Income has dried up and too much is being taken from reserves. Now is the time for change
Claims stemming from the Deepwater Horizon oil spill are likely to hit $3.5bn (£2.4bn), with the full extent of the damage yet to be revealed. However, the disaster may be a salutary reminder of the need for commercial insurance – and could be a wake-up call for companies worldwide.
Certainly, in the UK and across much of Europe, commercial rates have been depressed for too long.
It is a particular concern that insurers have been releasing reserves – you dip into rainy day money at your peril. In fact, because of the pressures on commercial claims, insurers should be stashing away more, not thinking of the short term.
Insurers are also seeing a growing number of claims per incident, giving them more reasons to charge the right premium from the start.
At the smaller end of the market, there has been growing commoditisation with new entrants in the SME sector. Competition is to be welcomed, but something different needs to be offered rather than simply driving down prices unsustainably.
Brokers have a key role to play in commercial insurance, but they are also facing their own pressures, with clients asking for premium reductions. This can be dangerous: brokers need to be unambiguous in the guidance they give. If claims are turned down because of a gap in cover, or if not enough emphasis is put on disclosure, then repercussions can be serious.
Commercial insurers are always going to have to pay some huge claims, but this means they must be underwriting for profit as they cannot rely on investment income. Indeed, insurers’ investment strategies have become increasingly conservative as the financial crisis has taken hold, moving from shares to gilts and bonds.
Returns have dropped and even though the stock market has rallied insurers have not reaped rewards.
In the past year, motor rates have been rising but it is not known if these increases will be sufficient to turn matters around. Problems in this sector are deep set.
Prices have subsequently been driven down in the commercial arena and the experiences of motor look set to be repeated here. Do we ever learn?
There is time to put matters right, and the solution lies in shallow but consistent premium rises. There is still room for insurers to assess risks individually and reward cases where risk management is effective, but the relentless emphasis on price slashing has been extremely damaging. Insurers have been eating into their profits, shrinking their reserves and failing to adequately prepare for the future. They are facing their own internal pressures as a result of Solvency II and they need to maintain strong reserves: these funds are not meant to prop up commercial business that has been incorrectly priced.
Nobody needs reminding that trading within a recession is difficult, but modest rises are going to be far easier to bear if they are put in place now.
Many will remember the so-called liability crisis that took place about 10 years ago, when premiums doubled or even tripled.
There is no time to lose. IT
