Get ready for a bloody renewal…

Recent half-year results published by leading international insurers and brokers all point to a hardening commercial insurance market that appears to be rapidly gaining pace, which means risk managers across Europe need to start preparing their colleagues and bosses for higher insurance costs next year.

Potentially more significant and difficult to explain to the CFO is the fact that, as this ‘reunderwriting’ takes place, insurers are also taking a long hard look at what they are actually offering within their policies. The most obvious example of this is the trend to exclude cyber from property policies.

The same process is occurring for the range of supply chain risks that are covered or not by business interruption in one form or another.

The argument is that it is better for risk managers to be able to tell their CFOs that they are covered for a cyber loss because they bought a specific policy to cater for the exposure. This is a neat argument for insurers as they limit what they used to offer and sell new policies at the same time.

Some risk managers are happy to go along with this because it gives them peace of mind. When the big one hits they don’t have to stutter and stammer and start worrying when the CFO asks: are we covered for this?

Others are understandably unhappy about this trend, which will inevitably pick up pace as the year progresses. The idea of paying more for less is really not that palatable to many risk managers, who have enjoyed the fruits of the long soft market for many years.

Now, no risk manager in their right mind would suggest insurers continue to post 110% combined ratios while they struggle to make adequate investment returns and add emerging risks to their portfolios – wittingly or unwittingly.

This would be a road to disaster and the regulators – while understaffed and resourced – would surely be forced to act before we saw a swathe of insurer insolvencies as we used to in the 1970s and 1980s.

But, risk managers really do not want to see the following:

• Insurers applying radical rate increases across the board without adequate warning and in collusion
• Insurers failing to differentiate between those customers with poor loss records and those with good loss records and clear investment in risk management
• Insurers seriously dragging their feet at renewal negotiations in order to push customers into panic buying decisions at year-end and having to accept stringent price rises on restricted cover
• Insurers also dragging their feet on claims payments or denying valid claims to improve their cashflow
• Insurers continuing to cut headcount at every opportunity with the mythical promise of becoming more efficient because of their investment in technology, the benefits of which are very unclear to customers
• Brokers claiming to be acting in the interests of their clients, but really seeking to maximise their revenues from both insurers and customers at every opportunity without adding any value
• Brokers continuing to shift as much premium as possible into their own managing agencies and facilities in competition with the carriers, to line their own pockets at exorbitant levels of commission.

So, what could and should the sensible risk and insurance manager be doing right now to make sure they do not find themselves in a difficult position at year-end, if the above list turns into reality?

We suggest the following:

• Demand that your broker works doubly hard to earn their commission and fees by getting those renewal negotiations truly underway right now to explore all options
• Pull together the best and most transparent presentation of your risk profile you have ever done. If you need help, there are plenty of experienced risk management consultants out there to help
• Start warming up your boss by telling them what is happening out there and what you are doing about it
• If you don’t have a captive, set one up and use it to negotiate the best possible terms directly with the reinsurance market if need be
• Talk to the capital markets and providers of alternative risk transfer solutions, such as parametric covers, and find out what they have to offer – you may be surprised
• Centralise everything to maximise your buying power – if you have not already started the process of including employee benefits within your programme, take a serious look at doing so
• If you really think that the carriers and brokers are colluding to stitch you up, suggest to your association that a conversation with the regulator may be a good idea.

Now all of this may sound like a lot of hard work at a time when resources are scarce. It may also require a bit of upfront investment, such as capitalising the captive and paying for some decent advice and support.

But if those storm clouds appearing on the horizon – as described by some experienced risk managers – are for real, you could well be thanking your lucky stars you did something about it now rather than waiting until December!