After years of soft market conditions, it may seem unusual that the hard market that finally arrived is so persistent. Considering that the previous hard market was well over a decade ago, there had been some discussion that insurance underwriting cycles may have disappeared. But years of declining rates, claims inflation, evolving natural catastrophe exposures, event-driven litigation, emerging risks and other factors naturally led to the market conditions we are now experiencing.
Of course, it is never as simple as describing market conditions as ‘hard’ or ‘soft’. It depends on the class of business and the particular market. Many factors that have created the current conditions have impacted some markets more severely than others and at different points in time.
Some markets, such as the US, saw tightening sooner than others and are firmly in a hard market for most lines. Hardening followed in the UK and, subsequently, in continental Europe. But even within geographies, there are different degrees of hardening according to product and market segment.
Pressure on lines of business
A hard market is often characterised in terms of price increases, but there are also the issues of terms and conditions, capacity and coverage availability. The long soft market certainly created a need for insurers to focus on price, but in certain lines of business and geographies, broadened terms and conditions also crept in. These get tighter as the market hardens, while capacity often shrinks. This is because underwriters are working to find the right balance of risk, premiums and coverage to sustain their portfolios while also meeting the needs of the customer.
For certain risks, there is less capacity than in prior years. New capacity is coming in, but these new entrants are generally testing the waters by participating in excess layers rather than providing primary products and services.
Pressure on most lines of business has built during a decade of rate decreases, increasing loss costs with broadened terms and conditions, and risks that weren’t always adequately priced. There have been other challenges, such as increased frequency of physical losses from natural hazard events, not only from a very active hurricane season but also from tornadoes, hail, flooding and wildfires.
Some lines are particularly stressed, such as D&O liability, where we have seen a range of event-driven litigation and an increasing volume of security class actions, an incrementing prevalence of litigation funders, average settlements growing year over year, reinforced regulation following the global financial crisis and regulatory activism triggering a globalisation of actions against companies.
Non-traditional losses appeared in 2020, namely Covid-19 and social unrest in the US, which are respectively estimated to have caused losses to the insurance industry of $50bn and more than $2bn. And with insurers seeing depressed returns from investment income for an extended period, there is little ability to make up for unfavourable loss ratios. The combination of all these factors made a hardening market inevitable, with some lines of business and regions experiencing much greater levels of adjustment than others.
Support for customers
Securing the capacity they need at an acceptable price is a big concern for customers. They are responding to market conditions in a variety of ways, from starting renewal discussions early, to retaining more risk through deductibles and co-insurance, and looking at alternative ways to transfer risk.
We see our captive customers, for example, evaluating their options for retaining more risk and looking at innovative, holistic solutions such as combining life and non-life risks into a single captive, an area where an insurer such as Zurich has strong capabilities and expertise.
Early and clear communication is critical as insurers look to support their customers during this challenging time. This is a tough market, regardless of which side of the table you are on, and early discussions are absolutely necessary. Insurers must be willing to listen to the customer’s needs and propose alternatives that allow them to consider any reasonable trade-offs. At Zurich, we engage with our customers as early in the renewal process as possible, and by understanding what matters most to the customer, we are better positioned to find the right solution.
As an example, we have found that holding large-loss-scenario workshops with our customers in several countries in EMEA has been especially useful in alleviating market concerns. We bring in the risk manager, the broker, claims professionals, underwriters and risk engineers to roleplay various scenarios. These are typically the ones that keep the risk manager up at night, and we work through how the coverage would respond. In North America, through our claims’ stewardship process, and in cooperation with our risk engineers, we offer both pre- and post-loss collaboration with brokers and customers to help in better understanding risks. Through this dialogue, customers can better identify areas that may require a change in their risk management strategy.
Risk mitigation services
It is also important to stress the value of risk mitigation services such as risk engineering, modelling, loss prevention and incident response, all of which become even more crucial in a hard market as companies look for alternatives to complement traditional insurance solutions. Risk managers do not need to go on this journey alone and should work with their insurer and broker to build resilience, where possible.
To help in this area, we have recently created Zurich Resilience Solutions (ZRS) to address the rapidly changing risk landscape, with a holistic approach to supporting risk managers and helping build resilience. While many organisations have their own data, they may lack the broader perspective across their industry segment and suffer from a scarcity of relevant and reliable data, tools and insights beyond their own experiences to help them manage and mitigate risk. The ZRS model is designed to address this by providing companies with valuable insights into specific issues and solutions based on our experience, data and knowledge of industries.
In the current market environment, we are aware that what customers value most is stability and security. At Zurich, we are trying to reach a sustainable place with our customers and provide the long-term consistency that they need to manage their businesses effectively.
Contributed by Sierra Signorelli, chief executive officer for commercial insurance, Zurich Insurance Group