What effect is Covid having on the hard market?

It is well established that the insurance market is in a period of hardening. Experts within the industry have been analysing the forces at play and the phrase ‘perfect storm’ has been used to signify what is a uniquely challenging set of pressures affecting the market.

How do we know it is a hard market and not just pandemic pressure?

1.Rates are rapidly increasing. Lloyds’s reported average rate increases of 10.8% in 2020 which continued into the first quarter of 2021, and we have seen a much higher rate increase with some types of cover. Rate increases have been seen for some time in PI, Property, and Marine and other classes have followed. Motor and Liability have seen reducing capacity and it has been difficult to hold these rates steady. Where Covid has had an effect is in instances where there are reduced estimates of activity (e.g., vehicles on the road). This is showing in some cases a reduction in total premiums; however, we believe the actual rate has increased and therefore will follow other classes this year.

2. It appears to be affecting all classes – to differing degrees, but all are affected.

3. There is a sustained increase in premiums through more than one renewal cycle.

4. It is more than just rate increases. Although premiums have gone up, we are seeing a simultaneous reduction in covers and elements being stripped out of policies.

What is causing the hard market and what is Covid causing?

1.Expected losses

There is an increasing frequency in the scale of costs from natural disasters and this is taking its toll on reinsurers already. The United Nations Office for Disaster Risk Reduction (UNDRR) reported almost a double in disasters and economic losses in the last 20 years.

Much of the change is explained by climate-related disasters and global warming. Natural disasters are costly, we can examine some recent examples to see the pressure on Lloyd’s and large insurers to payout:

• “Hurricanes Florence and Michael which hit the US in the second half of 2018 are believed to have resulted in insured losses of more than $10billion¹
• The extreme freeze that hit the UK early in 2018 resulted in insurers paying a record amount for burst pipes – £194million in a three-month period.
• 2018’s extreme heatwave led to more than 10,000 households needing to claim for damage caused by subsidence, at a cost of more than £64million.” – The Association of British Insurers (ABI)

There are also expected pandemic related losses such as BI and Financial Loss which insurers will need to factor in, for examples Lloyd’s are predicting pandemic pay-outs will reach £6.2bn. The combination of climate change and Covid is therefore exacerbating the expectation of losses for insurers.

2. The collapse in investment returns

The base rate has been low since 2009 and in the short to medium term, the base rate is not going anywhere. This results in insurers receiving low investment return on capital causing underwriters to be more reliant on profit from underwriting rather than return on their investments.

The past year has seen huge amounts of government sending to try to buffer the impact of the pandemic. BBC News reported that government debt for the financial year of April 2020 to April 2021 is said to be at a whopping £355billion. This is the “highest figure ever seen outside wartime.” – BBC News.

To try to recover some of this money and boost spending, interest rates have been set even lower, at a rate of 0.1%. This is a lower base rate than the rate set in the 2008 crash and it would appear they are set to stay that way. The further decrease in interest rates causes further pressure on insurers to underwrite profitably and therefore pressure to underwrite more cautiously.

3. Recessionary pressures

Although there is an expected growth forecast for the UK economy GDP still sits 7.3% lower than pre-pandemic levels. The support package has been fantastic, but it has kept a lot of ‘zombie firms’ afloat which in a normal period would have gone bust. Coupled with the end of the furlough scheme, unemployment will undoubtedly rise. Recessionary pressures created by the pandemic will lead to an environment where claims increase through fraudulent claims, BI and private medical as people may be out of work. Increased claims and uncertainty causes insurers to consider rising claims costs in their capital reserves, pushing up prices for premium, exacerbating the hard market.

4. Reduced capacity

Poor profitability on investments in insurance in previous years due to a soft market means that there is a lack of investment for insurers causing lower capacity. This is completely unrelated to the pandemic and is part of the cyclical nature of the insurance market.

As we can see, there are several factors that have been at play for a long time, and this is a very different scenario to the price corrections seen in 2009 and 2017 where we saw elevations in premium.

What effect does Covid have on the hard market?

The pandemic is a clear exacerbating factor to the hard market, and it will make for an even more challenging landscape for brokers.

Being able to talk to clients with confidence on the range of factors at play and knowing how these factors have had an impact on the industry is the key. It puts brokers in a strong position when explaining why a client’s premium is going up after a difficult year and provides context to the rest of our series on why taking action and changing tact is key to navigate the hard market.

Look out for our next blog on how the London Market is reacting and what brokers need to consider when navigating the hard market. Sign up to our mailing list below for more risk insights.