Buyers urge insurers to up game as trust erodes in hard market

Although the commercial insurance market needed a correction, little recognition of risk management efforts or differentiation between long-term buying partners and opportunistic peers during recent hardening, has eroded trust in insurers, according to risk managers taking part in a panel discussion during Commercial Risk’s Global Programmes conference this week.

Alexander Mahnke, CEO of insurance at Siemens and chairman of German risk manager association GVNW, acknowledged that insurers haven’t made money from corporate insurance for quite some time and that pricing needed to rebalance in traditional lines.

“We want our insurers to earn money with the business they do with us. Doing this in an unsustainable way, not making profit over a long period of time, is not something that is good for the market, or insurers, and because we believe in long-term relationships, it is not good for us either, because it creates erratic behaviour,” he said during the virtual event, being held on 14-16 September and sponsored by Allianz, AIG, AXA XL, Axco, Globex Underwriting Services, Marsh, TMF Group, Willis Towers Watson and Zurich.

And Mr Mahnke noted that underwriting was erratic in the last two renewal rounds in Germany. He said this has eroded trust, and explained that 80% of GVNW members rated the reputation of corporate insurers in Germany as “very bad” in a poll this February.

Mr Mahnke pointed to cyber as a problem line. “Just a couple of years back, the same insurers that now mourn their losses in cyber and withdraw capacity, were the first in line telling us and our CFOs that cyber standalone is something we really have to look at. And some went as far as to say that if you don’t buy cyber you are halfway to a D&O claim,” he said during the event, supported by risk management associations Airmic, Belrim, Ferma, GVNW, Narim, Parima and Rims.

Mr Mahnke said insurance buyers want “reliability, foreseeability and transparency” from their carriers. “Quite frankly, if you take that away, risk managers will ask what is the value of a finance product that should smooth the impact of risk over a period of time, if all of sudden prices go up and capacity goes away,” he added.

The other risk manager on the panel, Franck Baron, group deputy director of  risk management and insurance at International SOS, and chairman of the pan-Asian risk management association Parima, said a big problem is the lack of differentiation between buyers that have made long-term commitments to insurers and those that have not, as well  as reward for risk management at renewals.

“A good portion of corporate risk managers are looking for long-term relationships with carriers but we should not ignore that some were very opportunistic in buying insurance for years. For them, if you benefit from a competitive market, then when it is an increasing one, you suffer from it. But for the long-term partnership buyers, we have been suffering from this cycle extremely badly. We are losing the value of risk management, with no room for differentiation. I am talking about companies that have invested in risk management and in long-term relationships with carriers. This has been badly damaged by what has happened over the last 24 months,” he said.

The two insurers on the panel acknowledged the impact of the hard market on risk managers.

Matthew Latham, head of global programmes and captives at AXA XL, said that feedback from the last couple of renewals “has been received loud and clear by insurers”.

“We are making every effort to address those issues by engaging earlier to ensure there are less surprises and that clients understand the decision-making. And we are making sure that our people on the ground are empowered to make decisions,” he said.

Mr Latham pointed out that there have been higher claims from the pandemic, nat cats and social inflation, and not just in the US. Underwriters are therefore trying to be more selective about the risks they take on, he said.

Mr Latham also highlighted that while property, for example, has been hardening for three to four years, there were 14 years of rate reductions prior to that, and in that time there has been an acceleration of losses.

On the issue of long-term relationships ,Tony McHarg, head of multinational at AIG, said it is important to focus on partnership rather than procurement. “We need to distinguish between sensible underwriting decisions of a carrier, and the overall supply and demand of the market. They are related but it’s not any one carrier’s decision to stress a line of business across the global P&C market. The argument isn’t whether the correction needed to happen, but should insurers be valuing differentiated risk and differentiated risk management? Absolutely,” he said.

The panel also noted that there has been a growing interest in captives and other alternative risk transfer mechanisms as a result of the hard market. But all participants agreed that companies should not wait for a hard market before looking at such solutions.

“We are seeing increased interest in captives, increased deployment of captives from existing owners, and the extension of the use of captives across new lines of business. I don’t think it is a hard-market strategy, but the current market is driving some tactical development of captives to offset either restriction in capacity, or higher retentions, or to mitigate costs,” said Mr McHarg.

“Captives give the risk manager a better level of control and help to cushion these impacts of the market,” added Mr Latham. “History tells us the market will go up and down, and having a tool like a captive is really important,” he added.

You can still sign up for the rest of the Global Programmes conference here.