Navigating the Challenging Insurance Market
Aon hosted a live client webinar on the 23 April 2021 which was led by Jane Kielty, Managing Director, UK Retail and a panel of Aon’s senior broking specialists, to share their insight into why the insurance market is so challenging; what options clients have to counter the prevailing trends; how clients can work with Aon to get the best outcome; and, what Aon is doing to support the market and drive professionalism through the launch of a new charter.
Acknowledging that recent premium increases are hugely unhelpful to most organisations as they “reel from the impact of COVID-19”, Aon’s Client Partner & Executive Director for the UK Norman Andrew, opened Aon’s webinar by looking at the two main triggers behind the current hard insurance market; sustained underwriting losses, and poor investment returns.
Comparing this hard market to the last one back in 2001/2, Norman Andrew emphasised the real difference was in the reduction in market players and coverage withdrawal. “Yes, we’re seeing capacity reduced. Yes, we’re seeing premiums increased. But now, more than was the case back in 2001, there are significantly fewer players in the market, and we are seeing important aspects of cover withdrawn from policies.”
2020 – a benign year for losses…
but for COVID-19
Focusing on losses, analysis of natural catastrophes reveals spikes in the last 10 years correlating to the Japanese earthquake and tsunami in 2011, and hurricanes Harvey, Irma and Maria in 2017. “2017 was the trigger for why we have been facing the market challenges over the last few years” said Andrew, adding that 2020 would have been a benign year had COVID-19 not happened, with Lloyd’s estimating the cost of COVID-19 to the global insurance industry to be around US$203 billion both in claims and a reduction in asset values1. But, given the underlying level of losses when COVID-19 claims are stripped out Andrew sounded a note of optimism for the future, arguing “there isn’t necessarily the need for insurers to claw back what they incurred in COVID-19 losses in 2020”.
Turning to insurer profitability, analysis of the combined operating ratio (COR – claims plus expenses as a percentage of earned premium) for leading markets reveals many were loss making on their underwriting e.g. Lloyd’s reporting four straight years of a COR over 100%, although 2020 would have been 97% if COVID-19 costs were stripped out. Add in investment returns, however, said Andrew, “and my take away, is that things aren’t quite as gloomy as the CORs would suggest” for insurers.
A lack of insurer competition
For buyers however, this time around we face a lack of competition which is sustaining the hard market. “The market is less populated in terms of players which is never a good thing from a competition perspective,” said Andrew, referring to a drop from 40 to 18 insurance markets in the last 20 years due to mergers, failures or exits from the market and a third fewer syndicates at Lloyd’s than there were in 2000. It follows that with fewer players and insurers and the ones left being more selective in what they’re prepared to write, capacity problems are also fuelling the hard market particularly in areas like food, waste, and chemicals with challenging terms and conditions being applied.
“We’re seeing different wordings around areas like communicable disease and silent cyber” said Michelle Beverley, Head of Corporate Broking, UK Retail at Aon. “It’s becoming very difficult to get consistency across all the insurers. We’ve also seen a huge amount of coverage withdrawal. In the property market we’re seeing exclusions around pandemic, communicable diseases, denial of access, and with the advent of a lot more ransomware claims in the cyber market we’re now seeing silent cyber exclusions applied.” For liability, there are COVID-19 and data protection exclusions, fire safety for PI following Grenfell, and, Beverley added, “We’re seeing more issues in the D&O market around insolvency, with markets being more particular about what they’ll offer.”
Pricing up in double digits
In terms of pricing, all these factors meant if you were a client renewing in Q4 2020, the average exposure adjusted movement was 44% from the previous year. Why are prices in the UK more severe? “The UK is unregulated from a pricing perspective, so we enjoy the best of rates in a buyer friendly market but the worst of rates in a hardening market” said Andrew. The rating direction for financial lines is far more severe with an increase of 90% in Q4 2020. In contrast, property was at 24% and casualty at 6%.
There is however, some reason to be optimistic said Andrew. “The market had to harden but insurers have made good progress in improving their health. COVID-19 has been a setback, but they don’t need premium for this risk going forward because it is largely excluded, and reinsurance treaty renewals were more modest than anticipated. The severity of rate strength seems to have peaked and we have everything crossed on your behalf for a benign catastrophe season.”
