Instead of oscillating between extreme hard and soft markets, the insurance industry needs to promote a more sustainable business model that will help control the insurance cycle, according to an executive at the insurer Markel UK.
And perhaps the ongoing hard market presents an opportunity for the industry to reset some long-held practices, indicated Nic Brown, divisional director – broker, Markel UK, who participated in a panel discussion on the hard market at the recent annual conference of the British Insurance Brokers’ Association (BIBA), held in Manchester, England.
“I think we’ve got a huge opportunity in front of us. We’ve had two years of hard-fought conversations with customers, and there’s probably two things that I’d urge everyone in this room to consider,” he said.
“One is to have a long memory, please, because you’ve been let down by some of your insurers and MGA capacity providers who have headed for the hills in the last couple of years. It’s not just about price, right?”
It’s important to have a long memory and support those providers and insurers that have continued to work with brokers and insureds all the way through this hard market, he added.
In his second point, Brown implored the audience of brokers to “please, please, please, after two years of hard-fought rate increases, let’s not go back to price as the only differentiator.”
He stressed that a price correction was necessary after many years of soft market pricing so that insurers could get to the point where they could underwrite profitably. It was important for insurers to get back “to the basics of fair and long-term sustainable pricing,” while making sure they have clear customer support, Brown stressed.
“If you can’t think of a reason why you are placing a business, other than it’s cheaper, then we’re all doing something wrong here, right?”
Insurers want to provide more value for customers, more risk management and better quality of products and coverage, but they can’t do that if the margins are constantly being pushed down, he emphasized.
Brown said it is “absolutely critical” for brokers and insurers to adopt a more sustainable approach to insurance cycles. “I’m very passionate about sustainability … in the insurance marketplace. And, by definition, oscillating between extreme hard and soft markets is slightly the antithesis of sustainability.”
Brown was joined on the panel by Carl Evans, partner, group chief executive – Professional Risks, at Griffiths & Armour, a London-based insurance broker; John Batty, director of Technical Services at Manchester-based Bridge Insurance Brokers Ltd.; Marc Lewis, chief underwriting officer, Commercial Lines Business at Aviva, headquartered in London; and Sarah Mallaby, Commercial Distribution and Trading director at AXA Commercial in London.
Diving into the topic of the current hard market, Evans, the panel’s moderator, said, while prices have gone up significantly over the past few years, the UK market is still at long-term average rates and he has seen no evidence of profiteering or profit chasing on the part of insurers.
Evans said his specialty as a broker is in professional indemnity in construction, which has seen underpricing and under-reserving in the last 20 years. “There needed to be a price correction, and that’s happened.”
Lewis at Aviva acknowledged Brown’s passion around trying to remove the insurance cycle, but he didn’t think that would be possible “because of the nature of competition.” The market has simply responded to 15-16 years of significant rate softening and coverage creep in policy wordings, he explained.
“Naturally, in a hard market or harder market, you start to see some of that cover pulled back,” which needs to be considered. “This isn’t just about pure rate — is the cover afforded sustainable as well?”
When discussing some of the trends for individual lines, Lewis said, financial lines were arguably the area that’s hardened the fastest and the most aggressively. However, management liability, or the D&O market, is now starting to stabilize.
“I think over the last six to six to nine months, we’ve seen 16 new entrants in this space, typically offering capacity up to £5 million, so that’s created some downward pressure on rate in the D&O market. We expect there to be some rate decreases in that sector through 2022.”
While employers liability, public liability, and motor have seen more modest levels of rate growth over the past two years, Lewis warned that this sector has seen a frequency benefit because there have been fewer accidents during COVID lockdowns, with fewer people falling over in supermarkets and less traffic volume on the roads, resulting in fewer accidents. “So some of the rates have been depressed by frequency benefit.”
As the UK moves back to normal, coupled with significant claims inflation, “that’s an area we need to be mindful of in terms of some rate pressure as we move forward,” Lewis said.
When the panel was asked how inflation will drive the hard market, Lewis said the insurance industry across the globe will feel its effects on claims inflation.
Aviva is projecting claims inflation of as much as 8% on a number of key lines of business through the rest of 2022, with an expectation that it may drop slightly in 2023, he said.
