Insurance market correction
The UK and global insurance markets have experienced a severe rate correction over the past three years after a long period of overly competitive pricing, which eventually became unsustainable.
Between 2015 and 2021, over 54% of listed insurers, responsible for over 52% of the global insurance market, made an overall financial loss relative to their cost of equity (McKinsey Global Insurance Report, February 2022). Insurer profit margins effectively disappeared due to historically low and volatile investment returns, attritional claims cost inflation and intense market competition. These losses increased rapidly, with record natural catastrophe claims in 2017 and 2018 and subsequent reinsurance price rises in 2019, exacerbated by the pandemic and economic slowdown in 2020 and 2021.
As a response to this lack of profitability, many insurers withdrew from the market entirely, consolidated their exposures or merged to reduce their cost base. Those that remained responded sharply by reducing capacity, narrowing their risk appetite and limiting their exposure. This created the hard market conditions experienced between 2019 and 2022, as competition almost disappeared for some insurance products and trade sectors. Reduced capacity resulted in increasing numbers of co-insured risks, which further limited competition and increased rating pressure, often indiscriminately across entire trade sectors and lines of business.
Strict portfolio reviews have also been undertaken, driven by a combination of reinsurance treaties, insurer management, the EU Solvency II directive and the Lloyd’s of London Performance Review. This major remediation work is mostly complete as we enter 2022, but insurers continue to cleanse unprofitable risks or those in unattractive sectors from their account.
The few insurers that have continued to write new business or have recently entered the market to take advantage of higher rates, have done so very selectively and for strict underwriting profitability, rather than premium volume and market share. Underwriters remain highly selective about the risks they choose to write, how much capacity they choose to deploy and at what price.
Underwriting authority has been reduced throughout the hardening market, with detailed underwriting rationales and increasing layers of referral required for pricing, cover and capacity decisions to be made by insurers. Along with remote working since the pandemic, this has significantly reduced insurer competition, responsiveness and coverage innovation.
Insurance market returning to profitability
These remediation efforts have been mostly successful for insurers and for the first time since 2016, the market is now broadly returning to profitability. The Combined Operating Ratios (CORs) of leading insurers have improved consistently across the market by an average of nearly 10% (Reinsurance News, 2021), representing a major improvement in their overall underwriting performance.
Reinsurance rates only increased by an estimated 4.1% in the January 2022 renewal cycle (Hannover Re, February 2022), which is down from an average of 18.5% in 2021 (Fitch) and should begin to ease some of the cost pressures faced by insurers, along with operating cost savings during the pandemic as they transitioned to a more efficient and flexible workplace.
Although interest rates remain at record lows, stock market returns and bond yields for insurers are beginning to improve into 2022, potentially encouraging insurers to protect and grow their market share for future investment returns, instead of for the strict underwriting profitability required in recent years.
Competition is slowly beginning to emerge for some risks in the most attractive sectors and lines of business. There is finally some limited new capacity entering the market cautiously and selectively, encouraged by higher rates and not constrained by historic loss experience.
In Q4 2021 and Q1 2022, we have seen more consistent green shoots, with new insurers looking to grow and some existing insurers slightly broadening their appetite and underwriting flexibility as they have returned to profitability.
2022 insurance market expectations
As the market begins to stabilise, policyholders have reason to be optimistic over the longer term, though for 2022 itself, the consensus is that the market will continue to be challenging. Restricting rate increases to single digits should be achievable in some areas, but specific sectors and product lines will again see double-digit portfolio rate increases, notably the heavier property/casualty exposures.
Financial and professional lines continue to be problematic but are expected to experience relatively lower rate increases this year of around 50% on average, down from over 100% in 2021 (Insurance Insider, September 2021). The cyber market is a clear exception and stands out as a particularly troubled product line, with expected average portfolio increases well in excess of 100% (Insurance Times, February 2022).
As a softening of underwriting approach starts to filter through to policyholders, the average rate increases across insurer portfolios should reduce, but it is important to note that this will not yet equate to consistent rate reductions for some time and only then for the most attractive sectors and for the most profitable and well-managed risks where there is enough competition to reduce pricing. Rates are still consistently increasing but in general terms, “the rate of increase is beginning to decelerate” (Fitch, December 2021).
