The Market Finally Turns
After a four year period of dramatic rate correction across the UK and global insurance markets, average rate increases for insurers broadly returned to single digit percentages by the latter half of 2022. This is the first time since 2018 the average has been below 10% and this moderation and stabilisation in overall risk pricing is expected to continue throughout 2023.
Having completed their portfolio reviews in recent years, insurers have cleansed their unprofitable lines of business, corrected their rating models and markets begin to look towards growth opportunities once again, albeit at the current level of risk appetite, capacity levels and pricing. These remediation efforts have mostly proved successful for insurers and the market has broadly returned to profitability, with Combined Operating Ratios for commercial insurers now almost all below 100% (which is effectively break even) for the second year running. This represents a major improvement in overall underwriting performance with Aviva, RSA, Allianz, AXA, Travelers and Zurich all below 95% for 2022 and both Chubb and AIG below 90%. The London market represented by Lloyd’s of London is reporting 92.2% for 2021 and 91.4% for 2022, compared to 102.1% in 2019 and 110.3% in 2020.
Insurers are now broadly achieving their growth and profitability targets through focusing on their core sectors, which they understand in depth and know from experience and data that they can underwrite profitability over the long term. Inflation is affecting sums insured and financial estimates, enabling insurers to achieve overall premium increases without significant underlying rate change.
The market has seen a return to insurers actively prospecting and targeting new business opportunities, cautiously challenging their own risk appetites and some underwriting decisions of recent years. Insurers are now keen to trade with brokers they trust and are competing for clients where they believe the risk management processes and risk mitigations will allow for long term profitability with less of a focus on the underlying rates alone. In turn, this has led to incumbent insurers looking to protect their market share by defending their accounts from competition by minimising rate increases and looking to incentivise loyalty with the return of Rate Stability Agreements, Low Claims Rebates and Risk Management Bursaries.
There are significant exceptions to this across product lines, geographies, trade sectors and for specific risk exposures, but market stability has essentially returned for the most part and insurers and policyholders have cause to be optimistic in general terms. We are a long way from seeing consistent rate reductions or a return to soft market conditions, but this stabilisation is clearly welcomed by policyholders after four years of extreme premium increases and coverage restrictions, alongside the wider economic difficulties clients are experiencing, including inflationary cost pressures on wages, raw materials and fuel together with a reduction in demand in many industries.
Key Issues for 2023
Global Natural Catastrophes and Treaty Reinsurance Renewals
The property insurance market has been impacted by natural catastrophe losses and the subsequent increase in Treaty reinsurance costs on 1st January 2023. Natural catastrophes continue at record levels, with insured claims for 2022 exceeding $132bn ($100bn in 2021 and a 10 year average of $81bn), notably Hurricane Ian alone estimated at $50bn-$65bn (Swiss Re, 2022).
More than half of all reinsurance renewals take place in January and in 2023, the renewals have been described as “complex”, “arduous” and even “gruelling” by one brokerage and “tense”, “late” and “frustrating” by another, who have struggled to provide acceptable terms for their insurer clients (Guy Carpenter and Gallagher Re, January 2023). This is felt most in the Property market, especially for those insurers with a large proportion of North American exposure, with reinsurance increases typically over 50% and a cumulative increase of over 150% since 2018. Reinsurance capital has again reduced in 2023, this time by 15.7% to $355 billion (Insurance Journal, January 2023) and represents the “biggest reinsurance capital squeeze since 2008” (Howden, The Great Realignment, January 2023).
This extended period of large losses and its impact on the reinsurance market increases the overall cost base for insurers and keeps upward pressure on pricing levels. This will inevitably filter through to policyholders in 2023, which is likely to allow insurers to continue demanding rate increases on those clients in the heavier and most exposed sectors or with large claims, limited risk management engagement and therefore reduced insurer competition. These increased reinsurance costs may also prevent any notable rate decreases, even for the most attractive, profitable and well managed risks.
Inflation, Valuations, Supply Chains, Brexit and Ukraine
A fragile global economy is forcing governments and central banks to balance the threat of recession with severe inflationary pressure as we tentatively emerge from Brexit, the Covid pandemic, currency fluctuations steady themselves and supply chains begin to recover. All insurance markets including Property, Casualty, Professional Liability, Financial Lines, Cyber, Accident and Health, Aviation and Trade Credit have felt the impact of Russia’s invasion of Ukraine to a differing extent, alongside the current volatility in international markets.
