A hard market is never good news for risk and insurance managers. And especially when it comes after an economic slowdown and a major global pandemic. And while there is much talk about a moderating market, that still means rating is increasing, just not as fast. There is very little chance of a soft market for the foreseeable future, especially with pressures such as growing inflation, climate change, social inflation and cyberattacks.
But there are a few positives to be taken from the current situation. Not many, but GRM has managed to scrape together ten positives to take away from the hard market, to try to bring some cheer in these winter months:
It is only really during a hard market that the value of risk management and loss prevention is truly recognised. When pricing is low, there can be a temptation to overlook issues and put off necessary improvements. There is an argument that the cost of investing in loss-control measures can never really be recouped when the market is soft, as insurers cannot discount any further (though this obviously ignores the value of reducing losses to the business for their own sake, rather than simply to keep down the cost of insurance).
But a hard market is when risk differentiation really matters. Poor risks are penalised heavily, so investing in improving the risk makes even more sense and can easily be demonstrated to the board.
During periods of soft market conditions, there can be little innovation from the insurance sector. Competition is often all about price, broad cover and terms and conditions. But when the market hardens, that is when innovation begins and it is undoubtedly happening currently, generally from MGAs, coverholders and insurtechs, all of which sense an opportunity in the market.
And there is innovation not just in products and solutions but also with how they are structured, with insurers keen to discuss multiyear deals and alternatives.
It is well known that alternatives to traditional insurance struggle in soft markets. Everyone says a captive should be for life, not just hard markets, but the truth is that the amount of business put through captives, as well as the establishment of new captives, soars when markets harden.
So, now is the time to really get value from your captive. Use it as an incubator, use it to fund those huge retentions that have been forced on you, use it as leverage with insurers and use it to tap the reinsurance market. And look at other alternatives such as parametric insurance or capital markets. Now is the time to really explore these alternatives and see the potential value.
4. Value for money
Your broker is your partner in all this – and now is the time to make them properly work for their commission/fees. They got you great deals in the soft market but then, they had insurers knocking down the door to get your business. Now they have to work harder and you can really get your money’s worth. And if they don’t, then it’s time to change.
5. Personal recognition
Risk and insurance managers are generally not the most visible of employees. They are rarely high profile, despite the value that we all know they bring to the organisation. But as insurance cost increases start to bite, the CEO will want to know who you are (or at least the CFO will). And with D&O one of the most distressed classes, the c-suite will be on the phone checking what can be done. Take advantage of this raised profile while you can.
In a soft market, wordings become ever more broad and woolly, terms and conditions get expanded and insurers throw in all sorts of extras, which all sound wonderful. But when losses mount and the market changes, that is where the lawyers often get involved. Vague wordings become legal battles and no-one knows where they stand (Covid-19 business interruption anyone?).
But with terms and conditions tightened in a hard market, at least you now know exactly what is covered and what isn’t. Wordings become clearer and ultimately there should be a speedier claims process and less need for lawyers – which everyone should be happy about (apart from the lawyers themselves obviously).
In a hard market, you know who your friends are. Insurers talk a lot about partnerships and relationships, and are keen on long-term tie-ups. But in a soft market, insurance quickly becomes a commodity. Excessive competition, shortsighted buyers, brokers playing the market – all of this leads to a disconnect and the inevitable commoditisation of insurance.
But if you played the markets when it was soft, switching insurer every renewal like you do with your car cover, then it can be no surprise when prices rise and you get caught out. Now at least, you know where you are, and you know the insurers that stood by you and honoured the partnership ideal. Or not.
8. Once bitten, twice shy
So now, all those short-term players – the ones in it for the immediate premium gain – have been weeded out and you won’t get caught again. You’ll have learned the lesson and you’ll never get fooled again by the insurance industry… probably. At least, not until they come to you with a ridiculously low renewal offer, with all sorts of goodies thrown in
(Starting to struggle now to make a top ten). Well, it gives everyone something to discuss and moan about at the annual risk management association conference. Arguably, it brings the risk management community closer together with a shared grievance. Now that conferences are back in-person, what else are you going to talk about in the coffee breaks?
Looking on the bright side, things can only get better from now on – right? It’s a small crumb of comfort, but it won’t last. It never does. The underwriting cycle carries on inexorably, grinding away and has done since insurance was first invented. Many thought the cycle was dead because the last soft market went on for so long. But never underestimate the cycle.