As insurance brokers, there isn’t a day that goes by that we don’t hold our breath. At times, we’re afraid to open underwriter emails as the messaging we receive is seldom the good news we want to hear. As I often tell clients, we would much rather be the good guys then the bad guys. But we have no choice but to deliver the terms that are available.
The insurance marketplace sat idle for 15 years, until July 2019 when it abruptly turned. Many of us were in disbelief when underwriters resisted our persuasive attempts to reduce rates. It took 6 weeks before the message sunk in that the long soft market was over. Many of us started predicting a hard market around 2008, at least in terms of higher rates. But 2008 was infamous for another reason – the financial crisis. This ultimately led to a prolonged soft market which benefitted consumers. Still, year after year, we told clients to brace for the hard market which never materialized. Many clients stopped listening and many brokers stopped relaying “the sky is falling” forecast.
In July 2019 when reality sunk in, the days where brokers and clients were in the driver’s seat was over. Over the years, brokers, together with their clients, played a part in driving rates down. After all, doesn’t everyone want the best possible deal? Of course we do, it’s part of our culture. Sometimes; however, the best deal comes at a cost. Over the years, rates failed to keep pace with inflation. As insurer costs rose, they did their best to trim and become lean and mean.
While consumer mentality was backing the race to the bottom, eroding insurer profits were looming in the background. To make sense of profit losses, annual inflation is not news. Over the same period, where rates declined, remained stagnant or increased minimally, claims’ costs rose e.g. the cost of materials and labour. Add in other expenses such as salary increases, rising utilities and rent to name a few, and rate increases were not covering insurer’s increased costs.
Add in the reinsurance costs. If only an earthquake or hurricane damaged a single location, insurers could comfortably cover the loss. Since there are only a handful of reinsurers, they provide reinsurance around the world – it’s what we affectionately refer to as spread of risk. Global warming has played a part in rising reinsurance costs. You need only look at natural disasters to know that big catastrophic events happen with more and more frequency. Often, 100% of the catastrophe premiums collected are paid to reinsurers with no profit for insurers.
In the last few months of 2020, and in the first quarter of 2021, the hard market hardened further. As brokers, when we hear the dreaded news that insurers have exited another class of business, we collectively gasp. In the 2002/2003 hard market, insurers exited certain classes of unprofitable business too. The difference was there was always another insurer willing to step up; albeit at higher rates. Fast forward to the current market and replacement coverage isn’t available at any cost. Unfortunately for some clients, there are no insurers willing to take the risk.
To further understand why profits eroded over the last decade, you need look no further than low interest rates. Insurance companies have 2 potential revenue sources, underwriting and investments. Insurers can operate at a loss on the underwriting side, provided they make a profit on their investments. Anyone with a savings account knows that historically low interest rates have not kept pace with inflation. So, when insurers are not making money from either source, we have the perfect storm and a hard market is born. It’s a little more complicated than that but that’s the gist of it. Long story short, the hard market has been looming for years.
How long this hard market lasts is on everyone’s mind. Hard and soft markets cycle. Thankfully hard markets typically last 2 or 3 years and then capital starts flowing back into the market and we’re away to the races again. There is a lot of talk that the hard market will last into 2022. We are hopeful that is the end of it. Personally, I can hardly wait to breathe again. Apart from my own and peer’s stress, it’s ultimately our clients we feel badly for. There is nothing quite like delivering news to clients that premiums and deductibles will double and seeing the looks on their faces. It reminds me of how I imagine doctors must feel when they deliver news to patients that there is nothing more they can do for their patient’s declining health.
All this aside, we will all make our way back to a better future, free of COVID and where insurance rates start to slide downward and the hard market is just a distant memory of, “remember when?”
To learn more about how insurance experts can help you navigate difficulties brought on by COVID-19, visit the Westland website.