This was evidenced by the data as in Q4 2021; UK rates still grew by 22%, driven by heavier Property risks and particularly Financial and Professional Lines. Crucially however, the rate of increase is reducing quarter on quarter from its peak in late 2020 of 44% and 35% in 2021 (Insurance Journal, February 2022).
Differentiating in a diverging market
Because of the new capacity selectively entering the market, risks are becoming increasingly divided into two tiers, dramatically separated between those in profitable sectors where there is a clear appetite for insurers to grow again and others where there is limited to no competition on pricing and restricted capacity.
For the very best risks, competing insurers are beginning to expand their appetites cautiously and pipeline opportunities to accelerate growth again (Deloitte, November 2021), whilst existing insurers are constraining their rate demands and improving their underwriting flexibility. We are once again achieving rewards for these clients’ loyalty, including multiyear rate stability agreements, low claims rebates and risk management bursaries, as insurers look to protect them from competition.
As the market continues to diverge, it is crucial that brokers are able to create quality market presentations and differentiate their clients to underwriters by communicating a depth of knowledge of the risk exposures and providing detailed information on how these are mitigated by positive risk management features and planned improvements.
It is also important to present detailed, accurate and user-friendly claims data, which represents a challenged and cleansed claims experience and includes supporting analysis of claims defensibility rates, cause trends and reserve settlement factors that can be used to negotiate improved terms and programme structures for risks with a frequency of claims.
Insurers are continuing to compete for risks that the broker has articulated clearly to be of high quality, proactively risk managed and which are historically profitable based on their claims experience. This competition is also containing the incumbent insurers’ ability to force through severe premium rate increases where it is not warranted by claims performance or trade.
Although we are still at the very peak of insurer pricing and remain in the depths of a hard market in which many clients are seeing substantial premium increases due to sector, claims, product line or risk management standards, the tide is now finally turning towards stability.
Specific issues for 2022
Policy coverage broadened significantly during the soft market conditions prior to 2019 and has subsequently tightened between 2018 and 2021, reverting to insurers’ standardised and increasingly restricted wordings.
This momentum towards “off-the-shelf”, approved wordings gathered pace as a result of the uncertainty created by ambiguous broker wordings and the subsequent policy disputes highlighted by covid claim notifications.
It has now become more difficult to negotiate bespoke wordings tailored to policyholders’ specific needs. Underwriters who are flexible and innovative by amending their own standard wordings within the confines of their much reduced underwriting authority are being rewarded.
Market exclusions to restrict cover are now commonplace, e.g. to actively exclude “Accidental Cyber” coverage from a Property policy or “Unsupported Systems” coverage from a cyber policy. The pandemic has also resulted in the removal of many Non-Damage Denial of Access covers and almost all Communicable Disease coverage under a property policy.
Emerging from the pandemic
The pandemic continues to have a significant impact, not just directly from paid Covid-19 claims but also due to the knock-on effects, including the reduction in premium volumes and increasing claims activity due to the overall economic downturn. This has also caused increased insolvencies and subsequent litigation, along with accelerating claims inflation from increasing rebuild and repair costs, including a scarcity of construction materials, labour, vehicles and parts.
With insurers and brokers working remotely, the ease of reviewing risk information, visiting sites for surveys, communicating with insurers (especially in Lloyd’s) and presenting clients to the market has become much more challenging. Whilst technology is adapting quickly, these changes to working practices are restricting insurers’ ability to respond and limiting brokers’ ability to negotiate effectively in an already very challenging market. We expect to see an improvement in this area, which will benefit clients, as we return to a more office-based environment.
Natural catastrophes remain at near-record levels of over $100bn in 2021, notably Hurricane Ida estimated at $30bn- $32bn (Swiss Re, December 2021). Reinsurers hope they can more readily absorb these losses on a profitable and sustainable basis now the market is reaching a much higher premium level and “on balance, the reinsurance segment will remain profitable, its risk-adjusted capital position will remain sound and will be resilient in the face of these near and longer-term challenges.” (AM Best. December 2021).
