Danger zones in a hardening market

There’s no doubt some parts of the insurance market continue to harden.

Honan Insurance Group’s December 2019 Quarterly Market Update reports that high-hazard property, professional indemnity (PI), natural catastrophe risks and residential strata risks with aluminium composite panel construction remain challenging areas for the insurance industry.

‘Underwriters continue to be very risk selective on both renewal and new business and are still prepared to walk away if things don’t stack up,’ says Travis Wendt, Honan’s head of broking and carrier management.

‘We’ve witnessed a number of instances where the incumbent insurer has elected not to renew cover due to changes to underwriting guidelines, even in longstanding client/insurer relationships.’

As a result, Wendt says there’s been a greater reliance to obtain terms through overseas markets such as London and Singapore. Unfortunately, he adds, these traditional markets are undergoing their own remedial actions to restore profitability.

PREMIUMS HEAT UP IN A HARD MARKET

Gareth Horne, a partner at legal firm Clyde & Co, reports that his clients have experienced significant pressure on pricing in both primary and excess directors and officers (D&O) insurance. Public liability, especially in excess insurance, is also becoming pricier. 

‘There’s D&O cover available, but we’re also seeing a limitation on Side C cover. Either it’s not provided or it’s provided only in the lower excess layers,’ he says.

Craig Claughton, head of FINPRO at Marsh Australia, adds that some of his clients looking to purchase certain limits of D&O just can’t.

After rising by 88 per cent in 2018, he says the average premium increase for clients was 119 per cent in 2019 and similar increases are expected in 2020, with Australia’s high rate of shareholder class actions to blame.

‘Virtually every insurer is applying higher premiums to almost every part of their portfolios,’ says Claughton. ‘They’re managing their capacity and exposures and looking to increase the excess for each loss. Plus, they’re being far more selective about the risks they chose to take.’

Unfortunately, he expects things to worsen. ‘We get about 20 new class actions each year. The average settlement is A$60 to A$70 million. On top of that, you have defence costs of about A$10 million to A$15 million per action. So, you are looking at close to A$100 million per matter. Not all will succeed, but say 10 do, that’s A$1 billion in losses. The current estimate of Australia’s D&O premium pool is A$450 million. If we continue like this, premiums will have to rise continuously to meet claims.’

The PI market also continues to be unprofitable. According to Claughton, PI premium increases are in the 50–75 per cent range. There’s also a significant shortfall in capacity and companies can’t buy the limits they want.

‘PI premium increases are driven by claims and industry experience,’ he says. ‘Virtually all areas of professional services have had premium increases [as has] anyone who gives advice.’

In addition to claims against financial institutions, the construction industry is in the firing line.

Marcus O’Brien, a partner at Clyde & Co, says this relates to defective building work and the liability of professionals such as designers, architects and engineers. ‘Most insurance policies will have an exclusion for any advice or work around cladding. Part of that is due to fires such as those at the Grenfell Tower in London and the Lacrosse building in Melbourne,’ he says.

O’Brien adds that a rise in royal commissions, inquiries and regulatory activity is triggering the investigation costs in D&O and PI policies, adding pressure to pricing.

Horne says there’s only so much that insurers can do to make PI and D&O more affordable. ‘Various insurers have consciously decided to withdraw from the market or have significantly reduced their exposures, meaning there’s less competition,’ he says. ‘Anecdotally, insurers definitely have a greater appetite to test plaintiffs’ claims through to conclusion.’

NEW ZEALAND’S HARDENING INSURANCE MARKET

Insurance Council of New Zealand CEO Tim Grafton also sees signs of a hardening market. ‘Due to a better understanding of seismic risk, this is most pronounced for commercial property earthquake cover in higher-risk seismic areas like Wellington, Marlborough, Manawatu, Wairarapa, Hawke’s Bay, Gisborne Region and Canterbury,’ he says.

Aaron Sherriff, partner at lawyers Duncan Cotterill, agrees. ‘When it comes to earthquakes, there have been some high-profile instances over the past 24 months where insurers sought to restrict their writing of new business or placed this on hold. Alternatively, they have applied some significant increases in premiums,’ he says.

‘Under New Zealand legislation, if you have a body corporate in a large apartment building, everyone must have the same insurer. But we see cases where earthquake cover is watered down or completely scrapped because they just can’t get it.’

Sherriff adds that in coastal zones with higher incidences of storm damage, erosions and claims, some insurers will no longer write policies for new homeowners.

Grafton notes there also has been a marked increase in some liability lines claims in New Zealand. Like in Australia, D&O insurance premiums — particularly for listed entities — and professional indemnity insurance for engineers have seen some large increases over the past two years.

THE WIDER REGION

Kevin Quek, general manager for Trust Re’s Labuan Branch Office in Malaysia, says that, overall, there are signs of a hardening market in Asia. But the Asian market is very fragmented, he adds, and issues are often localised rather than regionalised, especially when dealing with losses and natural catastrophes. ‘I can see insurers adjusting their rates for loss-producing accounts and remaining competitive on profitable small- to medium-sized risks,’ says Quek.

‘In general, larger risks that require international capacity will see hardening rates as most reinsurers are tightening their belt. We have also observed that coal power plants in the South-East Asian region face a huge increase — up to 57 per cent for a recent renewing account.’

Quek points to several factors such as aging risks, frequent losses and the fact that several markets have abandoned writing ‘dirty’ energy business over the past few years.

Ben Dunston, Willis Towers Watson’s head of broking in Asia, describes the Asian market as changing, not necessarily hardening.

‘In some areas, such as marine, insurers have written unprofitable business year after year and are now correcting their portfolios,’ he says.

‘This is a trend happening globally. Obviously, insurers expect to have some losses on the risks they write, but where expense ratios have crept up in a soft market and insurers are spending 40 cents in every dollar running their business, the premium pool for paying losses is smaller.

‘Coupled with the year-on-year soft market rates and increasing exposures such as widening of cover, this means insurers are writing a lot more exposure for less premium.’

AUSTRALIAN INSURERS READY FOR DISASTER SEASON

The full impact is yet to be fully calculated, but Campbell Fuller, head of communications and media relations at the Insurance Council of Australia, says most insurers would have anticipated a damaging disaster season this year, including bushfires, cyclones, storms and floods, and have put prudential measures in place.

‘We saw expectations of an escalated bushfire risk from as early as February or March 2019. So, in general, it would be unusual for this to have a significant impact on premiums,’ says Fuller.

Peter Cheesman, head of analytics for Asia Pacific at Aon Reinsurance Solutions, agrees. ‘Multiple properties are lost each bushfire season, and while this season has destroyed more homes than any other in the past, insurers are well aware of the bushfire hazard and have been technically pricing in the risk for a number of years.

‘Insurers will be reviewing their methods for pricing the risk and ensuring their methods remain valid or get some general tweaks. We doubt there will be any noticeable premium increases over the near future.’

One insurer with no plans to increase its premiums is Suncorp. ‘Our home insurance premiums are priced to several risk-based factors and incorporate numerous data sources. One single event will not necessarily affect insurance premiums,’ says a Suncorp spokesperson.

Suncorp has also increased its reinsurance protection in FY20 with strong additional cover to limit the impact of further natural hazard costs for the year.