Covid-19 heralds hardest of hard markets

The impact of coronavirus means that most classes will see a hardening of rates.

That was the consensus of an expert panel brought together by Insurance Times this month to discuss the impact of the Covid-19 pandemic on insurance.

Speaking during the live webinar, titled ’Brokers and coronavirus: What is the new normal?’, RSM co-head of financial services Peter Allen said he “would be surprised if this was not the hardest market of my working lifetime”.

Allen cited three reasons for this assessment.

Firstly, there has been a long period of depleting reserves for insurers and reinsurers.

Secondly, most major classes have been affected by the pandemic. Trade credit, for example, which is a relatively marginal, tidal class of business, had to be bailed out by government last week.

“Personally I’ll be rather surprised if any class was saved from a hard market”

Peter Allen, RSM

Allen said the government intervention was a sign of a very hard market, with potentially whole classes drying up.

Thirdly, insurers are not only seeing a multi-billion pound loss on the liability side, but they are also seeing a drop in the value of their assets.

”Personally I’ll be rather surprised if any class was saved from a hard market, and I think we’ll see conditions like those of the mid-80s and early 90s, which is quite a few marginal classes dried up completely,” Allen explained.

In those circumstances, communication ”becomes a particular art”, he added.

”It is difficult to explain to a client that something they’ve had cleanly and has run cleanly for years is suddenly three times as expensive as it was last year.”

For Brokerbility chair Ashwin Mistry, the temptation to raise rates will be too much for insurers to resist, especially with share prices falling sharply across the board.

He said construction professional indemnity (PI) and PI in general ”is going to be very expensive”.

”And let’s not forget that the government still enjoys 12% of the premium, so there might be a temptation, in terms of correcting the ship, to potentially look at IPT as well,” Mistry added.

Customer reaction

How will customers react to hardening rates? ”We’ve been in a very soft market,” Mistry said.

”The issue is the customer has got used to low premiums. They’ve got used to brokers cutting each others’ throats with a gravitational pull to the bottom line.

”If a hard market does ensue, I suppose the Treasury benefits from more IPT, but selling in an environment where the economy is yet to recover – whatever shape that recovery might take – is going to be a really tough sell,” he added.

Matt Pini, head of UK wholesale at Direct Insurance Group London, said there will naturally be questions and it will be for brokers to come up with a better deal.

”We’ll find that excesses are probably raised to get the premium down. That’s the way it normally goes in hard markets.”

Face-to-face negotiation will be more important than ever, Pini said.

”Over the past couple of months, we’ve worked on Zoom chats, etc with underwriters, which has worked to a point, but you can’t replicate face-to-face negotiation.

”At times like this, sitting in front of an underwriter and seeing the whites of their eyes is more important than ever,” he added.

Commission model under pressure?

Mistry said brokers will have to face the challenge of selling in a hard market, which has not been experienced for a number of years, and the Covid-19 crisis could see the existing commission model face greater scrutiny.

“We’re going to have to gear up as to how we sell product, and safety, and other areas in a hard market, and maybe this could be the beginning of the end of commissions where the brokers now work on a fee on cases over a certain size.

”Brokers now need to earn their trust rather than rely on commissions. In the public interest agenda, why would that not be debated? On a case where you have to justify what you’re doing for the customer, surely that has to be in correlation to what service the customer wants to have.

”Working on a commission model basically distorts the market. It must be on the regulator – or at least the thinking broker’s – agenda,” he said.

Fellow panellist Romero chief executive Simon Mabb said he had seen a lack of new business activity on behalf of the insurers.

”They’ve switched their new business underwriters to just get renewals out the door. They’re then taking the opportunity to try and push some rate.

”You’ll probably see that compounded by some clients dropping some of their estimates, etc.

”We will definitely see a rate increase when it comes to like-for-like risk,” Mabb added.

Insurance Times’ Brokers and coronavirus: What is the new normal? webinar in association with RSM took place on Wednesday 13 May and is the first of a series of monthly virtual events exploring what the new normal will look like.