However, insurers face both retrospective and prospective issues with inflation, he indicated.
For example, when insurers priced risks six months ago, they were not anticipating claims inflation running at 8%. “That is going to create pressure on insurers’ claims ratios,” Lewis affirmed.
In addition, he explained, it is difficult for underwriters to predict how risks should be priced today, guessing what the future inflation rate is going to look like.
Evans warned that inflation will make the ongoing issue of underinsurance a bigger problem than it already is.
Indeed, underinsurance is persistent and widespread, according to BIBA, quoting the UK Chartered Institute of Loss Adjusters which estimates underinsurance to be evident on more than 40% of claims.
Evans said it’s important that customers get reinstatement cost assessments on buildings and machinery. “Underinsurance is not going away. It’s only going to be a bigger problem than it is now, and I think if you can secure increases in premium through sums insured, it puts less pressure upon rating increases alone.”
If insurers stand still on the indemnity of sums insured and inflation runs at 7% per annum for three years, they’ve “got a hell of a problem,” Lewis cautioned.
Mallaby at AXA noted that the industry is in uncharted territory — because most of today’s industry practitioners weren’t around for the hyperinflation of the 1970s.
As a result, insurers, brokers and BIBA all have a part to play in training teams to adapt, she said. “There’s loads of virtual training from most insurers now,” according to Mallaby.
Batty at Bridge Insurance Brokers agreed that brokers should use the services that are on offer from their insurer partners. “They’re quite prepared to come out and do training,” which he suggested for all junior members of staff.
New people need to be trained to make sure sums insured are adequate and that the cover is appropriate for the customers, according to Mallaby. “We don’t want the customers paying for cover they don’t need.”
Equally in a hard market, she said, “going for the lowest price for a hollowed-out product is not going to be professionally very good for you and your reputation, if you then end up having a claim that’s not covered and it exposes you as a broker to an E&O claim.”
Navigating Hard Market
In a section of the discussion when the panel offered advice to young brokers in the audience, Batty said strong relationships with key insurers has helped his company successfully navigate the hard market. “[D]uring the soft market, we didn’t just move business around for price; we built relationships with key insurers and those relationships in a hard market are key — they’re our friends. We turn to them at times when we need them. So that’s been absolutely essential.”
Another piece of advice he offered is to start early with risk placements. “Identify problems with risks, if you can. Engage with risk management.”
He said that Bridge Insurance Brokers is lucky to have “an outstanding head of risk management. … It really does set your presentations apart when you’ve got [a high] level of information on a risk that you can present to an underwriter.”
So how can a broker stand apart from the hundreds of emails that inundate underwriters? Batty proposed the tried-and-true practice of meeting with underwriters, face to face. “Talk to them about the risk that you’ve got, sell it to them. They find it very hard to say ‘No,’ when you’re talking to them and giving a good story, face to face,” he added.
“Build on your reputation; it counts for everything. If you’ve got an underwriter that trusts you and is willing to back you, then they will write [the risk] for you. Work with the insurer, work on risk management — and that’s how you navigate hard markets,” Batty said.
Doing the Basics
Mallaby at AXA also agreed that brokers need to engage early with their markets. “It’s amazing how many brokers don’t do the basics.”
Especially in hard markets, she said, it doesn’t need to be more sophisticated than just regular engagement pipelines, “especially if it’s a difficult risk to place.”
And, don’t hide behind emails, Mallaby advised. “It’s really hard to say no to someone you’ve met and been to their premises.”
“Scatter-gunning and marketing every insurer in the market” is a “pointless exercise” and should be avoided, she said. Instead, brokers should pick one or two insurers to work with and “really engage with them.”
Evans acknowledged that brokers often waste a lot of insurers’ time by not preparing properly, not presenting properly, not knowing at times what they are doing.
When brokers make presentations to underwriters, it’s important to explain why claims are unlikely because the client has taken “a specific action to resolve that risk or that exposure,” Mallaby said.
She also suggested looking at packaging — for example, what else does the customer need, and what can be offered to the insurer “to make the portfolio a bit more attractive, from a profit perspective.”