Motor Fleet claims inflation continues to increase rapidly, at levels consistently between 5%-10% annually and at 6.1% in 2021 (Claim Metrics). Currency fluctuations due to Brexit have inflated the price of vehicle parts arriving from Europe, along with rising repair costs due to increasing vehicle technology and labour costs and shortages resulting from the pandemic.
There is also a general lack of knowledge and expertise in some insurers’ repair networks to deal with advanced driver assistance systems and the exponential growth of hybrid and electric vehicles due to their battery technology and unique software. Thefts also remain high, especially of keyless entry vehicles.
Conversely, the overall frequency of Motor claims fell significantly during the COVID-19 lockdowns of 2020 and 2021, and we are now starting to see lower costs of personal injury claims from whiplash since the Civil Liability Act (2018) was finally introduced in May 2021, both of which should alleviate some of the inflationary pressure.
The Property market is seeing claims inflation of around 10% per annum, with a rapid rise in the cost of labour and materials for rebuild due to Brexit and the pandemic, with increased periods of business interruption and reduced business resilience, both financially and operationally.
The Casualty market remains impacted by changes to the Ogden Discount Rate in 2017 and 2019, whilst social cost inflation continues with medical advancements and higher damages awarded for care provision, NHS compensation costs rising faster than inflation and wider exposure to emerging psychological risks such as mental health, abuse and discrimination.
Sectors of Note
Casualty and Motor
The first product lines to benefit from rate stability and even rate reductions are in the most attractive areas of the market where there is an improving claims experience and quality risk management.
These include lighter motor Fleet (private car and vans) and attritional liability risks without significant injury/damage potential or a long tail for potential loss development.
Although Casualty and Motor is witnessing the most benefit from reduced rating increases, the heavier exposures are not yet benefiting due to increased loss potential and a lack of market competition. For Motor, this includes Haulage and Logistics, Couriers and Motor Trade, especially for Prestige and Self-Drive Hire fleets.
From a Liability perspective, the areas still experiencing the highest increases include Product-led risk exposures including Medical risks and products supplied without clear Rights of Recourse, e.g. parts or finished goods imported from China. The market continues to be especially difficult where there is a potential Covid exposure, e.g. Medical, Pharmaceutical and Clinical Trials, extending to Care Homes, Leisure, Hospitality and Hotels.
Similarly where there is a potential for serious injury to employees under the Employer’s Liability section, e.g. Stevedoring, Waste, Sawmills and Offshore Risks, or to the public from a Public Liability perspective, e.g. Leisure, including Tourist Attractions, Events, Nightclubs, etc, especially where insurers perceive a significant Covid exposure.
Property & Construction
Non-combustible and well-protected Property risks, with sprinkler (or equivalent) suppression, low inception hazard, a spread between buildings, quality risk management and Continuity/Resilience planning, are being rewarded with decelerating rate increases in 2022. Capacity and competition are not expected to reduce any further unless there is a specific claims or risk management justification.
Key exceptions include buildings of combustible construction including those with the use of unapproved composite panels, which has led to multiple high-profile losses. This construction method is especially prevalent in the Food and Pharmaceutical / Medical sectors for temperature control, often combined with negative trade features, e.g. heat processes.
Residential Real Estate portfolios including Care Homes and Hotels are broadly seen as unattractive to insurers, with residential occupancy increasing the hazard and insurers seeing consistent Flood and/or Escape of Water losses. Where these risks are of combustible construction with polystyrene panels or ACM cladding in the aftermath of Grenfell, they remain almost uninsurable, although we have found solutions where there are strong risk protections and a clear plan to remediate the issues.
As underwriters continue to be highly selective, trades with a higher inception hazard are also seen as unattractive, including Food, Waste, Timber, Plastics and Chemicals, along with risks that are unprotected by adequate fire separation and suppression, e.g. large, unsprinklered warehouses.
The rate increases across the market for Directors’ and Officers’ Liability (D&O) in the UK are finally beginning to show signs of decelerating in 2022. We are beginning to see some competition in the UK mid-market and large corporate space from new capacity.
Markets that have started writing UK business in 2021 include Inigo, IQUW, Arcadian, HDI, Tegron, SCOR, Rising Edge and Omnyy. However, not all the new insurers are targeting the UK sector or offering meaningful capacity.
