What the hardening market means for insurance firms

After many false dawns, some parts of the UK insurance market are hardening. Construction, engineering, investment firms – these are just some of the classes of business being hit with stiff rate rises, particularly in professional indemnity (PI).

In construction, the situation is so bad that insurance consultant Mactavish has warned that firms could be driven out of the business. 

But how widespread, really, is the hardening in UK commercial lines and what are the consequences for brokers and underwriters operating where rates are on the rise?

Niche segments

Aviva managing director of UK intermediaries Phil Bayles said: “We’ve seen a lot of business coming out of Lloyd’s, which is obviously reducing capacity. Until there is enough rate in that market to encourage other capacity to come back, those parts of the market will harden.”

Bayles pointed out that underwriters are on the front line with the brokers.

“They understand where the market’s moving. It’s in their nature to price up to where the market is heading. We haven’t got a problem with that. I don’t think the market’s too slow. It’s dynamic,” he added.

Bayles believes the management information is so good nowadays that, even in the markets widely perceived to have undergone a hardening, there will be precise pricing on the risks. 

“Even on professional indemnity, there are parts that are performing well, and others performing badly. There are sub-segments within the wider segments,” he said.

Lorega managing director Neill Johnstone says factors driving increased rates are the general retraction in capacity from the Lloyd’s market, particularly with regard to SME and property lines. Given the disruption in the market, there are bound to be changes in approach as risk is re-rated to reflect this, he said.

“While we don’t see a general hike in premium on the horizon, it is likely that risks which have been underpriced in the past may see some correction,” Johnstone said.

Manchester Underwriting Management director Richard Webb says professional indemnity rates have moved since the end of 2018, especially for those professions and risks involved in construction, in particular building and engineering contractors.

Impact on the industry

With evidence that rates are moving across multiple lines of business – especially in professional indemnity – experts have warned of the risks involved with a hardening market and how to cushion the impact.

Webb said the last hard market ended in 2004, meaning many will not have experience of stiffer rates. For too long, many brokers have got along with compliant underwriters by fishing for the cheapest price, but that will change under the new conditions.

“A broker’s relationship with their underwriter is key, more than ever in a market such as this. A healthy business relationship can help both the underwriter and broker,” said Webb. 

“Shopping around for the cheapest price is clearly becoming an unviable approach for PI risks. If ever there was a time to focus on building a healthy and sustainable relationship between broker and underwriter, it is now.” 

Elsewhere, brokers and their customers will need to be aware of the forthcoming changes to policy wording and conditions.

Addleshaw Goddard’s construction and engineering consultant Jane Stubbs says the harder market in the sector will likely mean higher premiums and excess, changes on the basis of cover, and changes to insurance terms including extra exclusions meaning removal of extensions and more onerous conditions.

Businesses taking on contractors and consultants will need to be aware of these changes. 

“Employers may need to become more flexible in terms of what insurance cover they will accept from consultants and contractors and may turn to alternative covers,” she said in a update briefing on the issue. 

“Employers also need to be wary of insisting on obligations which may, in extreme cases, void cover under the professional indemnity policy.”

Hard market training

With so much attention focused on the pricing and policy changes, it is easy to forget the importance of training underwriters and brokers for a hard market.

Marsh JLT Speciality president Lucy Clarke said: “I’m certainly not saying we had never predicted a ‘hard’ market at JLT, but in the fourth quarter of 2017 we did some hard market training. 

“The training is really obvious to some of us, but if you’ve never had to have difficult conversations with underwriters or clients, it’s important to think how you do that.”

She added: “The last segment of the training was people telling ‘war stories’ from 2000 or 2005. It helps staff remember fundamental stuff like, ‘you’ve got to communicate to your client as soon as possible’.” 

Training provider MAP Training offers advice on how to prepare underwriters for writing business under hard market conditions. In a rapidly changing market, it suggests underwriters need a clearly defined underwriting strategy to implement and follow.

MAP adds that underwriters need to understand risk perception, quality features, policy coverage, pricing models, and be skilled at applying them to renewal and new business cases. But, it says on its website “the best underwriters and the ones that adapt fastest to the rapidly changing market are those with the wider perspective and with a more holistic approach – ie they have highly developed trading skills”. 

Training, policy coverage, pricing, negation – there is plenty for brokers and underwriters to get on with as they brace themselves for a hard market. And, depending on how far the hardening market spreads, UK commercial insurance staff could be in line for a big shake up in the way they carry out business.