The insurance market is cyclical, moving through both hard and soft markets. A soft market is generally characterised by low rates, high limits and readily available cover. In a hard market premiums increase and capacity will generally decrease. This can be caused by a number of factors:
• falling investment returns / low interest rates
• increases in frequency or severity of losses
• reduced capacity
• cost of reinsurance
• regulatory intervention
Low interest rates mean that insurers can no longer rely on their investment returns to bolster unprofitable results. When interest rates are low insurers focus on underwriting profitability which means raising premiums, tightening underwriting guidelines and being more selective about risk.
In general insurance claims are increasing because of social inflation, which is the societal trend towards increased litigation, broader contract terms, plaintiff-friendly legal decisions and larger jury awards. An example of this is the increased number of Securities Class Actions (think Centro Group, Commonwealth Bank, Takata airbags) seen over recent years.
Because of significant losses ($1.8 Billion in 2018), Lloyds of London Decile 10 review resulted in a number of unprofitable Lloyd’s syndicates exiting the Australian market resulting in reduced capacity and a retraction in the number of underwriting agencies who have typically participated in the hard-to-place risks.
Reinsurance is the insurance that insurance companies purchase to protect their bottom line. Recent times have seen the cost of reinsurance increasing due to the large number of catastrophe losses around the world. This additional cost is then passed down to the consumer. S&P Global Ratings noted that reinsurers saw property catastrophe rate increases in the range of 15% to 25% in the second half of 2019.
The Marsh Global Insurance Market Index found that commercial insurance pricing increased 11% in the fourth quarter of 2019, while financial and professional lines rose nearly 18% (Marsh Global Insurance Quarterly Report Q4 2019). This suggests that the insurance industry is currently hovering around 9-10 o’clock on the insurance clock pictured above, with rates expected to continue to rise in the foreseeable future.