Time to retain more risk?
For buyers then, what options are there to counter the prevailing trends of pricing and availability through the retention of more risk which can save on premium and reduce the insurance premium tax burden? Aon now offers a new tool – the Claims Retention Insight Platform (CRIsP) to help clients understand the impact of changing their retentions. It’s similar to Aon’s Risk Finance Decision Platform (RFDP) tool which is used for more involved programmes. “CRIsP is for more straightforward programmes, with low retentions, simple deductible structures and also if you have a more stable exposure over time,” explained Matthew Grant, Principal Consultant, UK – Actuarial & Analytics. “It analyses the impact on premium and claims when you change your retention and highlights the target premium saving needed to support changing retention levels.
Getting the best outcomes for clients
While exploring retention levels is important, insurance buyers will still need to work hard with their broker to realise the best outcome when going to market with their risk. The big advice is be prepared, said Beverley. “We need to start the renewal process early. Where we were starting two to three months out, we need now to start six months out. And we’ll be asking you to involve more people in areas like health and safety, and IT. We are also asking for a lot more information. Knowing your insurer and them getting to meet you is a huge plus. No one can sell your business to an insurer as well as you can.”
Looking at the individual lines, starting with property/business interruption. “There is an expectation by insurers that minimum risk standards will be met. The first question that many insurers ask is where are you on risk recommendations?” Other areas of focus include business continuity plans, said Beverley, particularly looking at all scenarios and not just worst case. Insurers are also needing more information and a lot more detail while underwriting surveys have moved from “luxury to necessity”.
For liability and motor, a full breakdown on wage roll, turnover and vehicle schedule is needed. “The one big change we’ve seen in the last 12 months” said Beverley, “is being asked for risk assessment and site procedures in relation to COVID-19.”
On financial lines, this “is the one area where we have seen massive increases of up to 500%” said Beverley. “The basics we need to get a D&O/financial lines renewal over the line include a fully completed proposal form, fully completed COVID-19 question set, as well as all the usual documents around financial statements and management accounts. The newer requirement we’re seeing more and more of is for a company’s ESG credentials; how well your company does in that space can be a real plus.”
Finally, on cyber, insurers are asking for more information. “A lot of it is around what data management strategy you have in place and that unused remote desktop protocol ports are protected” said Beverley. “If you’re using a third party, what security do they have in place?”
Creating competition and capacity
To help clients, Aon is working to create competition and further capacity in the market. “We have a protected cell facility (Whiterock) we use which has proved to be very competitive on the last four clients where Whiterock have been involved, as well as looking for reinsurance solutions” said Beverley, who also explained that the Aon Carrier Treaty provides co insurance capacity up to 15% on core business lines placed in the London market through our Global Broking Centre. Additionally, Aon has worked to bring in new entrants like Protector – a Norwegian insurer – who have built a big corporate book in the UK and now write business for companies within both our Advisory and Corporate sectors.
Introducing the Aon insurance charter
Another initiative Aon has been working on to help clients is an insurance charter. “We recognise that for many clients, the late delivery of terms which bear limited resemblance to what insurer’s may have previously indicated is not acceptable. What we’ve done is attempt to lead the professionalism of the insurance market by developing an eleven-point charter to try and restore clients’ faith in the insurance market” said Andrew. Some of the key points, Andrew explained, include a requirement that insurers provide their renewal intentions in good time around rate, capacity and whether they are going to impose exclusions in areas like COVID-19. Additionally, the charter requests that insurers tell Aon in good time of any additional underwriting information that will be required. “This isn’t about stopping insurers from seeking rate strength or applying terms” said Andrew. “it’s about the market recognising the need to treat customers fairly”.
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Sources:
Aon UK Limited is authorised and regulated by the Financial Conduct Authority. Aon UK Limited. Registered in England and Wales. Registered number: 00210725. Registered Office: The Aon Centre, Leadenhall Building, 122 Leadenhall Street, London EC3V 4AN. Tel: 020 7623 5500. FPNAT551