The insurance market in the UK has been hardening at a rate not seen since 2001/02 and the Covid-19 pandemic has only accelerated this trend. This means that we are in the phase of the market cycle where in general, insurer capacity is withdrawing from the market, competition is reducing, premium rates are increasing, policy coverage is narrowing and insurers are being highly selective about which risks they choose to insure.
Factors currently affecting the insurance market
The main drivers of this are:
- A sustained “soft” market from around 2004 to 2018 with fierce insurer competition and few significant insured losses globally, resulting in ever reducing rates. This has gradually reached a tipping point where these rates became increasingly unsustainable with inadequate funding to pay for losses.
- Substantial reinsured catastrophe losses in recent years include hurricanes, wildfires, flooding, windstorms and cyclones. These have increased global reinsurance rates by an average of 5.5% this year and these costs are ultimately passed on to primary insurers and their clients. Reinsurers have limited the capacity available to primary insurers which must therefore retain more risk on their balance sheets, affecting their capacity decisions and pricing.
- Insured claims in the UK have all had a severe impact on insurer profitability in a number of key areas, including property, real estate, financial lines, construction, professional indemnity, marine and credit. Insurers have also seen double-digit claims inflation for damage and injury claims across motor fleet and liability, leading to continued losses.
- Insurers have historically been able to make profitable investment returns on retained premium income, but this has not been possible in recent years. Extremely low interest rates are now exacerbated by the unprecedented volatility and losses sustained due to Covid-19.
- Solvency II regulations have reduced the capital available for existing insurers in the company market, whilst creating a significant barrier to entry to new markets. This has resulted in a number of major withdrawals alongside unprecedented M&A activity, reducing capacity and competition.
- Lloyd’s of London’s has mirrored this approach in the London market after suffering £1bn+ losses in both 2017 and 2018. A strict performance review has been implemented, allowing only profitable, well-capitalised and sustainable syndicates to continue trading.
The effect of Covid-19 on the insurance market
- The full effects of the Covid-19 pandemic are as yet unknown. The contingency, event cancellation and travel insurance markets were hit with immediate losses. Subsequently, as the economy moves into recession, markets such as trade credit are now starting to pay claims.
- The already very challenging directors’ and officers’ liability market is also expected to be impacted. Company directors could be left personally liable for stock market losses and business value erosion and insolvencies, facing legal action from regulators, creditors and shareholders.
- Business interruption losses in the property market are already significant, where limited policy coverage had specifically been agreed in advance. If the verdict in the ongoing FCA test case goes against insurers, the ramifications could change this market beyond recognition.
- Almost all lines of business are expected to be negatively impacted by Covid-19 in some way. For example, the insurance market is already experiencing increased cyber, crime and political violence activity, fraudulent and exaggerated personal injury claims, property losses arising from unoccupied buildings and an upsurge in litigation brought against companies which may have acted in error or provided negligent advice, particularly in relation to employment law, redundancies and wrongful dismissal.
Mitigating increases: differentiating from the insurance market during the coronavirus epidemic
Insurers without enough time and quality information from brokers, are now looking to apply indiscriminate and arbitrary rate increases across their portfolios, alongside severe capacity withdrawals and cover restrictions. Combined with the wider economic difficulties caused by Covid-19 this can be disastrous for clients, who may ultimately have to pay more premium for less cover.
However, these themes are not applicable to every trade sector and insurance product. There is still insurer appetite, market capacity and pricing competition available for many industries and lines of business. Although a few specific sectors are experiencing blanket premium and deductible increases, alongside reductions in coverage and limits, most are still being underwritten on a case by case basis.
How brokers can assist customers during Covid-19
The ability of brokers to differentiate their clients in the marketplace by articulating a depth of knowledge and quality risk information, is now absolutely crucial. Insurers are continuing to compete for risks that can be demonstrated by the broker to be of high quality, proactively risk managed and performing well from a claims perspective. This is restraining the incumbent insurers’ ability to force through severe premium rate increases where not warranted by claims performance or trade.
Where competition and capacity does not readily exist, innovative and creative programme structures will become increasingly necessary for clients to attract an affordable premium. These can include higher risk retentions by increasing deductibles and reducing limits, scheduled and co-insured placements with a variety of insurers or nonconventional programmes where the premium is adjustable based on claims performance. Long-term, sustainable partnerships with quality and financially secure insurers are important to mitigate the ongoing and predicted market fluctuations.