We are seeing a general slowing of rate increases as the year progresses. It is anticipated that in 2022, we will be able to provide alternative market options compared to 12 months ago.
We also expect to see markets offering larger limits in a bid to remove other co-insurers from the larger placements as they look to grow by competing for new business, rather than just relying on organic growth on existing business.
However, behind what may look like the beginning of a downwards pricing trend, there are still pressures on insurers to try to maintain rates for to the following reasons:
- Environmental, Social and Governance (ESG) pressures bringing scrutiny from shareholders and the general public. This scrutiny is likely to produce claims/notifications. Insurers still fear that covid related insolvency claims against directors will have affected their portfolios significantly.
- Insurers have begun to see an increase in insolvency related precautionary notifications now that Government covid protection is ending, however it is too early to tell if this will cause a significant impact. An Ernst and Young report in October 2021 confirmed insolvency filings were up 17% from Q2 2021 and up 43% from Q2 2020.
- Most D&O claims in the UK remain centred around employment practice disputes, insolvencies or regulatory investigations. The increasing frequency of claims in these areas is still prevalent and will continue to drive an upward repricing of risk compared to only a few years ago.
- The concept of litigation funding in the UK also continues to drive the frequency of claims.
- Aside from the smaller but high frequency claims mentioned above, there are several large UK and European claims that have yet to be settled but continue to influence insurers’ decision making on limits and price.
We are likely to see continued upward pressure on price and deductibles in the Commercial Crime market and reductions in limit size in 2022 as insurer capacity has withdrawn. There is a growing trend for coinsurance at a primary level as well as a move away from each and every limits towards aggregate limits. Most Crime covers now exclude all forms of Cyber Crime. In the Pension Trustees’ Liability (PTL) space, there was a correction upwards in 2021 both in premium and deductibles. This is likely to continue in 2022 but mostly on those accounts that avoided a significant increase in 2021.
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Whilst some green shoots of recovery are appearing across certain areas of insurance, the Cyber market has become completely distinct and the product-line is now severely distressed.
Organisations and their insurers are navigating an ever-changing risk exposure landscape. First party claims, driven particularly by Ransomware, have hit all areas of the Cyber market, shining a light on the inadequacy of the historically low pricing in previous years as insurers attempted to secure market share in a rapidly growing product-line.
As a result, the Cyber market has experienced an extremely challenging few years, almost in tandem with the pandemic, causing insurers to take drastic steps to remediate their Cyber portfolios. Insurers have focused on:
- Co-insuring, sub-limiting or excluding aspects of cover, particularly Ransomware
- Significantly increasing deductibles
- Reducing limits and capacity, requiring additional insurers to complete placements
- Increased minimum standards for IT controls (failure to meet standards resulting in automatic declinatures or the introduction of onerous exclusions)
We anticipate that significant rate increases are likely to continue through 2022 and that ongoing systems and process enhancements will be required to combat the evolving threats and satisfy insurers. Much will depend upon the volume and nature of claims that develop in the coming 12 months.
It is clear that Cyber risks are a major issue for both the insurance market and for businesses worldwide. As the insurance market has looked to address the risk via pricing and coverage limitations, businesses are also now required to step up the level of investment in their own IT security systems and procedures, whilst brokers need to be able to articulate these Risk Management standards and risk mitigation features to insurers.
The Professional Indemnity (PI) market continues to experience pressure on rates and capacity, with certain sectors being particularly challenging:
Design and Construct (D&C)
Contractors, architects, design professionals and surveyors have all experienced dramatic changes to their coverage, premiums, deductibles and limits driven by market-wide losses, including the complex and high-profile Renewables and Waste-to-Energy losses which came to light in 2015, followed by the 2017 Grenfell fire tragedy which acted as a catalyst for overwhelming capacity reductions and insurer withdrawals, especially for businesses with any perceived exposure to cladding or fire safety.
The Lloyd’s Thematic Review in 2018 highlighted PI as a particularly troubled sector and threatened sanctions on those insurers which failed to remediate their position in 2019 and 2020.
