Even if you’ve never heard the term “hard market” before, you may be about to experience the effects of one as a commercial insurance customer. We have now entered a period where demand for insurance exceeds supply for the first time in a generation and conditions will become tough for some clients.

What is a hard market in the insurance industry?

Insurance runs on cycles called ‘hard’ and ‘soft’ markets. A soft market is a good time for insurers (and customers) in which the underwriting results are profitable and investment returns are buoyant. This creates confidence in which supply exceeds demand with Insurers competing aggressively to gain market share. This generally means: –

  • Lower premiums
  • Wider and flexibility on acceptance of risk
  • Extended cover and other incentives, such as long-term deals, low claims rebates, bursaries and attractive payment terms.
  • Occasionally a more sympathetic handling of claims in ‘grey’ areas.

As Insurers compete with one another the premiums will reduce whilst the exposure to claims increases. Insurers will start to suffer poor financial results but excess capacity and new entrants to the market often prolong the competitive soft conditions. Insurers can often continue to balance their portfolio to break even mainly due to achieving investment returns.

Ultimately, a combination of adverse factors will eventually combine to make losses unsustainable, premiums must increase and terms and conditions become more restrictive. Demand then exceeds supply, and a hard market is created. This now means: –

  • Higher Premiums
  • Withdrawal from the classes of insurance and restrictions on acceptance of risk
  • Removal of previous benefits and charges made for instalments
  • Strict handling of claims

What is the cause of the Hard Market?

There hasn’t been a hard insurance market for almost 20 years and there have been plenty of crises during that time. However, there has been a ‘perfect storm’ of factors that have combined to overwhelm inherent market competition in the insurance industry, rates were rising and insurers started to become more selective, including: –

  • Claims Driven Pressures. Lloyd’s of London has estimated claims of over $100bn across all insurance markets for 2020. The increasing numbers and severity of weather events continue to add pressure, as seen with Storms Ciara and Dennis. These hit in January & February 2020 resulting in an estimated cost of over £400m to insurers. The average escape of water claim in the UK is 30% higher now than 3 years ago and injury compensation costs have increased significantly due to Government action on the way future payments are calculated. The tragic Grenfell Tower fire has also been a catalyst for significant challenges in professional indemnity insurance.
  • Solvency II. Is a set of regulations introduced to reduce the risk of insurer bankruptcies. Insurers are required to hold higher levels of surplus assets as a consequence it removes spare capital and is a significant barrier to new entrants to the market. Introduced in 2016 it completes in 2021.
  • Investment Returns. Insurers, like other companies, are dealing with interest rates at extremely low levels. If they can’t make returns on investments they need to collect more premium.
  • Covid-19. It is still too early to tell the full impact of the Covid-19 insurance losses. It is possible costs could run to £3 to £4bn in the UK alone. Lloyd’s of London estimate that Covid-19 pandemic will inflict record global losses on insurers ($107bn claims and $96bn slump in value of assets = $203bn).

How can a hard market affect commercial insurance customers?

Typically it becomes harder for the average business to source similar cover at a similar premium during a hard market.

How to minimise the effect of the hard market?

We are actively reviewing all policies to ensure we fully understand your business, the sector in which you operate and identify unique policy features your business needs. We have the scale, relationships, expertise and time to spend on your insurance to solve problems and obtain the most suitable cover at a competitive premium.

“We make it our business to understand your business”

This article offers a general overview of its subject matter. It does not necessarily address every aspect of its subject or every product available in the market. It is not intended to be, and should not be, used to replace specific advice relating to individual situations and we do not offer, and this should not be seen as, legal, accounting or tax advice. If you intend to take any action or make any decision on the basis of the content of this publication you should first seek specific advice from an appropriate professional. Some of the information in this publication may be compiled from third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such. The information given in this article is believed to be accurate at the date of publication (Jan 2021). This information may have subsequently changed or have been superseded, and should not be relied upon to be accurate or suitable after this date. The views expressed are not necessarily those of Munro-Greenhalgh Ltd.