Captives including Protected Cell Companies are becoming increasingly popular for clients to retain additional risk and mitigate premium increases. They can also provide access to reinsurance for exposures where cover is not widely available in the primary market and this may eventually include a pooled and/or government-led “Pan Re” solution to pandemic exposures.
Brokers’ proprietary wordings, whilst seemingly providing expansive coverage, have now been proven to be flawed with a lack of clarity around cover. The inconsistency around Covid-19 coverage has triggered full reviews of these wordings, with many insurers now withdrawing their capacity from such products. Broker wordings should therefore be treated with increased caution.
Insurance sectors with recent and specific changes
A number of sectors which have experienced consistent losses are attracting severe rate increases, unless outstanding risk management standards and a highly profitable claims experience can be demonstrated to the market by the insured’s broker. Even prior to Covid-19, a hardening market throughout 2019 has specifically affected the motor fleet, financial lines, professional indemnity, property and marine insurance markets for 2020.
Motor fleet and haulage insurance
In 2019, the UK fleet market (one-third of all UK premiums), experienced increased underwriting losses of 5.7%. Claims inflation is in double figures for the motor fleet market, with inflated costs of parts from Europe (due to the relative strength of the euro and Brexit fears), additional in-built vehicle technology including LIDAR and RADAR bumper sensors and the increasing complexity of vehicle repairs for hybrid and electric vehicles. Personal injury claims costs also continue to rise, as do vehicle thefts, especially of keyless entry vehicles.
After the haulage and logistics sectors felt the full force of the 2017 changes to the Ogden discount rate with significant rate increases, premiums are now beginning to stabilise at this higher level, but insurers know that this is not enough to return them to profitability in 2020. They are forcing rate increases on customers who cannot demonstrate a commitment to improving fleet risk management or have had a volume or size of claims in recent years, especially if this trend is deteriorating.
Directors’ and officers’ liability insurance
The Directors’ and officers' liability (D&O) market has experienced consistent losses since 2017, from high profile class-actions in an increasingly regulatory environment, various corporate scandals and the collapse of Carillion. Margins were already tight after years of reducing premiums and widening coverage. Over a third of all D&O capacity was withdrawn in 2019, reducing competition on pricing and policy coverage into 2020 with increasing retention/deductible levels.
More frequent, expensive and complex litigation continues to arise from security class actions, IPOs, Cyber breaches, the #MeToo movement in 2019 and the Black Lives Matter protests in 2020. Insurers’ selectivity and scrutiny on each risk is increasing as capacity continues to withdraw rapidly from this market, most recently including AXIS, Vibe and Neon – even prior to Covid-19.
In an already challenging market, there is now the expected fallout from the pandemic in and its catastrophic impact on the stock market and global economy. Shareholders, creditors and regulators are already suggesting that company directors could be held personally liable for how businesses have prepared for and responded to the emerging crisis, with widespread business insolvencies forecast.
Commercial crime insurance
Crime losses, especially those resulting from Social Engineering, have caused some insurers to exit the market completely (Axis, Navigators, Sompo) and other traditional markets (AIG, Zurich, Chubb) to dramatically restrict coverage, reduce limits, increase premium and excess levels. The premium volume in the Crime market is far lower than for D&O and the combination of regular, large and complex claims is having a significant impact on the capacity and coverage available.
The mass redundancies expected from Covid-19 has also shocked the Employment Practices Liability (EPL) market. Standalone EPL coverage with new insurers is effectively unavailable and should now be packaged with wider Financial Lines programmes, albeit with increased premiums and reduced coverage expected, along with smaller limits and higher risk retentions.
Although typically a relatively small proportion of overall premium spend, financial lines saw some of the most severe increases in premium rates and reductions in cover in 2019 even before Covid-19. The insurers which remain in the market are now being highly selective about which trade sectors they choose to insure in 2020; and at what price.
Directors’ and officers’ liability insurance from Towergate
Our directors' and officers' insurance gives you the protection needed for the possible repercussions of acting on behalf of your company. Ask for a quote online today.
Professional indemnity insurance in the construction industry
The UK PI market, especially for the Construction sector, has deteriorated significantly over the last three years, and it continues to do so at pace.
There has been continued dramatic fallout following severe losses including the Grenfell Tower tragedy (2017) impacting building regulations, fire safety procedures and the risk exposures of architects and cladding contractors. The complex disputes across large infrastructure projects (especially in the waste-to-energy sector) has been exacerbated by the potential lack of insurer recoveries and supply-chain resilience driven by such fine profit margins and highlighted by the demise of Carillion (2018).
