Adam Clifford, Division President, Continental Europe, Chubb
This year will forever be remembered for the COVID-19 pandemic but even without the extraordinary circumstances we find ourselves in, 2020 was always going to be significant for the insurance industry.
After almost two decades of softening prices, the market cycle is changing. Signs of firming which were last year visible among financial lines and property in some European countries, have now spread to other sectors as pricing starts to increase across much of commercial Property & Casualty (P&C).
So why is this happening?
It is important to recognise the cyclical nature of the insurance market. Many people forget that prices do go up as well as down with supply and demand. That’s perhaps hardly surprising as the last time we saw rates rise was in the wake of the 9-11 terror attacks, where supply fell. So a considerable number of individuals working in our industry today have never before experienced a hardening market. This is in itself presents challenges in terms of education around what to expect and how to deal with it – and that applies to both brokers and carriers.
The market conditions we are seeing currently are a response to a number of factors. For many lines of business these include but are not limited to:
The impact of COVID-19 is not an underlying cause. The market was already shifting before the pandemic, although it is likely to contribute to further rate hardening and a lengthier cycle as capacity reduces even further.
Against this background, a continuing soft market is unsustainable. Those who once shed rate to boost market share have realised, sometimes too late and to their considerable cost, they need to be paid adequately for the risks they are taking. As a consequence, pricing has turned north.
It is misleading, however, to see the changing conditions through the prism of rising rates alone – what we are also witnessing is the return of much-needed discipline to the market.
Over the last decade, aggressive competition has not only been fought on the basis of price but also through expanded policy wordings and decreased deductibles. This combination can only go so far as ultimately it makes no business sense.
Insurers need to receive an adequate return for the risks they take. Balance sheet strength is fundamental because that is your promise to pay over a significant number of years. If you damage that, you damage your proposition, so price adequacy is critical.
Ensuring your capacity is in the market where you are getting paid for risk is therefore essential.
With some carriers forced to exit certain lines or changing terms, clients and brokers are seeking certainty and safety in a flight to quality. As this particular market hardens, capacity in general is reducing so the laws of supply and demand come into play.
So what happens now?
One area where the impact of the market changes will be particularly acute is around tacit renewals. Breaking tacit renewals creates a significant increase in workload for all parties involved and so time becomes crucial.
In Continental Europe, 1 January is the most important date in the calendar for renewals. But it is a date only, as the real work to get there is done many months in advance.
Brokers who start work on renewals in the summer months are rightly taking no chances. Those who wait until October or November to deal with their accounts may well face cancellations in the current market cycle. They will then need to scramble to put the information together so they can remarket and find capacity very quickly. Nobody wants to find themselves in that position.
It is on all of us in the industry, not just brokers, to look and think ahead because the state of the market is clear for everyone to see. That way we can all negotiate the various bends on the route to renewal in sufficient time, rather than having to deal with the issue only when it becomes critical.
Negotiate early, don’t leave it, because ultimately we are all here to provide a service to our clients and that has to be at the forefront of our minds as the market evolves.
What does this mean in practical terms and what should brokers expect from insurers?
Brokers know first-hand the frustration when insurers change their minds or their appetite at the last minute and rescind terms, so starting the conversations sooner rather than later is important – no matter how difficult some might be.
And remember also, this is not simply a two-way street – the tripartite relationship lies at the heart of this and it is on all of us to work together to ensure the right outcome for our clients and customers.
Adam Clifford is Division President for Continental Europe at Chubb