Hard cat market risks eroding value of insurance, warns leading broker

Focus on retentions and terms could create real problems for buyers

The hard property catastrophe risk transfer market is likely to further devalue corporate insurance and raise further questions about the relevance of cover for corporate buyers, a leading broker has told Commercial Risk.

Corporate insurance buyers face a shortage of property catastrophe insurance, higher retentions and potential coverage restrictions as insurers look to pass on changes to terms and conditions imposed by their reinsurers. In addition to rate increases, corporate buyers renewing at 1 January saw substantial increases in retentions and deductibles, as well as talk in the property reinsurance market of coverage restrictions.

According to Hugo Wegbrans, global head of broking at WTW, corporate buyers are being forced to take higher retentions as insurers react to changes in the reinsurance market. He noted that one WTW client moved from a $10m to a $100m retention because of uneconomical pricing at lower layers.

“Insurers have pushed on price as they have seen reinsurance costs rise. Retentions also came under pressure and we saw a number of clients taking bigger retentions, which I see as a worrying sign,” said Wegbrans on 1 January primary renewals. “Once companies take bigger retentions they tend not to come back to the market and buy it back again,” he said.

“That company will never buy a $10m retention again. It might sound good for insurers but the premium pot in excess of that $100m is slim and so, if this is done on a broad scale, the volatility of the market increases. I say to insurers, don’t push clients too far in retaining risk because it will push the market into a more volatile place,” Wegbrans warned.

Reinsurers are also looking to tighten up terms and conditions for property and business interruption coverages in a bid to avoid surprise losses and frequency catastrophe events. The recent reinsurance renewal saw a push to exclude war-related covers, as well as civil commotion, riot and civil unrest protection from property insurance. There is also a general desire from reinsurers to move away from offering all-risk coverage towards named perils.

Although the effects of tighter terms and conditions have yet to fully play out and work their way through to insurance coverages, this raises the worrying prospect of diverging terms and conditions from insurers participating on the same programme.

“There is a fear that we might end up with a market focused on wordings and clauses this year, which doesn’t help anyone, especially in a market where we need multiple insurers to cover a risk. Everyone having their own opinion on what you do or do not cover is a complete nightmare for clients. My fear, and we do not have clarity yet, is we end up in the nightmare scenario of differential terms between carriers, which make it really difficult for brokers and clients,” said Wegbrans.

A retreat from catastrophe exposures and tighter property and business interruption coverage also threatens to further degrade the value of insurance for large corporates. This comes at a time when insurers are struggling to cover emerging and intangible risks, which are increasingly relevant to businesses.

“The relevance of insurance has been reduced already over the past couple of years, and is further reducing. We now have limitations in natural catastrophe and important risks like supply chain and cyber. You once could buy heavy limits for cyber, but now nobody is putting out substantial limits,” said Wegbrans.

“The relevance of the insurance product is reducing and that should worry us all. Over the past couple of years the product has shrunk as insurers have sold less and the price has increased. If we continue this trend clients will start to question the relevance of insurance,” he added.

Ironically, many commercial insurers are now looking to grow, following two years of rate increases and a return to profitability, but they continue to retrench from a number of important risks, according to Wegbrans.

“Natural catastrophe, cyber and supply chain: These are all risks where risk managers want more capacity. That is where the market should step in and broaden the offering, rather than compete with and take premium from each other, creating a price race for a product that is insufficient for risk managers,” he said.

“It’s time for insurers to be innovative, as market growth is unlikely to come from the so-called non-aggregated or non-cumulative lines of business, as there is a surplus of capacity for these risks,” he added.

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