State of the 2019-2023 Hard Insurance Market
The Current Insurance Market
What is a hard insurance market? Here is one definition:
Hard Insurance Markets
Source: Federal Insurance Office, U.S. Department of the Treasury
The property casualty insurance business is cyclical in nature, transitioning between “hard” and “soft” markets. Generally speaking, a “hard” market is one in which insurance underwriting capacity is relatively low (competition has declined or capital is more scarce), prices for insurance are increasing, and policy terms and conditions are generally more restrictive. A “soft” market is one with more abundant capacity to write new insurance policies, increasing competition and, as a result, rates that are growing only marginally or even decreasing.
Key factors that indicate or lead to a hard market: large underwriting losses (both catastrophic and non-catastrophic losses); a decline in policyholder surplus levels for the industry; an environment of rising reinsurance rates, and momentum in premium pricing.
The current hard market followed fifteen years of level premiums.
Forecasts of the current hard market first appeared early in 2019, primarily in auto and commercial insurance. Over the first quarter of 2019, reports emerged of generally poor underwriting results, both domestically and at Lloyds (where a lot of Canadian corporate insurance is underwritten).
During the second quarter of 2019, the poor underwriting results were confirmed and insurance renewal rates reportedly rose 10-20%, with higher increases in certain areas (e.g. liquor liability, auto).
By the fall of 2019, renewal rate increases of 10-30% were being reported.
Insurance renewals in 2020 and 2021 experienced more increase (another 10-30%).
At this point, industry consensus seems that the current hard market is starting to wane.
This hard market metrics:
Length ≈ 4 years
Additional premiums paid by the average commercial insured were about 30% more in each of the four years.
Lessons Learned with Previous Hard Insurance Markets
Below is a simple graph showing the three hard insurance markets in the last fifty years, excluding the 2019-2023 event.
Below is a table of average premium behavior over time in each of these historical hard markets, as derived from economic data (U.S. National Association of Insurance Commissioners; U.S. Council of Insurance Agents and Brokers; Insurance Bureau of Canada).
Table 1: Average Premium Behavior in Hard Insurance Markets
As seen above, the hard market comes along every 16 years, and adds 25-50% to insurance premiums whilst it lasts.
The hardness of the current market is not as harsh as the much harder 1984 and 2001 insurance market events.
What are the lessons from the hard markets?
The 1984 event affected liability insurance of all organizations and caused extreme stress to both public entities and private corporations. The flurry of risk pool activity after the 1984 event changed the insurance landscape forever. Commercial insurers lost business to the newly-formed risk pools and had to eventually return to reality in order not to lose more.
The stress on insureds from the 2001 hard market was equally (if not more) severe. Many organizations trimmed the insurance fat, reduced liability insurance limits, raised deductibles, sought alternative risk financing and began to look at insurance as more of a financing tool than a necessary commodity.
Neither the 1984 or 2001 hard markets created a “new normal” for insurance rates. The rates returned to pre-event levels. This should then be the case for this current hard market, with the possible exception of auto insurance. Vehicle repair costs on newer European cars are increasing because of manufacturer’s rules and restrictions governing repairs.
Basic Strategies
What can be done to control insurance costs in a hard insurance market while maintaining prudent financial resources for an insurable event and waiting for rates to return to normal?
Here are the basic alternatives. They all involve time, expense, and, in some cases, measured risk-taking.
1. Evaluate Your Treatment by Your Insurers and Broker
The first step is to objectively evaluate your insurance rate increases. Are they above, at or below average?
You’ll need to consider your losses and loss ratio, your industry sector’s treatment, the average rate increase in your sector and the length and quality of your current relationships. It may be that your treatment is better than most and that to improve that treatment is just not cost beneficial.
2. Evaluate and Improve Your Underwriting Information
This next strategy is often overlooked but it is also important.
Brokers are often relied on to put together underwriting submissions to insurers and communicate your story to underwriters. It may be that their efforts could be improved. An insurer has limited time to underwrite, so if you yourself put your best foot forward with a clear, concise, and understandable report of all the required underwriting information, you will improve both the broker’s and the underwriter’s understanding of, and confidence in, your organization. An in-person meeting with key underwriters is considered best practice.
This element is important for effective insurance procurement and, of course, is a necessity for any successful form of insurance tender.
3. Evaluate Your Risk Tolerance
If you decide to go further in reducing insurance costs, the third step is to realistically assess your organization’s ability to retain insurable risk, i.e. your risk tolerance.
What is the largest loss amount (per occurrence) that you could tolerate if “push came to shove”? The value is likely a lot higher than your current deductibles. Remember, it is a corporate risk tolerance, not a business unit or departmental risk tolerance.
4. Self Insurance
Self insurance can take many forms: total self insurance (i.e. no insurance purchase), self insurance funds (fronted or not), increased deductibles, retrospective rating and coinsurance.
Decreasing insurance costs through self insurance requires a careful comparison of additional self insured loss with cost savings. One self insurance tactic may not make sense on its own. Five tactics in combination could well reduce costs with acceptable variance, particularly if a five to ten year time frame is used (“the portfolio effect”).
Actuarial analysis and objective cost estimating are key to a proper self insurance decision, as is a recognition of their effects of insurance claims on future years’ premiums and the time, expense and grey hair in making insurance claims.
5. Insurance Tender
We use the term insurance tender to refer to a competitive bidding and controlled by insurance brokers, each using different insurers.
That definition does not include “marketing” of the insurances by the incumbent insurance broker to other than the incumbent insurer. In our experience, the “one-broker marketing” approach usually does not produce honest nor satisfactory results. The reasons for this are a little complex (game theory and cognitive bias) and that topic will be left for a future op-ed.
However, a tender amongst two or more brokers is often cost-effective, that is to say worth the time and effort of conducting the tender. In our experience, well-briefed insurance brokers are quite competitive with one another, hopefully leading the insurance underwriters to be as well. If the clear, concise and understandable Insurance Underwriting Information mentioned earlier is prepared and used, and the brokerage competition managed in an fair and market-savvy way, maximum market competition is achieved.
The insurance market is like any other market: fluid, diverse and, if properly accessed, efficient. A brokerage tender is the work periodically required to assure this market efficiency.
One final note. When increasing insurance deductibles, a tender is almost always necessary to obtain the proper credits. A broker’s compensation is usually tied directly (commission) to insurance costs. An insurance broker has cognitive bias (if not conflict of interest) in obtaining reasonable deductible credits in the absence of competition.
There are at least a dozen tender formats available. Picking the right one for your organization and its goals and circumstances is important.
6. Investigate an Industry Risk Pool
In Canada, there are several dozen reciprocal insurance exchanges (“reciprocals”) and other commercial industry purchasing pools formed under Provincial captive legislation. Each pool usually serves a specific industry or sector (e.g. healthcare, lawyers, public entities, nurses, etc.). These insurance pools vary widely in their membership requirements and commitments and in the stability of their rates. Many just do liability insurances and have a separate group commercial insurance program for property, cyber and accident insurance.
As well, mutual insurers and offshore group captives exist for energy and petrochemical companies.
7. Alternative Risk Financing
This strategy is a quantum leap in complexity over other strategies. Alternative risk financing runs the gamut from an insurance reserve or fund, to a fronted chronological loss stabilization plan, to a wholly-owned captive insurance subsidiary.
Assessing the cost benefit of these alternatives and making a good decision can take a few months. Implementation can take 6 months. Accordingly, alternative risk financing is a longer term solution, one involving costs (complexity, capital and commitment) but benefits (halving commercial insurance premiums).