Aon | Professional Services Practice
Release Date: July 2022
A Market Correction – Responses for Professional Service Firms to Consider
Conditions in the global insurance market have changed quite dramatically since 2020. The trends were underway for several years previously but were accelerated by COVID-19, which has triggered losses in several insurance lines and the market correction. Meanwhile some classes, particularly cyber, have experienced increased loss ratios leading to widespread changes in insurer positions.
For several years the key financial metrics in the industry, combined ratios and returns on equity, have delivered poor results. This was the result of the competitive soft market. As in the past, a significant triggering event caused a market correction.
Here are some consequences of this new underwriting discipline:
- The degree of rate increases has varied. However, financial lines, which includes Directors & Officers (D&O) and Professional Indemnity (PI), have seen some of the higher increases. This is particularly true for business placed into the Lloyd’s market, due to their overall recent loss experience.
- In many instances insurers’ internal guidelines prevented underwriters from deviating from management’s rate increase instructions. Thus, conventional negotiation has had more limited effects.
- In contrast to prior years, where portfolio growth was the imperative, markets have been content to lose business as rate increases across the portfolio used up their underwriting capacity.
In addition to COVID-19 related losses, uncertainty has been increased by short and medium-term concerns around inflation, which has had effects on both sides of insurers’ balance sheets.
The underlying causes for PI rate increases have included deteriorating loss experience and new emerging sources of claims. One element of this latter phenomenon has been labelled “social inflation”. It encompasses new types of claims, the effects of higher awards, and increased third-party litigation funding.
What Are the Current Prospects?
- Opinions vary as to where we are in the cycle. There has clearly been some easing for many classes this year. Rate increases are reportedly smaller for PI and Cyber renewals than in prior years. However, some commentators see a medium-term phase of tough market conditions for PI, D&O and, most significantly, cyber risks.
- Recent insurers’ results announcements and commentaries have highlighted improving combined ratios and signaled an easing in pricing. Inflation, in particular, and economic and political uncertainty are areas of concern. We should not expect a return of the soft market in the near term.
- Policies with losses will likely continue to attract increases, irrespective of overall market pricing. The exact effects would clearly be dependent on the nature and size of the loss.
- Some new capital has entered the market, and this may operate to ease some capacity concerns.
- Direct losses from COVID-19 claims seem to represent a manageable catastrophe event for the industry. COVID-19 was not a market turning event on its own, but it follows upon recent years of insufficient industry returns. Thus, a continued focus on underwriting discipline is to be expected.
- War risk losses from Ukraine are a new dimension. These will affect certain lines, most immediately and directly political risk and aviation.
- Increased societal and insurer focus on ESG risks may have potential implications for certain lines, perhaps most immediately on D&O and Employment Practices Liability (EPL).
Cyber insurers are concerned about major “events”, and aggregation within their portfolio. War risk exclusions are a subject of current scrutiny.
In the PI market, so called “silent cyber” has emerged as an issue. The London market is seeking to clarify the exact amount of cover for cyber risks within a PI policy. There are various endorsement wordings and Aon has agreed some preferred language with insurers.
Possible Market Outcomes
- The market shows signs of stabilizing, and the increases paid in recent years may be sufficient to obtain favorable terms in the near or medium term.
- A prudently optimistic view would presume moderating premium increases and some small reduction in existing insurer commitments. A portion of the market will be seeking growth.
- The pessimistic view could see high increases continuing and more lost capacity, with additional restrictions in policy terms.
Currently difficult conditions prevail in the cyber market due to the threat landscape. However, a decreased volume of ransomware attacks, and policyholder security improvements resulting from insurers’ heightened underwriting standards, seem to be having an effect on losses and insurer sentiment. This is worthy of a longer discussion.
- Build a comprehensive submission explaining the nature of the risks facing the organization and the risk management framework that responds. Include reference to emerging current concerns and steps being taken to mitigate. Provide evidence if possible.
- Questions around ESG related exposures and internal policies are to be expected from insurers.
- Mapping cyber exposures against insurance policies is a useful exercise before approaching the insurance market.
- Share a claims analysis with underwriters and invite questions.
- Monitor the market, ask for feedback on others’ experiences, and adjust expectations and renewal strategies accordingly.
Our April 2022 article on dealing with uncertainty has some additional pointers for addressing non-traditional risks, which may assist when presenting the organization’s risk profile.
Aon is not a law firm or accounting firm and does not provide legal, financial or tax advice. Any commentary provided is based solely on Aon’s experience as insurance practitioners. We recommend that you consult with your own legal, financial and/or tax advisors on any commentary provided by Aon. The information contained in this document and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity.