Upward Pressures on Premiums Easing
Insurance premium increases have continued to level out in most commercial lines as hard market conditions plateau, though underwriters remain selective and favour businesses with a “good story to tell,” Gallagher’s latest Business Insurance & Risk Market Update says.
Improved risk management by businesses and a return to insurer profitability have eased upward pressure on premiums, the report says, and alternative solutions such as the use of captives are now more common.
A return of capacity in the Australian market means risks that were previously shifted offshore can now be placed with local insurers, which has made international capacity more competitive, Gallagher says.
“There is good evidence that the steep pressures over the past two years are levelling out with premiums as investments in risk management pay off and insurers return to profitability,” MD Placement Mark Oatway said.
Conditions in some higher-risk industries are still tight, and further market volatility is threatened by natural catastrophes, the Russia-Ukraine war, economic instability with rising inflation, stretched supply chains and materials & skills shortages.
“Inflation, in particular, is having a significant impact as the risk of underinsurance in the property market rises, making updated valuations an essential,” Mr Oatway said, adding that businesses should quickly address any vulnerabilities before seeking cover.
Last year’s record flooding “continues to cast a long shadow over short-tail claims”, the report says, while economic risks threaten to drive an uptick in long-tail claims.
“The current claims environment is one of the most challenging and confusing in recent history,” the report said. “Inflation on both materials and labour is pushing up costs and this is also affecting non-flood claims.
“The situation is set to worsen as the easiest claims are closed first, meaning difficult times lie ahead.”
Gallagher says insurers are indicating premium increases are still needed on property risks and the market is expected to continue to harden for 12- 18 months, with increases of 10–15% standard. Up-to-date valuations are vital to avoid potential shortfalls between the sums insured and remediation, repair or reinstatement costs, and both cash settlements and short indemnity periods pose risks.
It also warns common business interruption (BI) indemnity periods of 12 months “are simply not long enough in the current environment” and would not be long enough to ensure the survival of most businesses should their property become uninhabitable in the current claims’ environment.
“Pressure on building works began after the bushfires of 2019-20 and has not let up, with claims processing times and costs escalating.”
Rates for financial/professional risks have stabilised, though regulatory risks loom, while cyber has attracted new capacity – driving a settling of the market.
In the construction market, the contract risks market has stabilised, though “significant issues” remain in the price and availability of public and product liability and professional indemnity (PI) insurance, and new legislation and the fallout from covid are forcing businesses to address psychological risks as a work health and safety risk.
Higher hazard industries continue to attract premium increases but these are smaller than in recent years, with “increases in single digits rather than double digits” most common.
Gallagher says claims that correlate to economic downturns, such as employment practices, insolvency and employee fraud are yet to significantly increase, but this may still occur, and claims related to “greenwashing” are expected to increase.
“Long-tail liability claims are confounding traditional wisdom by not spiking in ways expected, although the risk of this looms large, as do new threats from climate-related exposures,” it said.
Promisingly, innovation is beginning to re-emerge in the D&O market with the release of the first new wording in years, though in general potential risks remain to the stabilised rating environment.
“Global insurance markets remain fragile, with natural catastrophes, geopolitical events, inflation and volatility all presenting potential clouds on the horizon,” the report said. “Regulatory pressure remains high.”
In the cyber market, new capacity and renewed underwriter appetite has been helped by a shift of responsibility away from technology teams to company boards.
Pricing has stabilised for “good” cyber risks, though underwriters remain very selective. Health, transport, manufacturing and infrastructure remain high cyber risk areas and will be quizzed on how many sensitive records they hold, how they are secured, whether they include privately identifiable data and how old records are purged.
“Risk management is still key … and it needs to be sophisticated and driven at board level,” Gallagher said.
Insurance in the civil engineering sector remains difficult with little capacity available from Australian insurers, though for contract works there is an increasing appetite locally to underwrite well run construction businesses with good claims histories.
Gallagher says containment of worker-to-worker deductibles is “the current key battleground” in public and products liability insurance in the construction sector, and placing professional indemnity (PI) cover for construction businesses remains difficult, particularly for engineers, consultants and subcontractors.
London is “again welcoming” business though, and there are some signs the market for annual PI risks is beginning to level out.
In general, Gallagher says insureds are exercising more control over their risk management rather than having terms forced upon them.
“In recent years the ball has firmly been in the court of insurers, who were able to dictate terms, but now businesses have more control over how they structure risk. For example, a client may now choose to take a higher deductible,” the report said.