The commercial insurance market in the UK (and indeed globally) is riddled with convention and complexity that takes a great deal of expertise and experience to navigate at the best of times.
But these are certainly not the best of times.
Indeed, have buyers of commercial insurance (policyholders) ever faced a more challenging environment for the management of risk within their business and the purchase of insurance to transfer certain risks that can/should be insured?
So, what are the current factors giving rise to these additional challenges?
Divergence of Insurer Appetite in a Cyclical Market
The insurance market is cyclical in nature.
Underwriters chase volume by reducing rates (a soft market) to levels that are eventually uneconomic and result in underwriting losses. Certain participants then withdraw, resulting in reduced capacity (supply) causing rates to rise (a hard market) to levels where underwriting becomes profitable again – attracting new participants and increasing capacity…and so the cycle continues.
Having been in a multi-decade soft market until as recently as 2019/2020, rates have hardened in the last two to three years – particularly in distressed areas such as management liability (commonly referred to as “D&O”) and cyber where post-pandemic rate increases reached eye-watering levels (in many cases >100%).
However, we are now witnessing signs of relief for policyholders – where well-managed companies diligently presented to the insurance market can now achieve significant rate reductions and/or purchase indemnity limits that were not available to them as recently as 12 months ago in the distressed D&O and cyber markets.
But the reductions are not uniform. For example, property, liability, and motor rates continue to trend higher as claims inflation drives up insurers’ claims costs. We also see a market-wide divergence between underwriters’ attitudes to renewal and new business where, perversely, new business is attracting lower rates from insurers than their existing renewal book.
Inflation – Leading to Inadvertent Underinsurance
It is estimated that over 70% of commercial buildings in the UK are currently underinsured. As rebuild costs have escalated rapidly post-pandemic, policyholders have failed to keep pace, and their insurance brokers/advisors have generally absolved themselves of the responsibility to advise. A multiple-retailer client, when prompted as part of an ERA insurance review, recently discovered – on average – their freeholds were underinsured by more than 50%.
When was the last time your broker challenged the veracity of not only your buildings sum insured but tenants’ improvements if you are in leased premises, or machinery and plant if you are a manufacturer?
Where is that plant manufactured? In the US/Asia? Even flat pricing in US dollars means replacement costs have increased by 20% in pound sterling since 2020.
And underinsurance is a business-critical risk to a company’s balance sheet. It should be noted that if a building suffers one million pounds of fire damage and is insured for two million when the current reinstatement value is three million, insurers will only settle two-thirds of the claim…. exposing the balance sheet to £333,000 of uninsured loss – even though the sum insured is twice the size of the claim.
Heightened Supply Chain Risk
Disruption to global supply chains has left many businesses unprepared and inadequately insured against business interruption (BI) in the event of a catastrophic loss such as a major fire.
We regularly find businesses either having no business continuity plan or having plans that are outdated and ineffective accompanied by BI cover that is completely inadequate.
ERA’s insurance team has reviewed multiple manufacturers’ insurance programmes in the last year where, when challenged, management has concluded that following a major fire, by the time planning permission was granted to allow rebuilding of premises, contractors were able to deliver the building contract, the plant was sourced, installed and commissioned, and lost orders/contracts/customers recovered returning revenue to pre-loss levels, three to four years are likely to have passed…..and yet their BI indemnity periods are arranged for 12 or maybe 24 months.
Changing and Emerging Risks
As the risks businesses face have changed as the world changes, insurance programmes and the advice that businesses receive from their brokers have often failed to keep pace.
The risk to cybersecurity is perhaps the greatest threat to business today based on this report from Gallagher Insurance: –
In 2020, the average cost of a data breach was USD 3.86 million globally and USD 8.64 million in the United States. These costs include the expenses of discovering and responding to the breach, the cost of downtime and lost revenue, and the long-term reputational damage to a business and its brand.
And yet, ERA’s insurance team regularly engages with businesses who either have no cyber cover, cover that is poorly constructed or has totally inadequate limits of indemnity and sums insured – including when e-comms represent a significant portion of total revenue, a data leak would prove catastrophic, or the business would be totally unable to function if its critical systems were shut down following a ransomware attack.
On the rare occasions we find the right cover in place, higher premiums than are necessary are being paid because the risk management /cyber-attack defences in place have not been fully and effectively communicated to underwriters.
When was the last time your insurance broker or cyber underwriter communicated with your head of IT?
Scarcity of Expertise and Experience
With so many challenges facing policyholders, management has never been in greater need of expert risk and insurance advice. And yet we find ourselves in an insurance industry where brokers and insurance companies’ human resources are stretched to breaking point.
Following a cull of their most experienced staff during two to three decades of broker and insurer consolidation and mergers, the insurance brain drain has been exacerbated by many of those experienced underwriters and brokers who were retained, re-evaluating their priorities during the lockdowns, and taking early retirement rather than return to the office.
Real expertise has never been spread so thinly or harder to find across the industry. As a result, many companies are simply not getting the appropriate attention or expertise they need.
ERA’s experienced insurance team works with our clients to fully understand their business – serving as an extension of their management team to assist with understanding risk and providing specialist insurance procurement services. We leverage insight and our insurance industry network to maximise the value our clients derive from the insurance supply chain to minimise their overall long-term cost of risk.
This strategic approach requires time – mainly ours – so should you be in any doubt that your business is receiving the independent advice it needs to navigate its way through current risk and insurance-related challenges, minimising the long-term cost of risk to your business, please contact your regular ERA consultant to explore how we can help.