Small signs of improvement are beginning to emerge in the public sector insurance market. Alison Goodwin, public sector practice leader at Aon, looks at the state of the market and what the next 12 months hold.
With April renewals progressing well, there are some signs of green shoots in the market. Most tenders are now either in evaluation or with underwriters for quotations and, although it’s still too early to say the hard market is behind us, there is more optimism this year.
Some insurers are taking a more measured approach to renewals this year. Rather than applying increases across the book, corrective action is more targeted, with risks that offer higher exposure or have an adverse claims history most likely to face increases. And, while rate rises are still the norm, the average level of increase is reducing.
We’re also seeing some relaxation around communicable disease exclusions. As insurers gain a greater understanding of the risks posed by COVID-19, some are softening the impact of their exclusion and offering better cover than they have previously. This doesn’t apply across the market, as some insurers opted not to impose any exclusions in the first place.
In spite of these improvements, securing the best terms across all product lines still requires time and a detailed presentation. Clients who are able to provide a high level of detail, demonstrate that their risk is well managed and their claims profile is performing well are more likely to be offered the best terms.
In tender situations, some clients have achieved good results through competition. Although this is positive, there are still some challenges. Claims inflation and new risks mean that insurers are taking a more cautious approach in some instances.
This is what we’re seeing in the market.
Inflationary pressures are still building in the property sector. As well as pressure on reinsurance rates, with 2021 expected to be another exceptional year for catastrophic natural disasters, labour shortages and supply chain issues are pushing up reinstatement costs.
These inflationary pressures mean that accurate sums insured and up-to-date valuations are more important than ever. For instance, the RICS rebuilding cost index serves as a good gauge for the cost of reinstatement, and it’s currently running at around 8%. If an insured adopts standard inflation at around 5%, this could distort sums insured considerably and result in underinsurance in the event of a claim.
Please note that these numbers are changing regularly so do ensure that you use the very latest indexation factors when presenting your sums insured.
Cladding remains a concern and buildings with cladding can still be very difficult to insure. Providing plenty of detail around the type of cladding, risk mitigation measures and future plans for replacement can help when arranging cover. It’s also essential to keep up-to-date with any risk survey recommendations from your insurer, including following up any action points and providing timely feedback.
Better information is also required around contract works and contractors all risks cover. We understand the challenges, and that you may not even know what work is planned, but supplying as much detail as possible will enable us to provide accurate advice. For complex contract specific placements, rates are increasing, capacity is being squeezed and some insurers are not able to offer 100% lines on all cases.
Please note that any indications provided at the start of contract negotiations may vary significantly from confirmed premiums further down the line. Other high-risk areas can include high rise residential property and waste sites.
With any property renewal, be prepared to provide more detail than in previous years, start early, engage with your broker to understand the additional information requirements and work with your internal teams to provide as much detail as possible.
Corrective action in the motor insurance market appears to be specific and targeted, with blue light fleets most affected due to the frequency of high value claims. Also of concern are those moving towards greater dependence upon electric vehicles. This is due to the increased cost of repairs associated with these vehicles. Repairs also tend to take longer, which puts additional pressure on claims costs.
We expect rates to increase slightly in 2022 across the board but the best prices will continue to be offered to those clients able to demonstrate good management of their fleet, and where the best information is provided.
Rate increases are definitely slowing in the early part of 2022 and we are even seeing some renewals offered within existing long term agreement rates. Where increases are requested they are more targeted at risks which are perceived to be performing badly or where the claims experience has deteriorated.
Claims inflation is still a factor and purported to be running at anything between 5% and 15%. This is being driven by a number of things including: increasing legal defence costs; growing compensation culture; conditional fee agreements; changes in legislation; advertising by personal injury law firms; torts reforms; and court decisions.
There are some tiny, initial signs of hope in these markets with the level of increase beginning to slow. But, with the average increase falling from 30 to 40 percent to around 20 percent, there is still some way to go. This has an impact not only on you directly, as a public sector organisation, but also on any suppliers in your supply chain who rely upon this type of insurance.
As well as the rate rises, we’ve seen a shift in the basis of cover for some clients from any one claim to in the aggregate. This reduces the cover available through your policy so make sure you – and your contractors – factor this in when renewing. We would recommend that this is highlighted to any teams responsible for checking contractors’ insurance arrangements as it could leave you exposed in the event of inadequate cover.
Some insurers are also reducing their primary line and, for some clients, this can mean an alternative programme structure involving a number of insurers. Where this is necessary, cover will take longer to arrange as the primary line will need to be in place before additional capacity can be secured.
We have also seen more large officials indemnity and crime claims – and any organisation affected is likely to see an increase in their premiums.
We recommend starting the renewal process as early as possible, providing detailed information and responding to any queries promptly. Expect more clarification questions to help underwriters understand your risk and note that many financial lines underwriters don’t release terms more than 30 days prior to renewal.
The market for cyber liability continues to harden, with the number and financial implications of attacks increasing. This has made the insurance market more cautious than ever, with renewals coming in with increases of anything from 20 to 400 per cent.
We have also seen insurers reducing their quotation validity time to 30 days, imposing co-insurance clauses and increased excesses. So, where terms are offered, make sure that you understand any changes in cover and don’t delay in accepting them as they may change.
For organisations not already purchasing cover, it is becoming more difficult to access, with insurers requiring clients to demonstrate that they meet minimum systems and data security requirements. These focus on the maturity of their data risk management and many organisations are falling short.
Arranging cover may be a challenge but there are alternatives to traditional insurance that are worth considering. Many elements of an insurance product can be purchased such as risk management consulting, digital forensics and incident response. We have many years’ experience in cyber risk and can help you arrange a bespoke solution that fits your needs.
As well as the factors affecting each of the product areas, a number of legislative and regulatory changes will also shape the insurance market in 2022. These are some of the key changes to be aware of:
- The Protect Duty
Also known as Martyn’s Law, this legislation will introduce a statutory duty for the owners and operators of publicly accessible locations to take appropriate and proportionate measures to protect the public from terrorist attack. Draft legislation is yet to be published but we expect it to become law by 2023.
- Building Safety Bill
This is due to become law later in 2022 and is designed to create a clear, proportionate framework for the design, construction and management of safer, high-quality homes in the years to come. More to come on this in later market updates.
- Transforming Public Procurement
One of the key considerations for insurance procurement will be a move from evaluating the Most Economically Advantageous Tender to the Most Advantageous Tender. This shifts the focus away from cost, putting more emphasis on quality.
- Duty of Fair Presentation
The first English judgment (Berkshire Assets (West London) Ltd v Axa Insurance PLC) on the duty of fair presentation under the Insurance Act found that the insured had failed to disclose a material fact that would have resulted in the insurer avoiding the policy. This is a reminder of the insured’s duty to make a fair presentation of risk.
2022 is set to be a busy year, and while it’s encouraging that market conditions are improving, we expect it will still be challenging. Starting a renewal early and gathering all the necessary risk information will help your organisation secure the best possible terms.
To discuss any of the issues raised in this market update, contact Alison Goodwin at firstname.lastname@example.org or speak to your account manager.