What has caused the Insurance market to harden?

Market hardening isn’t typically caused by just one event, but rather a combination of factors that all place increased pressure on the insurance industry. There is, however, often a catalyst which speeds up the process – for example the 9/11 attacks in the early 2000s and the coronavirus pandemic today.

Factors contributing to hardening the market in 2020 include:

Terrible start to 2020 with storms Dennis and Ciara – With property accounts already losing money, the last thing UK insurers needed were floods that could end up costing well over £400m. Climate change is causing insurers to struggle with correctly predicting floods, and they need to build up a pot of money to take care of the next set of bad floods which will inevitably be on their way. Climate change and the frequency of natural disasters is becoming more common, leading to significant pay-outs for the global insurance industry. Reinsurance cost is a key component of an insurers pricing model and rates will rise significantly come the renewal time for treaties. Insurers will have no option other than to reflect these increases in their rates.

The Covid-19 pandemic – There’s no denying the ongoing pandemic has been one of the biggest factors. Insurers have been hit by unprecedented pay-outs, with Lloyds of London estimating the total cost to the insurance industry will be around $203 billion [i] – almost double that of Hurricane Katrina in 2005.

Solvency II – Legislation introduced in 2016 means that, by 2021, all insurers are required to hold certain levels of cash to ensure they can meet their liabilities. This need to have a certain amount of capital at all times is reducing the cumulated exposure that insurers are willing to carry. This has caused a number of insurers to leave the market whilst others have significantly reduced their capacity. Solvency II has also created a significant barrier to entry meaning that lost capacity in most cases is not being replaced.

The negative Ogden table rates are here to stay – When Liz Truss the then Minister of Justice changed the Ogden table rate from 2.5% to minus 0.75% it meant that insurers had to pay out far more on larger personal injury claims. Insurers were hopeful the rate would return into positive territory in 2019, but they were disappointed as the government have pretty much locked into a rate of minus 0.25% in England and Wales and minus 0.75% for Scotland, further impacting settlements and rates now have to be set accordingly

Low interest rates followed by low investment returns – With the Bank of England’s base interest rate at a record low of 0.1% during 2020, and more recently a fall in investment returns, many insurers have taken a loss on investment income, which for some, has reduced their capacity to underwrite risk. Also with lower investment returns insurers are under more pressure to make underwriting profit causing premiums to rise.

Rising motor claim costs – As cars advance technologically, they become more expensive to repair and the costs associated with motor claims go up. We’re currently seeing motor claim costs rise by around 4-5% each year, which in turn leads to rising insurance premiums.

Restructuring within the insurance industry – In recent years we’ve seen many insurers withdraw from certain lines of business to concentrate on core markets, and withdrawing or reducing capacity for certain risks. This naturally leads to less competition.

In a hard market, insurers are more likely to apply acceptance criteria, terms and premium increases more strictly. The more brokers evidence positive risk features which give underwriters an insight into how well managed, protected and generally well looked after a risk is, the more appealing it will be to underwriters and the more likely they may be to take on the risk or provide favourable terms. At Risk Hub we have considerable experience including working through hard market conditions to get the best for clients. We also utilise technology to identify and improve risk which over time should help negotiate competitive premiums.

[i] source Bloomberg 14th May 2020