Navigating the new and uncertain waters of the hard market

Navigating the new and uncertain waters of the hard market | Insurance Business

Navigating the new and uncertain waters of the hard market

As the complexity and magnitude of financial institutions (FI) increases, so too does the unrelenting barrage of risks they face. They’re under constant pressure to comply with regulatory changes and adapt to global economic volatility. In addition, FIs are key targets in the fast-evolving world of cybercrime because of the data they hold and the assets they deal in. They’re hugely exposed to data breaches, fraud and other cyber risks.

In recent years, the frequency and severity of claims in the FI space have increased and average settlements gone up. Premium rates have followed that trend, rising on average about 5% to 10% across the board. For the first time in many years, insurers are having to battle it out in a hard market.

“Rates in FI are definitely on the rise, which is a good thing. Premiums have been trending downwards for years despite the increases in claims and average settlements, and it simply wasn’t sustainable. We’re starting to see a turn in that tide. It’s a big ship to turn, but it’s happening,” said Ryan Nava, director of financial institutions at Nationwide.

“There are usually about 20 to 30 markets that write FI insurance in the US, compared to 50+ that write commercial. A lot of markets are scared of FI because it can be a challenging class of business. However, as we get into a hard market, more money starts coming in and new players enter, which puts pressure on rates from rising too dramatically. Then, as claims increase and rates have to go up, the interest of the newer players stagnates, and they exit the market. It’s a wicked cycle.”  

A lot of FI insurance underwriters and brokers have little to no experience of navigating a hard market, according to Nava. Whereas the brokers tend to hold the power in a soft market environment, the dynamic shifts towards the underwriters in the hard market because they have the option to push rate and coverage terms.

“You now have two parties trying to negotiate contracts, who have no idea how to interact with each other because the power dynamic pendulum has switched,” Nava told Insurance Business. “On the whole, while we’ve seen 5% to 10% rate increases, we haven’t seen much push in terms of rates. The market’s less likely to give broad terms when coverage requests come in, but nobody’s taken terms and conditions off the table.”

When navigating the new and uncertain waters of the FI hard market, it’s essential for brokers to get ahead of the game. It’s better to explain to clients four months in advance of renewal that they might have a double-digit rate increase and then over-deliver if it comes in at 5%, than to approach clients a week before renewal and set expectations of a flat renewal that cannot realistically be delivered, explained Nava.

Another essential thing that brokers and internal risk managers can push is client transparency, Nava added.

“It’s tough as an outsider to look at an FI and really know what’s going on,” he said. “The only real glimpses under the hood that we get as underwriters are the meetings we have with the insureds and the brokers. It’s important for insureds to be as open, honest and informative as possible in those meetings as that will help us to write the best and most appropriate coverage.”