Professional Indemnity Insurance market

It’s a time when property owners and businesses face many challenges. Consequently, the last thing any of us want to hear about is the hardening of the insurance marketplace. Unfortunately, this is the reality our industry is facing. We continually strive to secure the very best insurance terms possible. Therefore, we hope our following overview provides an insight into some of the contributing factors causing insurance premiums to increase. Most specifically increases are being seen in the property, liability and professional indemnity classes of insurance.

Why Are Insurance Premiums Increasing?

For 15 years the market has had excess capacity, resulting in insurance premiums not increasing in line with inflation.

The last hard market occurred after the World Trade Centre attacks in 2001, when rates uniformly rose. New capital subsequently entered the market, causing the market to soften. After the financial crisis of 2008/9, insurance produced stable and relatively good rates of return on capital. This compared to other options available at a time of ultra-low interest rates. These factors created a stable and favourable environment for insurance buyers for some 15 years. However, an over capacity of insurance providers resulted in insurance premiums not increasing in line with inflation.

Solvency II

In 2019, after two poor years of results and falling returns, insurers started to increase premiums. Some of this was voluntary, however some increases were imposed by regulators. They were concerned that the solvency of the industry was being impaired by consistent rate inadequacy. Lloyd’s of London in particular took a lead and imposed its Decile 10 programme. This forced syndicates to exit or dramatically reduce their involvement in the 10 worst performing classes of business. Three of these classes were UK Property, Liability and Professional Indemnity. The capacity for certain classes of insurance contracted. Therefore, rates began to rise – a fundamental supply and demand equation.

Discount Rate

The adjustment of the personal injury discount rate has resulted in increased claim reserves & payments.

The discount rate is a figure used to help calculate a large sum compensation payment, for serious personal injury claims. For instance, a person who is left paralysed following a car accident or an accident at work. The discount rate was historically a positive figure. This was to reflect the fact that someone awarded a lump sum payment will usually invest it and therefore expect to receive a return on it. The lower the rate, the higher the compensation (awarded by the courts). Consequently, the greater cost to insurers

The Discount Rate was pegged at plus 2.5% for many years. However, in March 2017 the rate was reduced to minus 0.75%. A negative discount rate has huge implications for the insurance industry, as instead of discounting lump sum payments, insurers have to pay money on top of the agreed lump sum to injured claimants. The change in rate in 2017 forced insurers to significantly increase loss reserves for serious injury claims. Subsequently, insurers had to take into account the higher awards they would be required to pay. As a result of this, premium increases have been seen across classes of business susceptible to personal injury claims i.e. Motor, Employer’s Liability and Public Liability insurance. There was slight improvement in 2019. This saw the discount rate further adjusted to minus 0.25%. However, the overall movement had still been severe. A negative discount rate is a significant driver of increased motor and liability premiums.

The Grenfell Tower Tragedy

The awful fire at Grenfell Tower highlighted the significant risks posed by certain types of cladding. These were found to be combustible, notably Aluminium Composite Material or ACM. The risk of a total loss of a building was better understood. Therefore, insurers began to reduce their exposures to such buildings. In 2018, it would not be uncommon for an insurer to underwrite 100% of a risk worth £100m. Today, the same insurer may only be prepared to underwrite 25% of the risk. The risk then needs to be divided between multiple insurers. The splitting of risk between a number of insurers, combined with reduced exposure limits, has impacted on the supply of available insurance contracts and as a result premiums have increased.

Increasing Costs of Reinsurance

Insurance companies protect their balance sheets through purchasing reinsurance. The cost of reinsurance has risen sharply. The impact of increases in large claims falls in a disproportionate manner to reinsurers. Reinsurance also responds to catastrophic events such as windstorm and flood. Reinsurers respond to events on a global basis, therefore it is not just losses in the UK that impact on loss ratios. There have been significant natural catastrophes in the US, Australia, China and Japan. As a result, property reinsurance is now more expensive. The average cost of reinsurance in 2020 increased by over 10%.

Covid 19 Is Increasing Insurance Premiums

Insurance rates were rising before the Pandemic struck in March 2020. However, Covid 19 has accelerated the trend, notably in liability and professional lines insurance. Insurers are concerned about the long-term health impacts of Covid 19. This has not featured in the pricing of Employers’ and Public liability risks historically. In addition, the UK is already estimating that insured losses coming out of known Covid 19 will exceed £5 billion. Insurers will inevitably seek to recoup some of these losses through increased premiums.

In addition, the Pandemic has weakened the balance sheets of many insurers who invest heavily in bonds. Fixed income valuations dropped by about 10% since the start of 2020. This in turn affects solvency ratios which could have been impaired by as much as 30%. The Prudential Regulatory Authority (PRA), which monitors solvency of insurers, will want to see these ratios restored. Insurers will need to generate more underwriting profit that can be retained, and capital thus replenished.

Insurance Premiums Increasing But Strategies Can Be Adopted

The above doesn’t make easy reading. However, the hardening of the insurance marketplace does need to be viewed in context of a long period. The Pandemic might be seen as accelerating a trend that was already underway. Pre 2020 insurers were already looking to improve results and exit under performing lines of business. Despite the current trend, strategies can be adopted. Steps can be taken to successfully achieve competitive insurance premiums. Furthermore, the history of the insurance pricing cycle tells us that hard markets tend to be short lived. They tend to be followed by prolonged soft markets, as new capital enters the market to take advantage of strong underwriting returns. Supply begins to outstrip demand once again, causing rates to reduce over time.

In response to the current market trend, we continue to expand our panel of insurers. This is to ensure that we are able to secure the most favourable terms possible.

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