A hardening insurance market

All industries experience cycles of expansion and contraction, and this is particularly true of the insurance industry. Although no two cycles are exactly the same, insurance industry cycles typically last between three to ten years and incorporate phases marked by an expansion (hard market) and a contraction (soft market) of insurance availability.

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

The most recent Marsh ‘Global Insurance Market Index’ report found that Australia’s commercial insurance pricing increased 35 per cent in the fourth quarter of 2020, while financial and professional lines rose 51 per cent. Both lines have been continuing an upward trend since 2017.

Soft market versus hard market

In a soft market, insurance companies have a broader appetite for “risk”, greater underwriting flexibility, and compete with one another by (generally) lowering premiums to attract more customers. 

This is when insurance companies have high-dollar reserves and can make money in the stock market; and can thus lower premiums to a point where they either don’t make money or even lose money on the “underwriting” side of the equation. 

The characteristics of a soft market typically include lower insurance premiums, broader coverage, relaxed underwriting criteria, increased capacity (equating to more policies and higher limits) and increased competition among carriers.

Alternatively, a hard market is when there is a high demand for insurance, but a lower supply of coverage available. The primary impact is a rise in insurance cost. Sometimes insurers reduce or stop providing cover for certain types of risk too. 

The characteristics of a hard market typically include higher premiums, low interest rates, an increase in the frequency or severity of losses, more stringent underwriting guidelines, fewer insurers writing certain coverage lines, diminished capacity and less competition among insurance carriers.

Why are we currently facing a hard market? 

The last few years has seen Australia gradually move towards a hard market; however insurance profitability took the biggest hit in 2020, where only $35 million in profit was reported for the calendar year. This was a staggering 98.9 per cent decrease on the $3.1 billion reported in 2019. This profit loss was largely driven by natural catastrophe claims costs, provisions for business interruption claims, a large strengthening of long-tail claims reserves, and falls in investment income. 

These are contributing factors that have played a role in Australia’s transition from a soft to a hard insurance market over the last few years. 

Surviving a hard market 

Here are a few high-level recommendations you can adopt to help mitigate hard market impacts on insurance spend. 

• Be prepared to provide more detail at the time of renewal. Due to increased underwriting scrutiny, you may be required to submit additional applications.  

• Don’t wait until renewal to review your policies and procedures. Maintain communication with your broker during your policy period – not just during the renewal process – to understand where improvements can be made. 

• Update your integrated risk management programs and procedures. Be prepared to explain your claims and what measures you took to mitigate this exposure. 

The bottom line 

Even before the coronavirus crisis hit, the insurance industry was in a period of significant rate hardening. 

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. 

This insurance trend is most likely to continue over the next two years, or even longer, so consumers should budget appropriately and work closely with their brokers to evaluate the efficacy of their risk management strategy. 

The key is to take proactive steps now to save in the future. 

We’re here to help. If you’d like to have a chat with one of our brokers about your existing policy, or simply to get more advice on a hard market and how it might impact your business, please contact Midland Insurance Brokers on 1300 306 571 or visit midlandinsurance.com.au. 

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