Insurance is based on the principle of a “Common Pool” – all policyholders paying a contribution into a central pot which covers all the claims and insurer operating costs and should leave a profit for the insurer and their shareholders. Insurers also look to invest premiums generated in order to obtain an investment income and to cover losses accrued from claims which could occur in the future such as Employer Liability claims.
Over the last decade, insurers have been looking to achieve growth by providing competitive pricing, extending the breadth of the insurance cover or undercutting other offers to win business.
After many years of customers enjoying a ‘soft’ Insurance market where many premiums either stay the same or reduce, due to competition and over capacity, the market is showing signs of hardening or increasing rates.
There are a number of reasons for this:
- Years of under-pricing and widening covers
- Lack of investment return for insurers due to downturn in the global economy
- Significant losses from global events such as hurricanes, wildfires, storms & floods (Hurricanes Harvey, Irma and Maria resulted in $100bn of losses alone)
- Increased claims compensation costs due to the Ogden ruling and how it compensates accident victims
- Increased claims cost due in motor claims due to technological advances (average claims costs have increased by nearly 50%)
- Covid-19 set to cost insurers $200bn
A number of insurers have dropped out of certain markets, including the Rural market, which has reduced capacity in the UK and globally.
What does the future hold for insurers?
Due to the current pandemic there are a number of risk factors to consider for insurers in these uncertain times:
- Possible recessions leading to increase in fraud, theft and arson claims
- Reduction in businesses undertaking risk management reviews as they seek to reduce costs
All of the above make insurers more cautious about the risks they write and with reduced capacity in the market they can start to be more selective about the risks they want to write, which actually makes risk and claims management ever more important for businesses.