Hone In: August 2019
In this edition of Hone In we update you on current market conditions, explain how and why the insurance market cycle is impacting you, and take a closer look at the strata sector. We also introduce our first Industry Snapshot focussing on Health and Medical.
Current market conditions
In 2018 we observed a shift in underwriting disciplines, which created uncertainty and disruption across various risk categories and industries. Throughout 2019 we have also witnessed extreme price increases in specific segments such as food & beverage industries, waste & recycling, automotive trades and many more.
While pricing increases remain, we have started to see a less punitive approach by the insurers, especially on more attractive risks. The market has almost complete alignment in the risk appetite. This allows brokers to better advise clients on likely outcomes and clients to be better prepared for premium changes.
We see healthy competition where insurers believe they can make an underwriting profit. When this occurs more capital flows through the market, which in turn sees more competition eventually leading to a fall in premiums, otherwise known as a soft market cycle.
Why are my insurance costs going up? The insurance market cycle explained.
Over the last two to three years we’ve been navigating the changes in the insurance market and we’ve been mindful of having transparent conversations with our clients around what this means for them.
Across the board, the biggest impact has been an increase in premium price. In some situations, the premium increase is so substantial our clients find it no longer economically viable to purchase cover.
The question you may be asking is:
Why are the increases so significant when my risk hasn’t changed? Why am I impacted?
It’s an important question. The answer allows you to prepare for conversations internally, to set accurate budgets, and to be prepared across all facets of your business planning.
All industries experience cycles of expansion and contraction. The insurance industry is strongly cyclical in nature and is characterised by movements between a hard market and soft market.
A soft market vs a hard market
Insurers derive their revenue from two main streams: underwriting profit and investment income.
- Underwriting profit is the difference between the premium collected from customers and the amount paid in claims and expenses.
- Investment income includes real estate investments, bonds and stocks. Solvency regulations dictate to insurers the levels and types of investments they can make to ensure there are adequate funds to pay claims and protect their policyholders.
As insurers have two forms of generating income, they can lose money through one stream yet remain profitable.
Local insurers have been operating in a soft market since the early 2000s. While the income derived from investment returns have struggled due to the low interest rate environment, profits from underwriting have been reasonably strong.
Investment incomes have remained stagnant, however, from 2011 to 2018, several events significantly impacted underwriting profits. Key events include:
Natural events impact policies covering property and profit,
Underwriting profitability in policies covering Directors & Officers Liability (especially side C) which have been eroded through increased shareholder class actions buoyed by the increased in litigation funders,
High hazard property (EPS and recycling) and professional indemnity coverage within the construction industry have also had negative impacts on underwriting profitability, resulting in the need for insurers to re-underwrite or exit offering coverage all together.
As the market conditions adjust, our role as a broker is to stay on top of current conditions enabling us to communicate with you in anticipation of any changes.
A perspective on Strata
In 2019, the strata insurance market is seeing premium increases to be ‘as expected’ as premiums continue to rise modestly until loss ratios improve for insurers. Underwriters used 2017-18 to take drastic corrective measures to remediate volatility and increase profitability to their portfolios. While ‘vanilla risks’ saw an increased premium by more than 10% year on year after the insurers incurred multiple years of underwriting losses across the sector.
Strata follows the Australian and international general insurer market cycle, where insurer results are posted and indicate that such remediation actions, combined with increased excesses are yielding positive underwriting results for some strata insurers. However, two of the biggest strata underwriting agencies appear to still require modest rate increases of upwards of 15% in 2019 to balance their books and return a profit for their existing or new insurer security.
Strata insurers and underwriting agencies who were first to take corrective steps on increasing rates, are now in a much sounder position having bolstered their bottom line, controlled fixed operating expenses and re-engineered their reinsurance and excess structures.
Kieran Drum, our National Head of Strata, and Travis Wendt, Head of Corporate Insurance and Risk Solutions, explore the current market conditions from a strata perspective in the video below. Click to view our observations and analysis as we take a closer look into the Australian strata industry.
Industry Snapshot – Health and Medical
Over the past decade, Australia’s health and medical industry has grown dramatically in size and gained a strong reputation for its world-leading technology, innovation, professionalism, research and robust development.
Our Honan Medical and Health division works with the industry to reduce exposures by better understanding our clients operating risks and eliminating multiple channels to market. One of the most topical conversations we are having with our clients right now is around risk in the Cyber environment.
The Heath Industry contributes to the largest amount of privacy breaches since mandatory reporting began. Human error makes up most of these breaches, but statistics show that the medical industry is more likely to face a cyber-attack than many other industries.
When these attacks are broken down by sector, healthcare was the second-most attacked industry globally, after the government sector. In fact, about 39% of healthcare organisations were hit daily or weekly by hackers. And only 6% said they’d never experienced a cyber attack.