Posted on October 22, 2013
We are often asked “Will premiums increase this year?”. This question is now harder to answer than at possibly any other time in the history of the insurance industry. Unlike previous years, the entire financial sector finds itself in “unchartered territory”.
Historically, pricing in the insurance industry followed a predictable cycle. We would move from hard markets where limited capacity would drive premiums up and competition and cover would reduce. Then, as more capacity returned, premiums would reduce and competition would intensify, resulting in lower premiums and wider options and cover becoming available.
During hard markets, insurers would make large underwriting profits, and invest these funds via the bond market and elsewhere and benefit from high interest rates.
Then when the cycle returned to a soft market, these prior year reserves would be used to support lower premiums, therefore allowing an underwriting loss in a soft market period to be supported by realising prior year reserves.
However, the face of the world’s financial sector has changed vastly over the last 5 years, and the traditional cycle is no longer an indication of what will happen to premiums in the future.
Currently it is more important than ever for insurers to make an underwriting profit, this is to say that after all expenses i.e. running the business and paying claims and commission, they are left with a surplus whilst making a contribution to the large catastrophe fund. With interest rates being so low, and the bond market being so flat, underwriting profit has never been so vital.
These factors are now critical when it comes to appointing an insurance broker and choosing a trusted advisor with a robust understanding of these factors and who is in a position to support a client’s budgeting and forecasting needs over a five year period.
In fact choosing the right broker, and basing this decision on ability and intellectual capability to act as trusted advisor, has never been more important than in today’s financial climate. Long term planning and rate stability in the property sector has never been more relevant.
Should you wish to discuss the challenges facing your business and insurance programme please contact our London office and ask for an initial meeting, under the protection of a Non-Disclosure Agreement with one of our Directors.