Insurance budgets face cuts due to pandemic as market hardens: Aon

Many commercial insurance buyers will face significant cuts to their insurance budgets during 2020 and into 2021 as a result of Covid-19, just as insurers crank up rate increases, warned Hugo Wegbrans, global chief broking officer at Aon. This will leave many companies facing difficult questions about insurance cover. Mr Wegbrans predicted that the commercial and specialty insurance market will continue to harden through 2020 and 2021, with further rate increases and tightening terms and conditions. “The market is clearly hardening. Initially, the market hardened for property and directors and officers (D&O) insurance but this has expanded to other lines of business and geographies. It started in the US but Europe is catching up,” he told CRE. And this hardening is now coinciding with constrained insurance budgets for many companies hit hard by the coronavirus. Companies are surviving with the help of government support but as that support is withdrawn, insurance budgets will come under increasing pressure, warned Mr Wegbrans. Some clients will struggle to afford insurance premiums, he said. “Carriers argue that rates are not adequate but many clients might not have the money to pay for rate increases. Some already say they have only 75% of their insurance budget and ask what we can advise they purchase, rather than just propose a renewal. This economic impact [of the pandemic on budgets] will play out in 2020 and into 2021,” he said. During the past decade, buyers have enjoyed rate reductions, broadening cover and, potentially, lower retentions as well as high limits of cover. That situation is now reversing. Many buyers hit by the economic consequences of the pandemic will face decisions about whether to reduce overall cover, increase levels of self-insurance, reduce the number of lines of cover, or not to insure certain risks at all, according to Mr Wegbrans. “In the soft market, buyers expanded their cover, but many may now want to get close to the minimum. They will have to prioritise cover to fit their needs and budget, and there will need to be more thinking around retention strategies and risk presentation. Everything will need to be clear for underwriters, who will price for any uncertainty. The more open and transparent you are, the better the result at renewal,” he said. Insurers, which are keen to cover their costs, may also require minimum levels of premium. However, some buyers may be entitled to a return of premium, explained Mr Wegbrans. Some insurance contracts include clauses that allow for premium rebates, typically triggered by a significant fall in revenues, he said. Insurers will see the hardening market as an opportunity to tighten up wordings, which will have expanded and broadened during the soft market. This has particularly come into focus with Covid-19, where insurers are having to pay claims, or are in dispute with policyholders, for pandemic losses they did not intend to cover. “All insurers are making sure that wordings reflect the intention of underwriters. Carriers are now much more cautious and will make sure they understand and model the risks they underwrite. Especially for all-risk type of covers,” said Mr Wegbrans. Coronavirus has put renewed focus on non-damage business interruption (BI) and supply chain insurance, he continued. “Markets will still write non-damage business interruption, but the all-risks side of the market has gone. There is still appetite for non-damage BI, but only for specific named perils,” he said. To some extent, insurers are using the hardening market to “clean up” their books, explained Mr Wegbrans. “Insurers are able to re-underwrite their books without punishing their top line, getting rate elsewhere,” he said. The current environment is not yet a “classic hard market” where buyers are broadly unable to secure the capacity they need, explained Mr Wegbrans. But capacity is constrained in certain areas, he said. The hardening is being driven by insurers’ need to achieve higher rates, following years of poor results and rising claims in some lines of business, said the broker. There is a trend for insurers to wait until the last minute to make decisions, which further limits clients’ room to manoeuvre, he added. “We are in a tightening or hardening market. It can be difficult to get programmes completed, in particular for excess layers. Insurers’ risk appetite has changed, driven by poor performance in the property market over time and social inflation in casualty lines. However, insurers are beginning to say the rating is now getting to a more acceptable level and some are looking to grow market share rather than just look at rate improvement,” said Mr Wegbrans. D&O and US casualty are among the most affected lines of business, with insurers reducing capacity, according to Mr Wegbrans. Capacity is also becoming more restricted for complex risks or those requiring large limits, he said. “There are constraints on capacity and this is driving price at the upper end of the market,” he added. The current hardening phase will not be “a one-year event”, predicted Mr Wegbrans. ”Next year will be a hard market but it will also be unpredictable. The market in 2021 will depend on what happens with the coronavirus pandemic and whether there are any large catastrophe losses for insurers. At the same time, insurance budgets will be affected by the economic impact of Covid-19,” he said.

Insurance budgets face cuts due to pandemic as market hardens: Aon

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