Recalibrating the relationship with insurers

The current hard market, after such a long soft market, is a stark reminder that the underwriting cycle is back and never really went away. And it has not surprisingly seen a strong reaction from risk and insurance managers about the fickleness of the insurance market, and an equally robust response from insurers about the need for a recalibration. All of which reminds me of a session at the Airmic conference many, many years ago (in the 1990s). Risk managers in the workshop were criticising insurers over suddenly increasing prices and tightening conditions as a hard market kicked in. Insurers responded by saying buyers had pushed them to the limit during the soft market, just looking for cheaper prices and regularly chopping and changing insurer. And then they both turned on the brokers in the room and said it was all their fault. To which the brokers replied that they were simply doing what the risk managers had asked, i.e. getting the best price. In fact, doing their job. And so the roundabout continued. Fast forward to 2021. Risk managers accuse insurers of erratic underwriting, a lack of differentiation and failing to recognise risk management efforts, while insurers stress the need for a recalibration of the market after 14 years of soft market conditions. Plus ça change. The root of the problem is of course the underwriting cycle. It always has been and probably always will. I have seen enough soft and hard markets since the late 1980s to know that the cycle benefits no-one. Insurers will say that hard markets come about because of the need for price corrections after years of underpriced risks. Risk and insurance managers will say insurers should price their business better and understand the risks they are taking. It is difficult for risk and insurance managers to explain to their CFO or finance director that the cost of insurance has inexplicably gone up, despite no increase in claims, improved risks etc and when the economy is going well. Because the underwriting cycle is a beast on its own. It often has little connection with economic downturns or recessions. A hard market usually stems from the reinsurance sector and will tend to be triggered by losses faced by reinsurers from catastrophes. A soft market will be triggered by more insurance players, increasing competition, and a desire of some for greater market share. None of which makes any sense to a finance director of a manufacturing company. Or any other company. When I first started writing about the re/insurance sector in the late 1980s, I had to cover results initially. I was surprised that re/insurers made big net profits, but when it came to underwriting results, they made big losses. But investment income more than made up for this. It appeared to me that re/insurers were making money (big profits in the late 1980s) despite not being very good at their job, i.e. underwriting the risk. Losses vastly outnumbered premium. No-one seemed very concerned at the time but as investment income dwindled, re/insurers needed to improve on their core skills – assessing the risk, rather than simply underwriting for premium. What is the answer? Clearly, the underwriting cycle is here to stay. Some thought it had perhaps gone away after such a long soft market, but it has once again reared its ugly head. So, the issue is how to smooth the effects of the cycle – or to avoid it altogether. Some risk managers are starting to question the value and relevance of insurance. One risk manager said recently at a Commercial Risk conference: “When I was first a senior risk manager 20-plus years ago, maybe a quarter to a third of my risks were insurable with third parties, but now I am down to about 10% and I suspect most risk managers are as well.” But for most, the solution is to try and smooth the underwriting cycle. And so far, the best solution for that is a captive insurer. It is not perfect, it can be expensive and time-consuming to establish (though cell captives are changing this), and it still ultimately relies on insurance protection from the market. The other solution is to improve the risks and to manage them better. And ultimately, what many risk managers are looking for from the insurance market is recognition of those efforts. Insurers want long-term relationships with clients for obvious reasons. And they want clients that take risk management and loss prevention/control seriously. Insurers have been very good at encouraging buyers to invest in loss control and to implement risk management strategies aimed at improving the risk. But that also means that when the market turns from a soft market, where some companies may have been using insurance as a commodity and being especially opportunistic and price-driven, insurers need to recognise those companies that have put the effort in, and acknowledge those efforts. That is what a long-term partnership is all about. Perhaps the recalibration is as much about re-setting the relationship between insurers and corporates as it is about pricing and risk.

Recalibrating the relationship with insurers

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