Rate increases, rate increases, and more rate increases (SIGH). Those thoughts have undoubtedly swirled around the minds of corporate risk managers and insurance buyers over the past few years – and understandably so.
Global commercial insurance rates have now experienced 17 consecutive quarters of increases, according to Marsh’s Global Insurance Market Index 2021, and while rates are moderating in many lines of business and geographies, the simple fact of the matter is that people are still having to pay more and more for their insurance.
In the final quarter of 2021, Marsh found that global property insurance pricing was up 8% on average, casualty pricing was up 5% on average, and pricing in financial and professional lines was up by 31% on average – driven primarily by cyber, due to the continued increase in frequency and severity of ransomware claims. In the United States, cyber insurance pricing jumped by 130% in the fourth quarter of 2021, and the United Kingdom saw an increase of 92%. It’s a similar story worldwide, albeit to a lesser extent than those two cyber-heavy markets.
To be slapped with a rate increase of 8% (the global property average) is annoying, but a price hike of 130% (US cyber) is just mind-boggling. But – and I draw upon my experience of wanting to flip the rules of boardgames to my advantage as an overly competitive younger sister – complaining isn’t going to get you anywhere.
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Hard markets don’t just come about because insurers want a bit of extra cash. Rather, it’s the opposite. They come about because insurers are bleeding cash. An overly simplistic explanation is that they’re paying out more money in losses than they’re taking in premium – and they require more rate to bring their books back to health and stability.
So, at the crux of all this is the increased frequency and severity of losses across many lines of commercial insurance. Some major loss drivers – such as climate change and extreme weather events (which have wreaked havoc on commercial property insurance) – cannot be stopped, but their impact can be lessened through effective and strategic risk mitigation and management.
This risk mitigation requires a team effort that includes (at the bare minimum) businesses, agents/brokers, insurers, and reinsurers. It cannot be left down to the individual businesses to determine what changes are needed in order to help the overall health of the insurance industry and push rates back to more competitive levels.
It’s easy to turn to a business and say: ‘Well, you need to try harder to minimise your loss potential.’ A large corporate entity with a risk management team could take that statement, run some data through their models, invest in some tools or equipment, and go back to the insurer and proudly present all of the work they’ve done to become a better risk. The chances are, in doing so, they might be able to save a little on their insurance premiums.
For middle-market businesses – those large enough to feel the sting of commercial insurance rate increases, but not perhaps large enough to have significant internal risk management expertise – the demand: ‘You need to try harder to minimise your loss potential,’ could well be met with the response: ‘What more can we do? We’re stretched as it is.’ They, perhaps, have a right to complain if they feel alone in that equation. But there should be no need for complaints because everyone should be actively engaged in the risk mitigation process.
We see this a lot in cyber. These days, many insurers are refusing to cover businesses that lack basic cyber hygiene (risk mitigation), such as multi-factor authentication (MFA), secure remote desktop protocol (RDP) and so on. I think that’s a great example of proactive risk mitigation in a market that desperately needs it.
Must insurers wait for other lines of business to need 130% quarterly rate increases before they bring in similar risk mitigation requirements?
I don’t think so. It’s time to put this long period of 17 consecutive quarters (51 months) of price hikes to bed and start working together even more to build resilience and reach sustainable risk mitigation practices that will help to nurse the commercial insurance market back to health, and importantly, keep it healthy.