Stopping the cycle: current market conditions 'here to stay'

Broking leaders say it’s time to stop referring to a “hard market” – believing that the current dynamic is likely to remain for years to come.

Responding to an Insurance News survey on what this year could hold for the industry, Steadfast CEO Robert Kelly questions whether pricing will ever go back to the “stupidity” of the highs and lows of the traditional insurance cycle.

“In my view it never will,” he said.

Mr Kelly accepts “that’s a strong statement”, but believes increased scrutiny from capital providers and regulators will play a key role.

“I think that the current commonly referred to hard market is not a hard market, it is the current market where [insurers] are endeavouring to price product to produce profit,” he said.

“And I don’t think they’ll go back to a situation of saying, ‘let’s go for market share, let’s drop our pants and get back into the silly syndrome’, because I don’t think APRA will allow them to do that.”

Mr Kelly believes the end of the insurance cycle would benefit consumers in the long run.

“If the consumer can have stable pricing which grows accretively, in very small percentages, then I think that is better than the rocky road of up and down, up and down, and then ‘we’re not going to insure this or that’.

“I’ve never seen as much interest [from] the people that invest in insurance companies and APRA as I have over the past two years. I think they are saying ‘come on’.”

Mr Kelly says a low investment environment has “brought the chickens home to roost” and although interest rates will go up, he doesn’t believe they will match historical highs.

“We are not going to get back to the days of huge returns. I think the market is the market, and the forces that are looking at the market are demanding that they make money. The status quo is going to remain for some time.”

While many other survey respondents see signs of stabilisation, most agree with Mr Kelly that there is no return to a soft market on the horizon.

“I think some industries do need to prepare for this being the new normal – it’s doubtful we are likely to see price movement in the short term, either up or down,” MGA MD Paul George said.

CBN Executive Manager Distribution Leigh Frost agrees. “I don’t really see the hard market deteriorating further in 2022 however it is unlikely we will see any premium relief – rather a stabilisation of the current rates for most classes.”

PSC CEO Australia and New Zealand David Hosking says this year will likely see “some stabilising” and “steep increases in rates and reduction in terms” won’t be as prevalent.

“In terms of client impact, there is clear frustration in areas where capacity has been restricted, but in general most clients have adjusted to the rate environment – depending on the quality of discussion with individual clients,” he said.

The experience will not be the same across the client base, Resilium Insurance Broking MD Ben Hastie says.

“I see the market plateauing in some areas, but in others I see rates continuing to rise and insurer appetites continuing to be refined.”

And Insurance Advisernet MD Shaun Standfield believes commercial premiums could continue to rise between 8% and 12% “for the next year or so at least”.

“Scarcity of capital and the need for return on the available capital is driving the current dynamic,” he said.

“There will be further reductions of capacity and a continuation of more occupations and locations not being able to secure complete insurance programs due to insurer appetite changes, reflecting the reality that some occupations and geographic locations don’t meet minimum financial return metrics of insurers.

“This current dynamic won’t change whilst we see increasing reinsurance costs resulting in higher local retentions being absorbed by insurers, low interest rates which puts additional pressure on insurer investment returns, and recent restrictions on movement of people and goods as a result of covid, which has seen significant upward inflationary pressure on materials, equipment and labour costs in rectifying insurable losses.”

Aon’s Head of Commercial Risk Australia Ben Rolfe says the country is heading into the fifth year of insurer remediation for some product lines.

“Finally market conditions are starting to improve, albeit in pockets,” he said.

“This has been the longest consecutive period of positive property rate increases we have experienced in decades so very welcome signs for buyers.”

Mr Rolfe says there is an increasing distinction between good and bad risks – and this will worsen over time.

“Pleasingly, premium rate movement in some areas is starting to stabilise … and particularly the more vanilla exposures and occupancies, well-managed risks, and risks with a low natural catastrophe footprint,” he said.

“Other areas however, such as cyber and some elements of casualty, professional indemnity, and complex property, remain significantly challenged. This divide will become all more pronounced over the coming months.”

Insurers are united in their efforts to reduce volatility, he says.

“This makes some industries and product lines hugely attractive to all, whilst others are borderline uninsurable.

“There is a growing disconnect between the experience of a waste recycler and a retailer for example. Not only does this frustrate buyers on the wrong side of the ledger, but it also stifles innovation at a time when buyers need it most.”

Broking leaders agree affordability issues are likely to continue for many clients, and communicating well in advance about how the market is moving is crucial.

“If you have kept your clients informed with regular communications on what’s driving insurance pricing it certainly assists in renewal discussions,” Mr Standfield says.

A full report of the 2022 survey will appear in the next issue of Insurance News magazine.