Why is Insurance Becoming So Expensive?
The insurance market, like other financial markets, is cyclical. While Australia has been enjoying a soft market for the last 5-7 years, it is now hardening quickly, and we are all taking notice.
What Does a Hard or Soft Market Mean in Insurance?
In a soft market, insurance is generally inexpensive and underwriting guidelines are relatively relaxed – i.e. it’s pretty easy to buy affordable and suitable insurance. However, in a hard market, rates jump up significantly (and usually quickly) with insurers pulling back cover and restricting their policies, if not declining to provide a policy altogether.
Where Are We Now?
We have shifted into a hard market and it’s most likely going to continue to harden even more. Insurers have tightened their guidelines, pulled out of some areas altogether and we’ve seen rate increases across nearly all types of insurance. The Financial and Property Lines have been impacted the most and we do not anticipate a shift back to the soft market in the foreseeable future.
Why are we in a Hard Market
Being a global marketplace, factors affecting insurers across the world will eventually impact insurance in the local market. The combination of large number of high cost claims and a relatively small amount of premiums to cover them has had a main role in causing the market to harden.
One of the high-level reasons for this is related to something that most people don’t know – insurers actually buy their own insurance, called “re-insurance”. Catastrophic claims across the world hit this re-insurance layer, causing the re-insurers to increase rates and apply cover restrictions, which then trickles-down to the consumer level across the world.
Multiple large catastrophic events around the world, such as the California wildfires, have had a large part in the Property Insurance market hardening worldwide. The global natural catastrophe losses for 2017 and 2018 combined were USD 219 billion, the highest ever over a two-year period.
In the Financial Lines space, there has been a significant rise in the number of class action lawsuits that are subsequently hitting Directors & Officers insurance policies. From 2000 to 2012 there was an average of just over two new securities class actions filed per year, but over the past four years this has increased to almost eight new filings per year.
This translates to an estimated loss ratio (claims paid versus premiums collected) of over 200%, while most insurers try to operate around 60%. There have also been serious claims hitting Professional Indemnity policies across several different industries, such as the legal, engineering and property services industries.
The insurance lines affected the most by the hardening market have been:
Until insurers begin to make a profit, we’ll continue to see rate increases at renewal.
What Can Be Done?
The first thing would be to make sure you’re working with a broker that understands your industry and the specific activities carried out by your business. This will help minimise the resultant issue we see so often – the insurer not knowing what they are actually covering, leading to an insurance program that doesn’t cover the activities being performed.
With this market shift in mind, KBI have been proactively working with insurers to build solutions, as well as with our clients to implement proactive risk management practices to maximise their policies. Insurers are now scrutinizing their portfolios more than ever and if they don’t feel comfortable with a risk they will price on the side of caution – if they agree to offer insurance at all.
We have built a profiling process which puts all parties on the same page, to put our clients in the best possible position to obtain the most relevant and cost-effective insurance available.
The KBI Profiling Process
We strongly suggest a full review of your insurance program to get a 360 view of what you currently have in place. You really need to know what your potential exposures are, how they can be mitigated through risk management practises and what risks can be transferred to insurance. This is especially important with businesses that are providing professional advice or have complex contractual obligations.
Some examples of businesses and areas of operations we see a real need for a risk review are:
- Engineering firms in all areas, including mechanical, electrical and mining enginers, design and fabrication
- Professional Advisory Firms, including corporate advisors, company secretaries, etc
- Investment Managers
Common Challenges Clients Face:
- We find that firms operating in the resources sector are at a higher risk due to the activities they are performing and the insurance requirements that are needed but not always met.
- We also encounter situations where liability is be buried deep into contractual agreements between Principals, Contractors and Sub-Contractors. On reviewing Professional Indemnity policies, it’s not uncommon for us to find a policy with multiple exclusions and although ‘the box is ticked’ with a policy in place, the policy holder does not have any cover at all.
- During reviews of insurance programs, we also hear of the problem’s businesses face when trying to find correct insurance with the multiple international jurisdictions they might be operating in.
- Some industries can be painted with a single brush by the insurers. Engineers are a good example of this, where insurers have bad claims experience in one sector (such as geotechnical engineers) which causes others to be affected by that experience.
To summarise our message, it’s never been so important to have your insurance program reviewed.
The market shift is seeing so many revisions to policy wordings and business owners are often put in a position where insurance simply will not be there for them when it’s needed.
Couple this with the rate increases we are seeing across the board, having a broker working for you who knows your business and the necessary insurance has never been so important.
Have any questions?
Talk to one of our specialist insurance brokers today!
We are a specialist insurance brokerage with an emphasis on adding value to our clients by helping them make an informed decision. Our approach combines that of an insurance broker and consultant, where we focus on providing expert advice to our clients while customising their insurance program and risk management solutions.
Since starting in 2013, KBI is constantly growing and becoming a leader in the Australian market. Our primary point of difference is that we don’t try to be all things to all people. We work in niche areas, where we can tailor an offering, advice and broker support to meet the specific area’s needs.