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Insurance premiums are up and coverage is more difficult to obtain. How can you get the best result?

By Andrew Saville on

You may have noticed over the medium term, that in general, insurance premiums have been increasing, and coverage is becoming more restrictive. This is known as a hard insurance market.

Below, we shed light on current insurance market conditions, the market outlook across different types of policies, and how using an insurance broker can help you achieve the greatest value for money out of your coverage.

The hard Insurance market conditions & premium increases

Before we get into trends and how to combat these insurance market conditions, it’s important to understand why insurance rates are increasing, and policy conditions are becoming more restrictive.

Insurance markets are cyclical, and the trends we are currently seeing in Australia, as well as overseas, possess all the characteristics of a hard insurance market. We are witnessing rate increases across the majority of insurance policy lines, particularly for those the insurer classifies as ‘higher risk’. However this trend is now also affecting lower risk categories.

Diagram 1. below demonstrates how the insurance market functions in both hard and soft conditions.

So, why are premiums increasing? 

Over a sustained period, insurance companies have been experiencing high loss ratios. Under pressure to recoup their financial losses, insurers must increase premiums and apply tighter policy conditions e.g. higher excesses, more cover exclusions, and restrictions on the risks they are willing to cover.

What is a ‘high loss ratio’?

A high loss ratio occurs where an insurer’s claim payouts are a high proportion of the total funds in the insurer’s premium pool. This can present a problem, because a loss ratio that is too high, can subsequently put an insurance company into poor financial health. If the insurer exhausts their premium pool with too many claims payments and not enough incoming premium to grow the total premium pool, they would be unable to pay insurance claims.

Example: A confidential PwC report found that Professional Indemnity insurers for building certifiers and surveyors wrote $40m in premiums in one year, but one insurer alone faced cladding-based claims worth $50m. Evidently, this is not profitable, and puts substantial pressure on an insurer’s bottom line, forcing them to increase premiums to pay for this loss.

In response to high loss ratios, insurers may take the following measures:

  1. Increase premium rates to bring loss ratios back into balance,
  2. Acquire more capital from their re-insurer to top up the funds, and / or,
  3. Place restrictions on the types of risks that can be underwritten. E.g. decline insurance on risks that are more likely to suffer a sizable loss e.g. a commercial property with tenants who manufacture fireworks.

This scenario is currently occurring in Australian insurance markets, where international reinsurance companies that fund our insurers, are dictating higher rates back to Australian insurers. This ensures re-insurers can keep premium pools in balance and continue to pay claims. The result however, is that insurers are forced to pass on higher premiums, and cover restrictions to the customer. 

Insurance premium trends and forecasts for key insurance policies:

General Insurance Trends

  • Insurance pricing has been up across most policy classes in Australia, and globally in FY20. This is unfortunately forecast to continue into FY21.
  • Premium rate increases are being driven by a number of factors:
    • COVID-19 - the resultant economic slump has made insurers risk averse and selective in what they choose to insure, avoiding unnecessary exposures on their balance sheet.
    • Macroeconomic pressures and major weather events, including a growing number of natural catastrophes, social inflation, and a low interest rate environment, are making it difficult for insurance companies to achieve strong investment returns to offset poor loss ratios.
    • Many of these factors were placing upward pressure on insurance premiums before the pandemic, and the onset of Coronavirus only served to exacerbate this.
  • Insurers are tightening policy terms and conditions, becoming more restrictive in their risk appetite and rigorous in their underwriting processes.
  • The only pricing relief may come from the approx. $20bn capital injection into the global insurance market between March and December, 2020.

Source: Insurance Business

Industrial Special Risk (ISR) & Commercial Property Insurance

  • Fire and ISR premiums are heading skyward in Australia due to a large number of insurance claims.
  • Increases can be attributed to rising levels of litigation and a number of natural catastrophes such as major hail and bushfire losses.
  • Aon reported average premium rises of 26% across its ISR portfolio last year, with this trend set to continue.
  • Insures are proactively applying rate pressure and restrictive terms and conditions to rectify their loss ratios. For example, coverage for business interruption extensions such as infectious disease is being heavily restricted or is completely unavailable.

Source: Insurance News

General Liability

  • In the General Liability market we are witnessing similar conditions to ISR, where claim ratios are well over 100%.
  • Substantial losses have been driven by the growing cost of insurance claims as a result of ‘increasing frequency and cost of litigation, broader definitions of liability, more plaintiff-friendly legal outcomes, and larger compensation payments being awarded’. (Aon)
  • Previously, insurance premiums were insufficient to account for the frequency and size of claims. Accordingly, insurers have made corrections, increasing rates to reflect more realistic claim levels.
  • The outlook for FY21 predicts further premium increases, and insurers becoming more selective in what they will agree to insure. Coverage with favourable policy conditions will be difficult to secure.

Source: Insurance News

Cyber Insurance

  • The increasing frequency and severity of Cyber Insurance claims has seen upward pressure on premiums throughout FY20.
  • Rate increases are expected to be targeted towards high risk sectors like healthcare, financial services, municipalities, higher education and tech.
  • Cyber premium increases are expected to be in the realms of 15% to 50%.
  • Insurers are becoming more tech savvy when assessing the risk presented by new insurance customers, now employing measures such as system scanning, and consultation of IT security specialists. This goes far beyond information requested in a traditional cyber insurance proposal such as revenue, business occupation, no. of staff etc.

