shrinking capacity, insurers will be scrutinising the number of brokers they want to work with. Be sure to work with a broker who has strong insurer relationships. A broker who belongs to a broker network may also be better placed to access products or markets that may otherwise be unavailable.
Step 4: Review Your Operational Policies and Procedures
Documented business policies and procedures go a long way with insurance underwriters. They may also improve your ability to access coverage and/or obtain a reasonable premium.
Step 5: Learn from Insurance Claim Experience
Realistically, claims happen within every business – it’s what you learn from the experience that’s most important. If your business has had to claim in the past, be prepared to explain your claims and what measures were undertaken in order to mitigate this exposure.
So, What’s Next When it Comes to Your Domestic Insurance?
Insurers are now relying upon charging enough premiums to cover losses and generate profits, which will reduce their risk appetite, the capacity they are willing to offer, and tightening up their underwriting.
The hard market is most likely to continue over the next two years (at least), so businesses should budget appropriately and work closely and transparently with your insurance brokers to ensure you continue to be able to access the right cover at a reasonable premium.
Our BlueRock team of insurance brokers are here to help. For more advice on your unique situation, reach out to our General Insurance team for a free consultation.