The collapse of Carillion exposed the lack of supply-chain resilience in the UK construction market which alongside Brexit, the Covid-19 pandemic and subsequent economic downturn have all resulted in labour and material shortages, together with widespread business insolvencies.
This has made insurers highly selective of the risks they accept in the construction sector, based on their activities, claims experience and financial resilience.
More positively, it seems the majority of this corrective action has now been taken by insurers and rates are slowly beginning to stabilise slightly at this much higher pricing level. Brokers and policyholders now provide better quality underwriting information in more time, engaging to build trusted relationships with insurers, who in turn now have more manageable risk exposure.
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Like in other sectors, the Solicitors’ PI or “PII” market has seen consistently high rate increases at each April and October renewal season since 2017. Three major insurers exited the market due to a lack of capacity and with some exceptions, those which remain are generally only offering firms the minimum £2m or £3m Limit of Indemnity mandated by the SRA (Solicitors Regulation Authority) and typically restrict the coverage they offer to Minimum Terms, whilst long-term policies are generally unavailable.
The rate of increase is now starting to slow as insurers begin to achieve “rate adequacy” from around 30% in 2020 to 10%- 20% in 2021 (The Professional Indemnity Company, 2021). Well run firms with good claims experiences and a lower percentage of high-risk activities are being rewarded with improved terms and lower rate increases, differentiated from the overall market by selective underwriters.
The average rate increase for PI in Financial Services and Financial Institutions is slowing in general but more than 95% of regulated firms are expecting rate increases in 2022, with over a third expecting higher deductibles and 29% a reduction in coverage (Clyde & Co. 2022). Privacy and Ransomware are seen as a key exposure, especially with increasingly remote working and weakened supervision, and policy exclusions are expected to effectively remove any Cyber cover from the Professional PI market.
Accountants and Management Consultants are still experiencing significant rate increases where they are conducting work considered to be higher risk, with the Financial Ombudsman able to make awards against regulated firms of up to £355,000, which has resulted in far higher claims across the sector. Larger accountancy firms involved in Mergers and Acquisitions work and audits of listed companies must undergo in-depth underwriting procedures to obtain coverage as underwriters continue to be cautious.
Mortgage Brokers and Independent Financial Advisors continue to be viewed as a particularly high risk after the fallout of poorly performing pensions, endowments and investments, especially for those exposed to Defined Benefit pension transfers.
The expected economic slowdown from the pandemic has encouraged even more insurers to withdraw and as such, this remains a particularly tough sector even as the wider PI market for Financial Services beings to stabilise.
Insurance Brokers themselves are also seeing highly selective underwriting, restricted capacity, onerous policy conditions and severe pricing increases.
Media & Technology E&O
Errors and Omissions (E&O) for Media and Technology firms has traditionally overlapped with Cyber coverage. Blended policies in particular have therefore suffered from significant rating increases and capacity reductions from underwriters due to the perceived Cyber risk and the withdrawal of insurers from offering these blended policies, despite the benefits of one consistent policy wording.
We are now seeing these placements split into separate Cyber and E&O policies, with exclusions for “silent Cyber” risk under the Media and Technology E&O policies moving forwards.
This may come at increased overall cost on a like-for-like basis as there are now two distinct limits for Cyber and E&O, but the improved flexibility allows policyholders to amend their coverage, limits and deductibles separately for each tower to mitigate this, particularly on Cyber where the placement is currently more challenging.
Dividing the policies in this way also allows brokers to increase market competition for each line individually by approaching insurers whose appetite is most suited to each, without the need for an insurer who can specifically offer a blended policy. We are seeing this approach being rewarded by the market, with insurers competing on price, capacity and coverage for each line on its own merits.
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About the author
Oliver Butterworth ACII is an emerging industry leader, Chartered broker and Associate of the Chartered Insurance Institute (CII) with over 10 years’ insurance broking experience, negotiating the placement of major UK and global risks into both the insurance company markets and Lloyd’s of London.
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The information contained in this bulletin is based on sources that we believe are reliable and should be understood as general risk management and insurance information only. It is not intended to be taken as advice with respect to any specific or individual situation and cannot be relied upon as such. If you wish to discuss your specific requirements, please do not hesitate to contact your usual Towergate Insurance Brokers adviser.