All you need to know about the hardening market and how Finch can help mitigate the impact on your business
Both the direct and indirect impact that COVID-19 has had on businesses is momentous and the insurance industry hasn’t gone unscathed. As we move into a period where demand for insurance exceeds the supply for the first time in many years, the implications of this are likely to affect you as a commercial insurance client. At Finch, we want to help you to understand more about trading in a ‘hard market’ and what we can do to help mitigate the impact this will have on your business.
You may have heard that we’re entering a hard market period, but what does that actually mean? Insurance is cyclical. Just like how the seasons change, the market fluctuates, with each insurance ‘season’ lasting anywhere between two to 10+ years.
On top of that, there are two types of insurance cycle conditions – hard and soft – that can affect the status quo.
What is a Hard Market?
In a hard market, you are likely to see:
- Higher premiums
- Reduced appetite due to stricter underwriting criteria
- Restricted or narrower policy coverage
- Decreased capacity, meaning insurers write less policies
- Lower limits on policies
Why are insurance premiums rising?
We mentioned above that in a hard market you typically see higher insurance premiums. Why? During a hard market, insurers place more stringent limits on the cover they can write, which automatically lowers their appetite. This in turn means they are writing less policies.
As the insurers’ capacity is lower, it can be more in difficult to find insurance solutions and that leads to an increase in demand for cover, all of which drives premium prices up.
Why is the market hardening?
There are many reasons why we’re heading towards a hardening market, from natural disasters to rising rates. We’ve listed just a few of them below:
- House prices were low at the start of 2020, meaning insurers were losing money on property cover. Then, storms Ciara and Dennis hit in February, which caused a rise in claims when insurers were already suffering a loss on property premiums.
- Solvency II was introduced in 2016 to harmonise EU insurance regulation. Principally, it aims to make sure policyholders across the EU have the same level of protection against failure of an insurer, regardless of where they purchase their insurance. However, it has resulted in some insurers leaving the market, meanwhile others have reduced their capacity considerably.
- Another factor is the Ogden Discount Rate has changed; this is a calculation used to work out how much compensation insurers should award someone who has life-changing injuries to cover them for loss of earnings and any care costs. The rates have changed meaning insurers are having to pay out higher levels of compensation on the larger personal injury claims.
What is the effect of COVID-19?
Even before the Coronavirus pandemic hit, the tides were changing. COVID-19 has naturally influenced the market, compounding everything.
John Neal, CEO of Lloyd’s of London, told the Financial Times back in April that the pandemic is “no doubt the largest insurance challenge the industry has ever faced”. In May, Lloyd’s forecast that COVID-19 will cost the insurance industry $203billion (£166billon) worldwide and has recently announced that it expects to pay out £5billion in Coronavirus-related claims. Meanwhile, the Association of British Insurers (ABI) still envisages the UK insurance industry will have to fork out more than £900million for COVID-connected claims, as well as £275million to travellers who had to cancel their trips as a result of the pandemic.
It is, therefore, likely that COVID-19 will extend the length of the hard market, as the insurance industry tries to recover from the impact of the crisis.
What does this mean for me and my businesses?
During a hard market cycle, it can be more difficult for businesses to find cover, and it’s our role as your broker to guide you through the insurance landscape. We have longstanding relationships with numerous specialist insurers, which allows us to have conversations with the right people for your business needs. We act as your champion out there in the marketplace, whether it is in a hard or soft cycle, to get you the best cover for your business.
We always keep a close eye on any market fluctuations. We will get in touch with you ahead of your renewal date to discuss your personal circumstances and how any changes in the insurance cycle will affect you.
This is marketing material published 11 Nov 2020