Brokers see no hardening but advise more retention and long-term deals

But German corporate insurance buyers should consider increased deductibles and try to tie down long-term contracts with their insurers over coming renewals as insurer margins come under pressure, advise brokers. Commercial Risk Europe recently carried out a survey of Europe’s top corporate insurance brokers as part of its annual Risk Distribution project and this included six of the major independent brokers in Germany and Austria. CRE asked senior executives of the German brokers what they believed would happen to corporate insurance terms and conditions over the next six months and what insurance managers should do to cope with tighter conditions as insurer margins begin to come under pressure. The international insurance and reinsurance market has suffered a number of big losses so far this year not least in New Zealand, Australia and Japan.hideBut after a tough first quarter the leading insurers and reinsurers reported better second quarter figures. Capacity and competition remains high for German and wider European corporate risks and, unless the global insurance and reinsurance market suffers a huge event over the Atlantic hurricane season, the brokers agreed that there will be no sudden hardening in terms. Corporate insurance buyers ought, however, to think hard about their buying strategy at coming renewals as the market will ultimately harden as losses mount and investment conditions are adequate at best. Defensive moves such as tying insurers into multi-year contracts and higher deductibles may be wise, advise the brokers. Florian Karle, Managing Director of German broker Südvers, said that ‘nothing much’ will happen during the next six months but does believe that change is inevitable in the longer term “At the moment we are still seeing strong competition and aggressive pricing. The market has to turn; we need higher premiums. But we do not think this will happen very soon. However we must differentiate between the various lines. Premiums in industrial property and casualty, motor and D&O depend strongly on the losses experienced by the individual companies in the past. Credit insurance premiums are rising strongly for all companies while limits are only increasing slightly,“ he said. Mr Karle said that insurers would have to suffer so many claims that the premiums are not enough to cover them to force a hardening. But to force a big change would really need one or two global events, he said. “Neither the earthquake in Japan nor Hurricane Katrina were such events. Alternatively the greedy mentality stops and insurers start calculating the amount of premiums they really need and begin to enforce that price level. We are all in the same boat, risk carriers, brokers and clients. The current premium level is not sustainable,” said Mr Karle. Stefan Nill, member of executive board of Dortmund-based broker Leue & Nill said that he thinks the market has reached the bottom. “Corporate insurance is still profitable. Margins have become smaller which is an indication that rates are stabilising or even going up. This is said on the understanding that we will not be confronted with more terror attacks or catastrophes,” he said. Corporate insurance buyers should prepare for any hardening and lessen its impact on their insurance costs through the acceptance of higher deductibles or the purchase of multiyear contracts ‘for as long as it is possible,’ said Mr Nill. Walter Schenk, member of the executive board of Austrian broker GrECo, said he still sees a flat market because of high capacity. “Contrary to some insurers we think that the rates will not rise, but will remain stable. They may rise partially for nat cat covers or D&O. But there is too much capacity for an overall hike, the market is still very soft.” To trigger a hardening Mr Schenck said that capacity would have to decline, the claims scenario would have to change ‘drastically’ and insurers’ investment returns would have to shrink ‘considerably’ to wreck their bottom lines. “Some people regard the forthcoming hurricane season in the US as a possible scenario for a hardening market, but we do not believe that will happen,” he added. In the absence of a dramatic market-wide hardening Mr Schenk said that the quality of risk management implemented by companies will be key. “The hardest hit companies will be those where risk management has not been installed properly to reduce the amount of claims. Where there are no state-of-the-art fire prevention measures, insurers will try to push through much higher prices or deductibles, in some cases rightly so, in others not. But this will focus on specific industries like paper producers, pharmaceutical and chemical companies. There won’t be a surge of price hikes affecting the whole market as happened some years ago.” Mr Schenck said that companies should check their security and risk management measures to help cope with any hardening. “One can also think about taking on more risks via higher deductibles and captives or use current market conditions and go for contracts which cover two or three years,” he added. Dr Leberecht Funk, partner of Hamburg-based Funk Group said that he believes stable or higher prices are unlikely. “For new business, the willingness to underbid competitors by about 10% is widespread. On the other hand, clients, industries or insurance lines with lots of claims in the past will have to expect premium increases of 5% to 10% and sometimes even more,” said Dr Funk. Only tighter capacity will force a change and that does not currently look likely, said Dr Funk. “From experience a shift to a hard market is only possible when capital becomes scarce. This is not the case at the moment, although some reinsurers had to report losses. The industry has to experience even more claims burdens before the market as a whole turns,” he told CRE. Dr Funk, like many in the market, believes, however, that there are potentially bigger claims ‘slumbering’ in the background and which may ultimately shift the market regardless of natural catastrophes. “Policies covering natural perils are usually hardest hit due to the high claim potential, followed by financial damage cover, in particular D&O. Huge potential claims are slumbering here due to losses incurred but not reported. But insurers will also aim at product recall and product liability policies. In Germany, motor will also be affected,” said Dr Funk. Dr Funk said that insurance buyers ought to check with their brokers whether cover can be reduced to ‘the essentials’ and investigate whether it is possible for companies to carry more of their own risks or mix policies with different claims burdens that could lead to improved results. “Measures postponed before to reduce losses should be considered, in particular in industries that insurers regard as problematic. In addition, clients can try to go for contract periods above one year to retain favourable conditions,” added Dr Funk. Norbert Noehrbass, Managing Director of Detmold-based broker Ecclesia, said he believes that rates for weather, natural catastrophe and coastal risks will rise by 5% to 10% for the January 2012 renewal and possibly even into the 2013 renewal. He said that rates for all property risks will start to rise during the January renewal. “Other corporate lines will continue to remain low for normal loss ratios and motor insurance will continue to harden on loss experience,” he said. “The hardening will be triggered by two major trends; first, the insured losses from the flooding, fires and hurricanes in the US and Canada; and, second, the need of insurers and reinsurers to write down their investments in government bonds. The trend will continue if we have severe autumn storms in Europe,” continued Mr Noehrbass. Worst hit lines will be all property covers and especially all risks and natural catastrophe covers, he said. Oliver Cullmann, Managing Partner at Bremen-based broker Gebrüder Krose said that to predict the development of insurance rates for the next six months is like attempting to make a weather forecast for the next six months. But, overall, he does not expect a hardening. “Currently we do not expect a general hardening of the market if no more major claims occur. Of course property insurers will try to impose price rises. But we have a highly competitive market on the other hand, so I do not believe in a general hardening of the market,” said Mr Cullmann. The broker advised clients to buy multiyear contracts for ‘as long as it is possible’ and think about taking more or higher deductibles.

Brokers see no hardening but advise more retention and long-term deals

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