Source: AJG, 2021.

Construction Insurance Market

Contract Works Insurance

  • Premiums and excesses are increasing, but concurrently, insurers are reducing the level of coverage available, offering lower limits of liability and sub-limits.
  • Cover enhancements have been wound back where features such as Guaranteed Maintenance and Design Exclusion are not available, or can only be offered for a very high premium / excess.
  • Customers with a poor claims history and exposure to extreme weather conditions will find it challenging to obtain cover without separate excesses for major perils / water damage claims.
  • Rate increases are sitting at 10% to 30% on renewal, and 50% to 100% if there is a poor claims history.

Construction Liability Insurance

  • A number of insurers have withdrawn from the Australian market, and those that remain have a limited insurance risk appetite. This is continuing to deteriorate.
  • Rate increases are between 10% to 30% on renewal, and 30% to 100% for those with a poor claims history.

Source: Construction Market Update, Willis Towers Watson.

Management Liability and Directors and Officers (D&O) Insurance Market

Directors and Officers

  • Class action litigation has been plaguing D&O Insurance for a number of years, where the cost of claims has seen insurers withdraw from the market, impose massive excesses, onerous policy conditions and drive premium increases up well over 100%.
  • Upward pressure on premiums is forecast to continue for the remainder of FY20, however there are emerging signs that the D&O market may be starting to stabilise. Premium adjustments over the past three financial years have grown the Australian premium pool. This, coupled with improvements in the risk environment e.g. greater regulation of class action litigation funders, may improve the viability of the D&O market, attracting new insurers, thereby increasing capacity and capital.

Source: Insurance News

Management Liability

  • Substantial premium increases can be expected – this is predicted to be over 50% for public companies, and 15% to 20% for private companies. For businesses classified as high risk, premium hikes may be far greater, with increases upward of 100%.
  • D&O and Management Liability insurers have been reducing cover limits, which has seen the need for clients to obtain additional layers of cover elsewhere.
  • More coverage restrictions are likely, where some insurers are adding exclusions for insolvency and communicable disease following the pandemic.

Source: Conwayes

Professional Indemnity (PI) Insurance

  • We are witnessing renewal premium increases of around 10% in the absence of any changes to the insured risk.
  • In general, the market is retracting with respect to capacity offered, and insurers are being highly selective in their risk appetite, making PI coverage very hard to come by for some businesses.
  • For high risk occupations, there are substantial price increases of over 50%. In particular this applies to design and construction, which has seen a sustained history of large claims. Insurers now routinely impose Cladding Exclusions for these types of risks.

 

Evidently times are tough. An insurance broker can help you achieve the best value from your insurance, while maintaining quality coverage.

Professional advice and recommendations tailored to you.

On average, 40% of clients are underinsured or not insured at all, before working with an insurance broker.
Source: Deloitte

As specialist commercial brokers, we work with you to assess your risk profile, providing professional advice and policy recommendations according to your circumstances. This helps ensure your business has the appropriate insurance coverage to respond and protect you in a claim.

Coverage v’s premium: Achieve value from your insurance spend

33% of clients were previously paying more on their insurance policy before they engaged an insurance broker.
Source: Deloitte

Whitbread approach the insurance market on your behalf to provide multiple quotations and policy options. We negotiate with insurers leveraging our economies of scale and relationships to achieve the best available premiums and tailored coverage suitable to your specific circumstances.

Access to broker only markets and exclusive coverage

As an insurance broker, we have access to markets and coverage not available to the general public. This helps ensure you have the best possible coverage in place.

Your own dedicated insurance adviser

With a dedicated adviser, you will always deal with someone who has an intimate understanding of your business and risks.

With years of training and experience, our specialists are equipped to explain technical details, compare different policies, make recommendations, and bring light to any special risks or issues you need to be aware of. We handle the complexities and challenges of the insurance market on your behalf.

We represent you in an insurance claim, not the insurer.

Whitbread have a specialist claims team to manage your claims from start to finish, always fighting to achieve the best possible outcome.

On your behalf our team:

  • Negotiate with insurers, assessors and repairers, to efficiently reach the best possible claim outcome.
  • Advocate for you – as our client we are not influenced by external demands. Our goal is to reach the best outcome for you, and you only.
  • Keep you informed on progression the of your claim.
  • Utilise in-depth technical policy knowledge when negotiating with insurers to achieve the best possible claim settlement.
  • Escalate insurer claim denials where appropriate, pushing for a favourable outcome via the insurer’s internal disputes resolution team.

 

A Whitbread specialist can assist

Achieve the best possible value from your insurance program, with the support and professional advice needed to navigate the challenging insurance market conditions. Speak to a Whitbread business insurance specialist:

E info@whitbread.com.au        T 1300 424 627 

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This insight article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice.  Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 Licence Number: 229092 trading as Whitbread Insurance Brokers for further information or refer to our website

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