Risk managers and brokers must up game in hard market

If signs of a hardening market take hold, insurance buyers and brokers will need to up their game to avoid the worst pitfalls and ensure renewals do not leave them with a nasty taste in the mouth, experts say. But such market conditions also give insurance buyers the opportunity to make a difference and prove their worth to business leaders, they add.

Risk managers are advised to start renewals early, deliver more risk data than ever before, properly communicate rising insurance costs within their own organisations and consider alternative risk transfer options to cope best with hard market conditions. Training is vitally important, said Ferma.

Brokers, meanwhile, are being urged, and it seems are taking steps, to retrain staff that may have no prior experience of working in hard market conditions, or need to refresh their memory.

It is now more than ten years since the last truly hard commercial insurance market, but there are growing indications that the seemingly everlasting soft conditions are coming to an end. Rates are up a touch globally and in Europe, with the last January renewals trickier than in a long time. People are waiting to see how the renewals around the world play out this year. But many expect tougher discussions for insureds and their representatives.

Risk managers and brokers are not used to operating in such conditions. Some have no hard market experience. This means there is a potential skills gap and they need to adapt fast. One of the differentiators going forward will be the ability and experience of those buying and broking insurance.

“It is more challenging to work in that kind of environment because the people in the insurance companies, brokers and, even in some circumstances, on the clients’ side, need to understand how to play in a hard market. Some have the experience from ten years ago and need to refresh their memories, but the youngest have never experienced a hard market. In our own organisation, and all others involved, we need to deliver training to prepare people for more technical and difficult negotiations in the future,” said Jean Rondard, co-head of CRB for France and head of risk management at Gras Savoye Willis Towers Watson.

Ferma said upcoming renewal negotiations could be tougher than for many years. Its president Jo Willaert said this is a “time when the professional skills of the risk manager make a difference”.

“A hardening market is a golden opportunity for the professional risk manager to show the value of their skills,” he said. He added that risk management education is key to getting the most from insurance in a harder market.

Airmic’s deputy CEO and technical director, Julia Graham, agreed with Ferma that tougher market conditions allow “sophisticated and experienced insurance buyers to demonstrate their value as business partners through mature risk management practices”.

But the hard market presents insurance buyers with risk as well as opportunity. To avoid the former, they are advised to start renewals early and carefully communicate changes in pricing, terms or conditions to their bosses in good time.

“It is about early engagement and honest and open feedback, because no one likes surprises,” said Paul Knowles, CEO of JLT Specialty.

“A risk manager doesn’t want to be communicating to their CFO on rate increase at the last minute. The risk manager needs to be able to explain rationally why premiums are moving. They have probably been able to deliver premium reductions year on year, so this is an alien conversation and difficult unless you are prepared for it. Risk managers need to understand why it is happening and be able to pass that message on,” he added.

Airmic has urged insurers to give clients fair warning that rates are going up so insurance buyers can manage the expectations of business leaders. This follows concern from some members that insurers have been communicating a change of strategy too late in the renewal process.

Ferma, Airmic and other experts are also advising insurance buyers to arm themselves with risk data to shield against the worst ravages of any hard market.

“In a harder market insurers become more technical, so the ability of the risk manager to present good-quality risk information and draw on their broker’s services will strengthen their position in negotiating the insurance programme. It will also help them to communicate with the CFO how the insurance budget is included in the greater risk management approach and can be used most effectively within the company strategy,” said Ferma’s president Jo Willaert.

Mr Knowles said risk knowledge and understanding has improved enormously since the last hard market. Along with the ability to obtain data, he added.

“So, there is more opportunity to prove you are a good risk and weather the storm better than you might have in the past. You can get to the right place, but it is going to take more time and effort, earlier engagement and a bit more thought. It is no longer an environment where you turn up and get everything you want,” said Mr Knowles.

Fellow broker Mr Rondard gave similar advice. “We are telling clients to go back to basics and go deeper into risk analysis so they fully understand their own risk. From this, hopefully they can let the data speak for itself. We can then go to the market knowing exactly what we want to achieve in a reasonable, documented and logical negotiation,” he explained.

Risk managers and insurance buyers should also consider the use of alternative risk transfer solutions if hard market conditions truly take hold.

“If insurance becomes more expensive, risk management methodology can be used to evaluate which lines or limits of cover are still worth transferring in the same way as in the past. He or she can assess when it is worthwhile to use another solution to manage company’s risks, for example, using a captive,” said Mr Willaert.

Airmic’s Ms Graham, who is a former Ferma president, agreed. She encouraged risk managers to make the most of opportunities presented by alternative risk transfer vehicles, including the use of captives.

Ultimately, a harder market might drive some companies towards other solutions such as captives, said Frédéric Lycops, risk and insurance adviser Europe and MEISA at FedEx Express, during our European Risk Frontiers Belgium roundtable.

“It should drive innovation. So people will be thinking about captives and other ways to handle their programme,” he said.

Mr Knowles advised clients to consider the claims payment philosophy of insurers and their ability to deliver “when the rubber really hits the road”, before switching carriers in search of cheaper cover.

“In the current market, we are very much making our clients aware of not just focusing on the premium aspect, which is tempting when rates are moving up. They must consider the claims approach too. So if you are going to switch insurers to secure lower rates, don’t do it at the expense of the type of claims handling you want to see at the other end of the process,” he said.

Tracey Skinner, director of insurance and risk financing at BT Group, said risk managers are concerned that large numbers of brokers have never worked in a hard market and will find such conditions tricky. Even a selectively hardening market requires a slight change in approach, she said.

“This might not mean a massive change in how you do things, but different things you need to consider. It is almost like a slight retune. This does mean a significant amount of retraining. As a broker, you might not get things done simply on the back of the fact you work for one of the big companies,” said Ms Skinner.

Mr Rondard agreed that the broker community needs to retrain its staff for hard market conditions. Mr Knowles said JLT Specialty launched a hard market training module for its brokers at the end of 2017, to make sure skills from the last hard market are being passed down to the next generation.