Inflation is a key theme for the UK insurance market in 2023, as it is across the wider economy, affecting Property and Business Interruption policies in terms of exposure values, reinstatement costs and Indemnity Periods. The Property market continues to see claims inflation in excess of 10% per annum, with a rapid rise in the cost of labour and materials for rebuild due to Brexit and the emergence from the Covid pandemic, with prolonged periods of Business Interruption and reduced business resilience, both financially and operationally.
The Casualty market and in particular UK motor fleet is continuing to be impacted by double digit increases in the cost of claims which will be progressively passed onto customers, especially in sectors with reduced market competition.
Motor Fleet claims inflation continues to increase rapidly at 9.3% in 2022 (Claim Metrics) with a peak of 15.2% in June 2022. The supply of new vehicles and parts since the shutdown of factories during Covid and now the Russian invasion of Ukraine has been very difficult, resulting in record low availability and record high waiting times for new vehicles. The knock on effect to both the settlement and replacement value of vehicles has increased insurer costs substantially. Currency fluctuations due to Brexit have also 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 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. Vehicle thefts also remain high, especially of keyless entry vehicles. Conversely, 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 and the restart of automotive production, both of which have alleviated some of the inflationary pressure.
Liability 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.
Policy Coverage, Terms and Conditions
Policy coverage has reduced significantly since 2018 and especially since 2021, much to the detriment of clients, as insurers learnt lessons from the financial and reputational impact of non affirmative coverage arising from the Covid pandemic and also took advantage of a limited supply of market capacity to restrict their coverage. Any event that would cause a wide ranging impact which is not reasonably quantifiable is now often excluded, with non damage coverage under business interruption policies being the obvious example.
Fortunately these restrictions have now steadied other than in specific circumstances. For instance, cyber insurers are looking to exclude previously non affirmative cover for systemic events affecting the internet as a whole, e.g. a catastrophic infrastructure loss to cloud based services including Amazon Web Services or Microsoft Azure, or from a state sponsored action. From March 2023, all Cyber policies “must exclude liability for losses arising from any state backed cyber attack” (Lloyd’s of London, 2023).
Property and Casualty insurers also cannot accept exposure to Russia (or Belarus) in view of its invasion of Ukraine and subsequent increased sanctions, nor in Ukraine itself in view of the perils. These are targeted exclusions which is very different to the entire sections of Business Interruption coverage the market saw removed immediately following the pandemic, when we witnessed the emergence of blanket Communicable Disease (LMA5393) and Cyber (LMA5400) exclusions.
Captives, Parametrics and Market Innovation
Clients’ self insured risk retentions have increased significantly including large deductibles and the use of Protected Cell Companies and Captives to cover wider Cyber perils at both Primary and Excess level, reducing overall cost of external market insurance. This is very typical in a hardening insurance market, either by the voluntary decisions of clients to retain more risk and reduce their external market premiums or when encouraged by the insurance market due to a shortage of adequate capacity.
Differentiating in a Diverging Market
Once again in 2023, risks are broadly divided into two tiers, dramatically separated between those in profitable sectors and lines of business 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 explore opportunities to accelerate growth once again, whilst existing insurers are constraining their rate demands and improving their underwriting flexibility. Brokers are achieving rewards for clients’ loyalty, including multi year Rate Stability Agreements, Low Claims Rebates and Risk Management Bursaries, as insurers look to protect their market share 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 which 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 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, in which many clients are seeing substantial premium increases due to sector, claims, product line or risk management standards, the tide has now finally turned towards stability.
Sectors of Note
The increased pricing and retentions experienced by insurers from their Treaty (portfolio) reinsurance renewals and the reduced availability and higher price of Facultative (risk specific) reinsurance will add rating pressure to Property risks in 2023, though for many clients this will likely be mitigated as increased reinstatement valuations, exposure values and Indemnity Periods inflate premiums.
Non combustible and well protected Property risks, with sprinkler (or equivalent) suppression, low inception hazard, separation between buildings, high quality risk management and established Continuity/Resilience planning, are being rewarded with decelerating rate increases. Capacity and competition are not expected to reduce further without specific claims or risk management justification.
