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RUL Managing Director Douglas Brown predicts that COVID and its economic fallout will transform the market… and it could be for the better.
The insurance sector is not immune from becoming a casualty of Covid 19. The Financial Times recently reported that, according to Lloyds of London, the COVID cost to insurers is more than $200bn - with $107bn claims and a $96bn slump in value of assets.
It looks to industry commentators that we are entering a hard market of decreasing capacity and rising premiums.
Like most financial markets, insurance is cyclical. A soft market occurs when supply exceeds demand and insurance companies assertively compete against one another to gain market share. Characteristics are profitable underwriting results and superb investment returns. For customers, it signifies wider risk tolerance, long-term deals, low claims rebates, attractive payment terms and lower premiums.
Following a prolonged soft market, a catastrophic global financial shock can produce a sharp interruption in the finely balanced market place; heralding change that is both swift and unforgiving.
This is the case with the COVID pandemic. Economic productivity plunges, employment becomes uncertain, assets are inactive and insurers’ vulnerability to claims are exposed. Investment returns stagnate and the value of the assets which underpin capacity providers start to shrink. In other words, both ends of the insurance pipeline are drained at the same time.
It is time for brokers become much tougher when the availability of what they provide becomes scarcer, and the pressure from their clients to control cost increases. Those engaged in high risk placements find the capacity they need evaporating, whilst those in simpler markets see the rules of supply and demand played out as premiums rise.
The mantra here must be relationships. Keeping the lines of communication open between your clients and your supporting insurers is very important.
Try to think of it like war-time rationing; it’s the same principle. Understanding the needs of your clients within the context of what the marketplace can and will provide is vitally important. Prepare clients for what is coming and help them make the right risk management decisions that control cost but leave their core assets protected. Nobody likes surprises, so have the difficult conversations early to allow for acclimatisation and planning. It’s hard to contend that ‘we are all in this together’ when you don’t warn your customer there are difficult times ahead.
Customers have become too used to focusing on price when buying insurance and bleating to the regulator when they get caught out, because the product they purchased isn’t broad enough to cover their losses at the premium they are prepared to pay. In the hard market, the availability of cover may eclipse the value for money proposition all together.
So stay close to your clients, warn them of what’s around the corner and give them advice that’s in context with the market place as well as their own risk landscape.
I’m hopeful that by 2022 we can start to reverse the economic and social damage wrought by Covid. That we’ll see some professions, particularly teachers, gain new found respect for the difficult job they do, and that clients learn to value their brokers as advisors rather than just conduits to cheap insurance.
I’ll leave you with a quote from John Ruskin, a prominent Victorian philosopher and philanthropist:
“It's unwise to pay too much, but it's worse to pay too little. When you pay too much, you lose a little money - that's all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The
common law of business balance prohibits paying a little and getting a lot - it can't be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”
― John Ruskin
Douglas Brown is Managing Director of Renovation Underwriting, the UKs leader in property renovation insurance cover. The emergence of a hard market is a discussion topic likely to be featured in our CPD training for brokers in 2021. Find out more here.
A follow up to this article has also been published; looking at the impact of a Hard Market on existing business. Read here.