Insurance managers are mulling changes to the structure of their policies in response to a push by insurers to increase prices following a devastating succession of catastrophe losses
Insurers have had an expensive few years. Now, after more than a decade of price reductions they’re pushing back – and insurance managers are starting to take notice.
There are three ways those insurance managers can respond to price hikes: buy less buy smarter or just pay more.
However, the relationship between insurance manager and insurer is a complex one, which makes the first two of those options surprisingly difficult. That’s because – for over a decade – insurers have seen rates fall year after year, meanwhile loss ratios have fluctuated, putting pressure on margin for many carriers and, in some cases, pushing them into the red.
While it’s often said that insurance is a relationship business, insurers are now hoping that relationship goes both ways.
Insurers stand by their client, offsetting downside risk when a valid claim arises. But now they argue that it is their time of need and they are expecting insurance managers, whose claims they have paid in the past, to stick with them.
And that puts insurance managers in a tricky situation.
To maintain those relationships while keeping their own boards happy, insurance managers must tread carefully.
One insurance manager for a big professional services firm, who asked not to be named, told StrategicRISK that their team had already started looking to change the structure of the company’s cover to offset price increases.
That negotiation with insurers can be particularly difficult for buyers that have passed on losses to their insurers. In those cases, carriers that have paid out on a claim expect that they will recoup their losses from loyal customers over the years following. In such an event, underwriters see it as a major faux pas to reduce cover immediately after – even if they have increased the price of cover slightly to recoup their loss.
Also bear in mind that, while there is a glut of capacity in the market, Fortune 500 or FTSE250 buyers will always depend on the likes of Chubb and AIG to lead their policies, which means there are only limited options for any firm looking to shop around.
Art of the deal
Given that dynamic, at a time like this, when insurers are pushing for price increases following a period of sustained losses, insurance managers should be reaching for their copy of The Art of The Deal.
It will be a complex negotiation that will likely see buyers increase their deductibles, taking more risk onto their own balance sheet. In return, to their most valued insurance partners, they will probably offer increased participation on higher layers of their excess tower, which are less likely to be hit by any loss.
Emmanuel Fabin, the insurance manager for TSB, said that the way firms respond to rate increases will depend on their internal risk management as well as the relationship they have with their broker and insurers.
The way firms respond to rate increases will depend on their internal risk management as well as the relationship they have with their broker and insurers
If a buyer has a long-standing relationship with an insurer and a history of successful and material insurance recovery, then Fabin said they are likely to stick with their carrier even if it tries to increase rates.
He said large firms that purchase significant levels of cover across multiple lines are able to leverage their buying power with existing insurers to resist rate hikes.
For example, a business that buys financial lines cover and has a significant property portfolio could agree to align all or some of its policies under a single lead underwriter in return for a discount or at least a reduction in rate increases for the financial lines policies.
Paul Knowles, chief executive of the specialty insurance broking practice at JLT, which was recently brought by Marsh, told StrategicRISK that some of his insurance manager clients were looking to restructure their programmes in response to the price hikes.
“I think clients are definitely going to be looking at the structure of their programmes [and] the relationships they have with carriers,” he said.
“The depth of relationships they’ve built over time with carriers now should be starting to pay dividends,” Knowles went on.
“The more they got a story around the quality of their risk, the more they have alignment in terms of their participation in it.”
He said buyers should be quick to engage their own boards about the price changes. He added that it can pay dividends to try and forge a relationship between C-suite executives and insurance partners.
Risk managers need to educate their stakeholders on the risks associated with the changes in the insurance market and what that will bring in terms of impact on the business pricing models
“Risk managers need to educate their stakeholders on the risks associated with the changes in the insurance market and what that will bring in terms of impact on the business pricing models,” he said.
“Risk managers have spent a lot of time building relationships with the carriers, which will bear fruit, but certainly in my experience, the higher up the organisation the relationships go, the better it is for the story to be told,” he concluded.
But very few argue that the price hikes are unnecessary and new data suggests there may be more to come.
What’s driving the price hikes?
In 2017, hurricanes and wildfires contributed to a record $144bn insured disaster bill, according to Swiss Re. Last year, that figure stood at $79bn, which still made it the fourth-most expensive in history.
For insurers, that took its toll on the bottom line. Famed international insurance market Lloyd’s posted a £2bn loss for 2017, the most recent full-year results it has published. And it was not alone. Swiss Re booked a $413mn loss in its property and casualty business and Munich Re’s reinsurance arm lost $476mn.
In more recent quarterly results announcements those firms have talked about pushing for higher rates from the insurers that buy reinsurance from them.
And there’s no doubt those price hikes are being passed on to the end client. A report from insurance broker Marsh shows that global commercial insurance prices crept up by an average of 2.1% in the final three months of last year, making it the fifth consecutive quarter of price increases.
But that marks a seismic shift from the pattern that has emerged over at least the past four years, when rates have consistently fallen quarter-on-quarter – sometimes by as much as 5%.
Marsh said the rate increases were largely driven by hikes in the cost of property insurance as well as an uptick in the price of financial and professional lines protection.
But it noted: “Overall, the market remained stable, with prices fluctuating within a relatively narrow range across most products and geographies.”
Nevertheless, the final three months of last year marked the first quarter since the survey started in 2012 to see price increases across every world region.
Global property insurance prices climbed by 3.6%, the steepest increase of the year meanwhile the cost of financial and professional lines cover leapt by 4.7%, also the biggest quarterly jump of 2018.
The broker’s president of global placement and specialties Dean Klisura said: “Although the last quarter of 2018 saw average prices increase in all regions, the increases were generally modest.”
The most significant price increases were concentrated in the Pacific region where rates were up 16.1% on average in the final quarter. Pricing in the US and UK was up by 2.1%.
JLT’s Knowles said his firm was seeing other pockets where pricing was hardening.
In particular, he said insurers covering construction-related risks were pushing for rate increases in the wake of events like the failure of a hydroelectric dam project in Colombia. The devastating Grenfell Tower disaster also dealt a big blow to insurers and served as a reminder of the potential casualty exposures in the construction market. Meanwhile, fires at The Mandarin Oriental Hotel in London and the Glasgow School of Art also hit insurers’ balance sheets.
The devastating Grenfell Tower disaster also dealt a big blow to insurers and served as a reminder of the potential casualty exposures in the construction market. Meanwhile, fires at The Mandarin Oriental Hotel in London and the Glasgow School of Art also hit insurers’ balance sheets
“Construction is being hit both in terms of the liability side, the professional indemnity side, as well as the physical damage side,” Knowles said.
He said the losses had seen some insurers reduce their exposure to the market, dampening supply and giving underwriters “stiffer resolve” to increase prices.
And that’s true of the wider market for all-risks property cover too. Knowles said that while it’s hard to generalise, average rates appeared to have increased by between 5% and 10%.
“Overall, there’s a definite stiffening of the market resolve to ensure that premiums aren’t going down without real, solid justification. Probably the majority of people will be seeing some uptick in their premiums.”
But there may be hope for some. Knowles said: “That’s not to say for good risks, rate reductions aren’t out there, but it’s that is no longer the norm.”
And that has split the market. “Lots of clients are going to see either the need for some uptick in pricing or looking to restructure their programmes to navigate through that pricing pressure,” he said.
But Knowles said his clients were ready. “We’ve tried to keep clients informed of where we’re seeing the market moving and prepare them for this.”
“Having had a decade of price reductions, we have to prepare our clients for a period of potential sustained price increase.”
However, he noted that there was still surplus capital in the market, which could indicate that recent price rises were just a “blip”. “It’s quite fickle at the moment,” he said.
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