There was a time when insurance premiums followed a well-trodden cycle. Premiums would decrease based on competition and then a ‘hard market’ would follow (broker speak for rapidly rising premiums: 20%, 50%, 100%, 200% – big numbers) as a result of insurance companies desperately trying to get more money into the pot. It’s a time when brokers tell their clients that their renewal premium has risen by just 50% but not to worry, it could have been much worse!
The root cause of this problem is simply GCSE economics – the market forces of supply and demand.
But over the last 10 years the cycle has disappeared, or so we thought. Premiums remained static (or fell slightly) as competition was rife. We cautioned clients that the dam would break at some point, but they didn’t. We began to wonder if the algorithms and financial models used by insurers had developed to a point where losses could be accurately predicted and premiums set accordingly. So, had the cycle of the hard and soft market disappeared?
Afraid not. The bad news is the hard market is back, but only for some sectors. Professional Indemnity has seen the biggest impact.
The Grenfell disaster sent shock-waves through the insurance market. Any business engaged in the design and build sector is seeing significant increases in premiums allied to restrictions in cover. Small increases for some – “just 20% but not to worry, it could have been much worse” – up to 100% for others. The worst pain being reserved for those involved in the design, specification or installation of cladding, particularly to high rise buildings. The fire is now spreading; Professional Indemnity cover for solicitors is seeing similar rising premiums.
So, will the fire spread further? It’s difficult to predict. It’s all about supply and demand. When insurers see losses mounting in one country they tend to deploy their limited capital in another country where returns are better. It’s a vicious circle; losses mount, capacity reduces and premiums increase.
There is of course one silver lining; when premiums rise so steeply, profitability is quickly restored, capacity is returned to the market and once again competition amongst insurer serves to drive down premiums. The return of that well-trodden cycle? Perhaps.
So, what can you do to alleviate the problem? What can we do between us to alleviate the problem?
Well, two things really. Plan ahead. We will guide you through the process at the earliest opportunity. Forewarned is forearmed. But that aside, the message is the same as ever. Those who claim less, pay less. A lot less in a hard market. “It’s only a 25% increase but don’t worry, it could have been worse” is the kind of message we deliver for those who ‘claim less’. Yes, I know it doesn’t sound great but the alternative message is not worth repeating.
Talk to us now. We can’t stop the cycle of hard and soft markets but we can alleviate some of its worst excesses.
Oh, and one last thing, it’s nothing to do with Brexit.
By Ian Laycock FCII – Chartered Insurance Broker – Group CEO