How market forces dictate rise and fall of insurance

All industries experience cycles of expansion and contraction, insurance is no different. Although no two cycles are exactly the same, insurance industry cycles typically last between three to 10 years and are known as a hard market and a soft market.

Today, Australia is well into a hard market across most insurance lines affecting the majority of industries.

The most recent report found that Australia’s commercial insurance pricing increased by 35 per cent and in the financial lines up to 51 per cent, with insurance experts predicting that the hard market will continue into 2021/2022, further exacerbated by Covid-19 and other issues.

What is a soft market vs. a hard market?

In a soft market, insurance companies have a broader appetite for ‘risk’, in other words they are prepared to insure a greater variety of things and are more flexible when negotiating in order to compete with one another.

During a ‘soft market’, insurance companies have high-dollar reserves and can make money in the stock market. Therefore, they can lower their premiums to a point where they either don’t make money or will even lose money, just to insure the customer (you).

Alternatively, a hard market is when there is a high demand for insurance, but, a lower number of insurers prepared to take a risk on certain types of insurances.

The impact on customers is a rise in premiums. Most insurers will reduce or stop providing cover for certain types of risk altogether as the premiums they would need to charge to cover their cost would not be affordable to the customer.

Why are we currently facing a hard market?

The last few years has seen Australia gradually move towards a hard market; however it was 2020 where we saw insurance profitability take the biggest hit.

In the 2020 calendar year, insurance industry profits dropped a staggering 98.9 per cent from the previous year. Shaken by bushfires, cyclones, floods and hailstorms which raged across much of Australia’s eastern seaboard, resulted in huge losses for the insurance industry.

The 2019-2020 ‘Black Summer’ bushfires alone were unprecedented in terms of scale and damage. The impact of the bushfires resulted in over 30,000 claims, resulting in insurers paying out a total of $2.4bn. This was the most expensive claims payout since the devastating floods and Cyclone Yasi hit QLD in 2011, with insurance losses totalling over $4.5bn.

The Covid-related global economic downturn has also caused interest rates to hover near zero per cent, decimating the investment return income which insurers have traditionally relied upon to keep your premiums down.

Banks, insurance companies and financial services firms and continue to face a litigation as last year’s Hayne royal commission hearings inspire regulators, consumers and shareholders to take them to court, this type of litigation does nothing to help keep your premiums down, in fact it has the opposite effect.

An increase of 300 per cent in shareholder class actions (lawsuits) has also notably made its mark on many types of insurances, most notably Management Liability, Professional Indemnity and Public Liability policies, which is a further cost to the insurers as they pay out to fund the defence cost and damages claims against their insured clients.

In order to survive these economic conditions, the insurers are relying upon premium adequacy to cover losses and generate profits by increasing rates, refining their risk appetite, reducing the capacity they are willing to offer, sharpening their underwriting, and incorporating restrictive language in their policies or in other words, putting more exclusions into the fine print!

Unfortunately, the insurance hard market trend is most likely to continue over the next couple years, or even longer.

However, what goes around, comes around, and when we do return to a soft market, premiums will once again fall and become cheaper.

We urge you to budget for your insurance cost appropriately and work closely with your broker to evaluate your risk management strategy in order to survive these unpredictable times.

Sources: Marsh Global Insurance Quarterly Report Q4 2020; InsuranceBusinessMag.com, InsuranceCouncil.com.au, APRA.gov.au; Canstar.com.au; Allens,Shareholder Class Actions in Australia, February 2017; AFR.com; InsuranceJournal.com; Assuranceagency.com.

Important: All answers and information contained within this article should be considered as General Advice Only. This advice should only be considered as General in Nature and its intent is only to prompt the readers to investigate their own individual insurances. It has been prepared without taking into account the readers own individual objectives, financial situation or needs. Because of that, before acting on the above advice, the client or any persons should consider its appropriateness (having regard to their objectives, needs and financial situation) and seek further independent advice from their own financial advisor.

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