"The big picture here is that with the increased frequency of events caused by climate change, costs could eventually become too large for the insurance market to meet. "
- Geoff Hall, Berkeley Alexander
Whilst the pressure on premiums can be partly blamed on inflation, there are many factors at play here.
Insurers are currently operating in a ‘hard market’ whereby demand for insurance is exceeding supply for the first time in many years. Price rises represent a course correction to the previous ‘soft market’ where supply (insurance capacity) was plentiful and prices were therefore low. But the reality is that insurer capacity is becoming tougher to come by due to several factors: competition is limited, coverage is contracting, and underwriting rules have tightened.
The convergence of geopolitical and macroeconomic shocks - war in Europe, fractured energy markets, 40-year high inflation, interest rate hikes, depleted capital, as well as Hurricane Ian - has introduced volatility into the market. In January 2023, reinsurers went through a global process known as 1:1 renewals, placing pressure on pricing and contract terms. The knock-on impact of that has been felt in every line of business worldwide. These headwinds have all contributed to insurers being more selective with risks and disinclined to negotiate on terms.
Perhaps the biggest single factor at play here is climate change, which presents significant challenges for the insurance market.
Insurance is still based on the maxim that the losses of the few would be paid for by the premiums of the many. The industry builds in for ‘event years’ (periodic extreme events) but we have begun to see these events much more frequently. What used to be a 1 in 100 probability is now happening much more frequently which must be built into the pricing model.
2022 alone was a year of volatile and turbulent global weather events with several major natural catastrophes such as storms, floods, and extensive wildfires across Europe. Insurers have historically viewed European natural catastrophes (NAT CAT) as a valuable hedge against US hurricane risks. However, recent events such as the flooding in Germany’s Ahr valley and the hailstorms in France are making the balance between US and European business unsteady.
Here in the UK, an intense summer heatwave and a prolonged winter cold snap created the perfect storm (excuse the pun) for insurers, with significant rises in subsidence and weather-related property damage claims. Add to this the impact of inflation with the rising cost of building materials and labour costs, and it’s no surprise that some insurers may have been increasing premiums in the first quarter of 2023.
We are also seeing insurers reduce the number of risks they quote and become more robust in carrying the increased rates their pricing models are demanding. Insurance is the classic supply and demand industry – if demand outstrips supply, prices go up.
Insurers could be facing an inability to find affordable reinsurance capacity due to greater exposure to NAT CAT events. The potential for NAT CAT events is growing and as the risk of ‘the many’ being affected by extreme weather increases, premiums may continue to rise to cover the increased cost of claims and reinsurance.
The big picture here is that with the increased frequency of events caused by climate change, costs could eventually become too large for the insurance market to meet. But in the meantime, premiums, particularly in property lines, may continue to rise as the industry adapts to the challenge of balancing volatile risk exposures and protecting policyholders. Progress is of course already being made in this regard, including the Flood Re scheme to meet the dual aims of keeping premiums down and homeowners protected.
But it’s not just these major global events. One of the other significant challenges is staff resource – insurers have the same issues that the rest of UK PLC has in recruiting and retaining staff in what some commentators have blamed on the fall-out from the Pandemic with up to 500,000 under 65’s deciding to cease working.
So, what to do in short-medium term?
As advisors it has undoubtedly been challenging to explain the price rises to customers, but this has made your role more vital. Not only have your clients got a greater need for protection in a volatile environment, but they also need quality advice on how to manage and reduce risk. Responding quickly and innovatively to help them protect and reduce their risk exposure is a great engagement opportunity and relationship-builder.