A tough contracting environment, with intensely competitive procurement processes and onerous contractual obligations being forced on contractors, is causing serious concern for PI insurers in 2020, with the effects of Covid-19 as yet unknown.
Construction PI underwriters, especially in relation to the ‘deign and construct’ sector, have made consistent losses, with various insurers withdrawing from construction PI and/or the UK PI market entirely. A 2018/19 Lloyd’s of London crackdown targeted loss-making syndicates, culminating in Lloyd’s restricting how much PI business syndicates are permitted to underwrite; no syndicate was allowed to increase the amount of PI premium they underwrote in 2019, with Lloyd’s making a net loss of £435m on PI over the preceding six years, with the aim of profitability in 2020.
As a result, insurers are looking to limit their exposures by reducing capacity, increasing premium rates, challenging low deductibles, and enforcing coverage restrictions. This underwriting strategy is especially extreme in sectors involving the advice, supply or installation of cladding materials, with this market all but disappeared and clients having to self-insure their exposure.
The delays and cancellations caused by Covid-19 are also expected to have a negative impact across the construction market.
Professional indemnity insurance from Towergate
Despite the tough marketplace, we can still offer professional indemnity insurance for a wide range of professions in the construction industry and other trades. Find out more and get a professional indemnity insurance quote online.
As a member of the Construction Plant Hire Association we can also provide competitive tradesman and contractors insurance deals for our clients. See our crane and plant hire insurance.
Property and real estate insurance
Since the reinsurance renewal season in 2019, primary insurers have begun to reduce the capacity available for clients in higher-risk sectors either due to their construction materials (polystyrene combustible panels or ACM cladding), heat processes (welding, cooking, frying), combustible materials (timber processing, waste/recycling), lack of protections (suppression/sprinklers) or significant flood exposure.
At least twenty major (£10m+) fires occurred in tower blocks in Q3 2019 alone, including the Premier Inn in Bristol, Holiday Inn in Walsall, a school in Dunfermline, a retirement complex in Crewe and multiple residential and commercial buildings. These are almost exclusively of timber-frame construction and/or including expanded polystyrene or ACM composite panels, similar to the combustible materials involved in the tragedy of Grenfell Tower.
The trend shows no signs of slowing with hotel fires in Q4 2019 in Eastbourne (Claremont, November) and Brentford (Travelodge, December). These high-rise fires are in addition to major food and beverage losses, including Ocado (Andover, February - over £100m), Masons Gin (April) and Omega Ingredients (August) and waste/recycling fires at a rate of more than one per day.
An extremely disciplined underwriting approach is being applied irrespective of claims performance and it is therefore imperative that brokers are able to differentiate their risks to insurers based on the quality of their construction methods, risk management and mitigation standards, business continuity/resilience and ongoing investment in risk improvements, including installation/ upgrade of fire protection (sprinklers and suppression), composite panel removal/replacement and increased flood protections.
Increasing numbers of risks now require a coinsured placement, rather than being covered in full by a single carrier, as underwriters look to limit their exposure to any one loss. This can increase the overall premium but also rewards quality risks that are able to consider higher deductibles, fixed loss-limits and work with insurers towards best-in-class risk management and mitigation.
Pandemic exclusions are now market-standard on property and business interruption wordings.
Property insurance from Towergate
Even in these challenging times, Towergate can continue to offer property insurance for a broad spectrum of owners, from major property investors and pension funds to private landlords.
Find out more on our property owners insurance page.
The withdrawal of insurers in specific, unprofitable sectors has disproportionately affected the severely underfunded Marine market. Beazley was a major UK insurer in this area which no longer insures freight liability, cargo or hull risks in the UK and many of the Lloyd’s syndicates which have been under pressure have chosen to withdraw from the loss-making UK Marine market.
The remaining syndicates have been asked by Lloyd’s management to provide business plans with a strategy for profitability. These developments have already resulted in a tightening of pricing.
There will be specific pressure on premium rates, with less capacity available and insurers being highly selective of risks, based on trade, premium and crucially their risk management standards, after multiple large fire and theft losses in the Marine cargo market.
Marine insurance from Towergate
We can continue to offer marine insurance to meet your needs. Please contact email@example.com for information about our product.
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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.