We've already written about a 'hardening' insurance market and how, until recently, this was primarily confined to the supply of professional indemnity insurance (PII). However, conditions across the whole insurance sector are now becoming more challenging as insurers are forced to increase premiums, reduce their presence in specific markets or withdraw from them altogether because they are no longer financially viable.
What is a 'hardening' insurance market?
Insurers use the term “hardening market” to describe a phase when certain types of insurance become more difficult and costly to place and premiums rise quickly.
It's no secret that the insurance sector is no longer as buoyant as it once was. And, like any other business sector, insurers are having to react to the impact that this is having on their profitability by increasing prices or discontinuing certain types of insurance. This situation can make it much harder for you to buy or renew your insurance because your insurer may no longer provide the coverage you need, or it may have become so expensive that you can no longer afford to buy it from them.
As insurers opt to exit specific markets, competition understandably eases, and those remaining can impose more stringent policy conditions and demand higher premiums. We already know that this is happening in the PII market. What's new is that these challenging market conditions are emerging in other areas of insurance where insurers are becoming less willing to cover certain risks – or have decided to exclude them entirely. As a result, businesses that previously had no issues renewing their insurance may struggle to secure the same types of cover that they enjoyed before and at a similar premium.
So why are other areas of the insurance market starting to harden?
The reasons are complex and driven by a variety of forces, including climate change, rapidly advancing technology, historically low interest rates in the UK and the ongoing COVID-19 crisis.
Weather-related disasters are becoming more frequent across the globe. This year alone, the UK has endured high winds and heavy rainfall from storms Brendan, Ciara, Dennis and Jorge, each of which wreaked havoc on our communities, property, businesses and infrastructure. As significant weather events like these become more likely (the Met Office reports that the probability of extended periods of extreme winter rainfall has risen sevenfold), insurers will inevitably face more and more costly claims, and this is not sustainable as things stand.
Consequently, businesses located in areas that are becoming increasingly prone to flooding or other extreme weather events may find that they will have to pay higher insurance premiums and could face more onerous policy warranties and conditions. The 'luxury', too, of shopping around among insurers may also become a thing of the past as these carriers assess the risk of climate change to their balance sheets and decide to limit their exposure or exit the market entirely.
A less obvious cause of a hardening market is the advancing technology that is reshaping so many aspects of our daily lives. Artificial Intelligence (AI) and device interconnectivity are transforming how we use everyday things at home, in the workplace or when travelling. And these pose new and unique challenges for the insurance sector.
Let's take vehicle insurance, for example. It's fair to say that cars today are far more complex than they used to be, with the emergence of hybrid and electric cars, driver-assist technology - such as GPS and parking and proximity sensors - and onboard computers that manage engine performance and fuel emissions.
Car repair costs and keyless-entry car thefts are on the rise
While all this technology means that we can enjoy a more comfortable and efficient car journey, it also means that car repairs are inevitably more complicated and expensive. Repairing damage to a vehicle today will almost certainly require more repair time, specialist mechanics and hi-tech replacement parts that aren't always readily available. Consequently, the cost of settling car damage claims has increased, leading to claims inflation.
Another factor impacting car insurance claims is the rise in the number of keyless-entry car thefts in the UK. Keyless-entry car theft, also known as relay attack theft, involves the use of a device that can unlock a vehicle by mimicking its key-fob transmission. Criminal gangs are exploiting this vulnerability to steal cars 'to order' or to sell on the vehicle’s parts. According to Motorcheck, a vehicle is stolen every five minutes in the UK, and the latest data shows that the rate of vehicle theft is on the rise.
Luckily, for the time being, the vehicle insurance market is still competitive, and premiums remain affordable. However, according to the rating agency Moody's, the lag between premium price increases and claims inflation will pile pressure on some insurers and will negatively affect the industry's long-term earnings unless this imbalance is addressed. This may lead some insurers to turn away from standalone motor insurance as it becomes less profitable or choose to increase their premiums in the future.
The UK economy and historically low interest rates
The Bank of England (BOE) slashed interest rates back in 2007/2008 in the wake of the financial crisis from 5% to 0.5% to help the UK economy recover. After the Brexit vote in 2016, the BOE cut the rate again to 0.25% before increasing it to 0.75% in 2018. Since then, it has continued to put off raising interest rates. Then in March 2020, faced with the COVID-19 pandemic, the bank cut interest rates from 0.75% to 0.25%, and again from 0.25% to just 0.1%.
When interest rates are high, insurers can tolerate underwriting losses up to a point as investment income from money set aside for future claims can mitigate these losses. However, because current interest rates are so low and have been for years (they are, in fact, the lowest in the BOE’s 300-year history), insurers can no longer afford these underwriting losses and so must focus on what’s profitable if they’re to balance the books. Consequently, certain classes of insurance, such as PII, are no longer viable for some insurers. So, premiums, unavoidably, go up, choice becomes limited, and the insurance market gets that much harder.
Making matters worse, unemployment in the UK has begun to rise for the first time in a decade as businesses struggle to survive the recession caused by the pandemic. As unemployment figures climb and productivity drops, revenue will suffer, and that means that businesses will find it harder to afford their insurance premiums. This, in turn, will negatively impact insurers and their ability to cover certain types of risk.
COVID-19 makes a hardening market even harder
While insurers may not have covered themselves in glory during the pandemic – the Financial Conduct Authority (FCA) has taken eight of Europe's largest insurers to court over whether they should be required to pay out pandemic-related claims – the fact is that insurers will be starved of capital when these losses cut into their cash reserves.
Moreover, the UK's historically low interest rates, combined with weakening equity markets and potential corporate bond losses, will severely affect the whole insurance sector as investment returns diminish. This situation is not just bad for insurers; it's bad for their customers too.
"COVID-19 will be the most expensive event ever to hit the insurance world", John Neal, CEO of Lloyd's of London.
Trading in hard market conditions, insurers must look to profitability in the short term to try to offset the capital shortage by giving preference to the areas where they can see the fastest return. The COVID-19 pandemic has surely compounded this situation, widening the effects of the hardening market beyond liability cover and into other classes of insurance.
Without a doubt, a very challenging time lies ahead for insurers, brokers and insurance buyers alike and few businesses are likely to be left unscathed.
Remember, we’re here to help. So, please don't hesitate to speak to one of our Clear representatives if you have any questions or concerns about your insurance.