Key exceptions include buildings of combustible construction including those that contain unapproved composite panels, which has led to multiple high profile fire losses. This construction method is especially prevalent in the warehousing, food and pharmaceutical/medical sectors for temperature control, often combined with negative trade features, e.g. heat processes.
Residential Real Estate portfolios including social housing, assisted living, care Homes and hotels are broadly seen as unattractive to insurers, with residential occupancy increasing the fire hazard and insurers suffering consistent escape of water losses. This is particularly challenging where these risks are of combustible construction with polystyrene composite panels or ACM cladding.
As underwriters continue to be highly selective, trades with a higher inception hazard are also seen as unattractive, including food, waste, timber, tyres, paper, plastics and chemicals, along with risks that are not protected by adequate fire separation and suppression, e.g. large, unsprinklered warehouses or those which may be difficult and expensive to rebuild, including listed buildings.
The first product lines to benefit from rate stability and modest rate reductions are in the most attractive areas of the market, where there is an improving claims experience and high quality risk management.
Rates have broadly plateaued and competition has actively returned to the market other than for Liability risks with significant injury/damage potential or with long tail claims development.
Areas of the market that are still experiencing consistent 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 the Far East. Insurers will also target portfolio increases for heavier Liability risks, where there is a potential for frequent or serious injury to employees under the Employers’ Liability section, e.g. Stevedoring, Waste, Sawmills and Offshore Risks, or to the public from a Public Liability perspective, e.g. Leisure, including Attractions, Events, Gyms and Nightclubs.
Inflation is a key topic in the Casualty market which is preventing any consistent rate reductions from insurers who are seeing increased claims costs on both attritional and large loss injury settlements.
The latest Judicial College Guidelines and the new pain, suffering and loss of amenity valuations have significantly inflated overall reserves for serious injury (McLarens, 2022), along with increased fees for medical, forensic and legal expertise. The involvement of multiple experts is becoming more common, with orthopaedic consultants referring claimants to psychology and chronic pain specialists and UK claimant solicitors attempting to value more claims outside of the Ministry of Justice portal to achieve higher settlements and legal costs.
Liability coverage for mental injury, anguish and nervous shock is gradually being restricted in policy wordings towards responding only when it is resultant from physical bodily injury. Similarly inadvertent coverage for negligence in preventing climate change is being removed (Lloyd’s new LMA5570 exclusion endorsement from 2021) and this has already begun to extend to more specific environmental impact (e.g. exclusions for the use of Teflon/PFAS in the packaging and food industries).
The UK Motor market saw rate reductions immediately after the pandemic, as insurers profited from the reduction in traffic and accidents during lockdowns and as working patterns and trends changed for the year ending June 2022 (UK Government, November 2022).
This has been short lived as accident figures “broadly show a return” to pre pandemic trends for the year ending June 2022 (UK Government, November 2022). Lighter exposures (private cars and vans) benefited most from this, with the heavier exposures still seeing increases 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.
The far more pressing issue for Casualty and in particular Motor insurers is the rise in claims costs and inflation in 2022 which is seeing insurers push for double digit rate increases even on well performing Fleets. This is due to Advanced Driving Assistance Systems (ADAS) and other new technology in vehicles which may reduce the frequency of accidents, but has a negative impact on repair costs. The rapid growth in demand for electric vehicles also increases repair costs alongside the inflated credit hire costs and vehicle write offs arising from the lack of availability of vehicles and parts from Europe since Brexit, Covid, the invasion of Ukraine and the severe automotive supply chain restrictions which are beginning to ease in 2023.
Ukraine produces 50% of the worlds’ neon which is needed for the production of semiconductor chips (Reuters, March 2022), along with wire harnesses, nickel and palladium used in electric batteries and catalytic convertors.
The UK also imports 80% of its automotive components from the EU (ACEA, March 2022) and the fallout from Brexit, energy price increases and a weakening pound has inflated prices. Lockdowns in China also continue, which is a major manufacturing and logistics centre for ancillary parts.
The average used car price has increased by £3,300 in two years since the pandemic (Auto Trader, August 2022) and dealerships reported a 27% increase in used car prices in H1 2022 (Yahoo Finance, August 2022). New car registrations fell by 24.3% in the UK in 2022, the weakest performance since 1996 (SMMT, July 2022).
Theft and fraud are at record levels, which is often seen during economic downturns, whilst catalytic converter theft (which contain precious metals that have risen substantially in price) rose over 100% in 2020 and 2021. The theft of keyless vehicles from relay attacks is at an all time high especially for luxury vehicles such as Range Rovers (Allianz, December 2022).
The Motor repair market is also experiencing serious labour shortages for electric vehicle repairs, with only 6.5% of the motor mechanic workforce qualified to service electric vehicles (Institute of the Motor Industry, January 2022).
The Financial Lines market’s pricing in Directors’ and Officers’ (D&O) Liability has continued to be moderated into 2023 as new and existing insurer capacity have both increased dramatically. As a result, existing D&O policies are beginning to see rate reductions, especially those risks which experienced substantial pricing increases in recent years.
Wholesale rate increases across the market for D&O in the UK have largely ceased in 2023, with more competition and existing programmes being marketed by brokers. There is now competition in the UK mid market and large corporate space driven by new capacity.
This is especially the case as insurers look to maintain market share in the face of a more competitive trading environment.
Much of the expected premium volume from IPO’s has also not materialised due to volatile capital market conditions and this has further pressured insurers to compete for market share to achieve their budgets. It is anticipated that in 2023, brokers will be able to provide more alternative market options compared to 12 months ago. Markets are beginning to offer larger limits in a bid to remove other coinsurers from the larger placements as they look to grow by competing for new business, rather than just relying on organic growth on existing business.
Excess layers are the first to benefit from healthy competition and reduced rates, with pricing often inconsistent and illogical across existing insurers and new entrants, therefore clients are often rewarded from approaching a variety of unusual insurers at renewal, especially in London where there is significant excess layer capacity available once more.
While the trend largely suggests downward pricing overall, insurers are still under pressure to prevent rates decreasing dramatically or broadening coverage. As D&O is long tail business, residual and continuing concerns continue to exist for carriers into 2023. Chiefly, these pressures are: 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 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 2023 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 space, there was a correction upwards in 2021 both in premium and deductibles. This is likely to continue in 2023, but mostly on those accounts that avoided a significant increase in 2021.
Cyber has experienced some of the most extreme increases in rates in recent years, as a relatively immature and rapidly growing market which was poorly understood and fundamentally mispriced subsequently suffered huge losses from Supply Chain attacks, Ransomware and Data Privacy regulation as technology and regulation has evolved.
Insurers took drastic steps to remediate their Cyber portfolios and focused on:
- Coinsuring, sublimiting or excluding aspects of cover, particularly Ransomware
- Significantly increasing deductibles
- Reducing limits and capacity, requiring additional insurers to complete placements
- Increasing minimum standards for IT controls (failure to meet standards resulting in automatic declinatures or the introduction of onerous exclusions)
In 2022 and early 2023, Cyber portfolios continue to see double digit rate growth, albeit these increases reduced substantially throughout 2022 since their peak in 2021.
Whilst the market is clearly softening across most other areas of insurance, the Cyber market has become distinct and this distressed product line is now only just starting to show the green shoots of recovery and a gradual flattening of rates.
This has been driven in part by an increased focus on organisations investing in and implementing adequate and suitable security controls and procedures to minimise and mitigate the threat of a Cyber attack, which brings more comfort to underwriters when considering individual risks.
This pricing correction, alongside the improved controls and awareness, means we are beginning to see Cyber insurers increasing their capacity for new business and new insurers entering the market, which helps to increase competition and offer buyers more choice and capacity available.
These projects remain ongoing, but we anticipate some insurers will look to impose sublimits if the loss is attributed to a systemic event in order to manage aggregation and ensure the solvency and ability of the market to pay losses.
Ongoing conversations are also in place around Cyber specific War exclusions and the impact these have on coverage. From March 2023, all Cyber policies “must exclude liability for losses arising from any state backed cyber attack” (Lloyd’s of London, 2023).
For insurance buyers, this is a positive direction for the Cyber market in 2023, but this is still a volatile and evolving line of insurance, which must react rapidly to continued changing threats in the global landscape.
Businesses must continue to ensure they invest in their security controls and regularly test their own resilience to the current and emerging Cyber threats. It is also important that businesses adequately seek to minimise the threat of a Cyber attack, as there could be wider implications for failure of doing so on other policy coverages, such as Directors’ and Officers’ Liability policies.