Despite significant developments in 2017, competition for Motor, Employers’ Liability/Public Liability and Property insurance remains strong.
In recent years the UK insurance market (for Motor, Employers’ Liability/Public Liability and Property insurance) has been characterised by strong competition between insurers, spurred by plentiful amounts of capital.
Many insurance buyers have experienced rate reductions, as underwriters looked to grow their portfolios and maintain their income. Two developments in 2017 in particular, however, have posed questions of the UK insurance market:
The discount rate applies to lump-sum compensation payments awarded to personal injury or fatal accident claimants for future losses. The final compensation is based on the value of the discount rate, which is the assumed rate of return on investing the lump-sum. The higher the rate, the lower the initial lump sum needs to be. The discount rate had been set at 2.5% since 2001, but was reduced by the UK Government to -0.75%, effective from 20 March 2017.
Separately, 2017 saw the largest quarter-loss on record for natural catastrophes, with insurance losses resulting from these natural disasters – US hurricanes Harvey, Irma and Maria, the two Mexican earthquakes and some of the California wildfires – estimated at a minimum of $100 billion for the third quarter.
In different ways, both developments have increased calls among some insurers for rate increases or, at least, an end to reductions. Competition in many parts of the market remains strong, however, with many good deals available, particularly for companies with a good loss history and good risk management.
Motor insurance has been most affected by the discount rate change because of the exposure to large bodily-injury claims, where the difference between pay-outs under the new discount rate vs old rate could run into many millions of pounds. This is particularly relevant to those businesses running a delivery fleet or a fleet of HGVs, where insurers have experienced large losses.
With most reinsurance motor rates due to be renegotiated in January 2018, the full effects of the revised rate are still to be seen. Some companies are facing pressure from their motor insurers for rate increases, though the extent of such increases is heavily dependent on a company’s loss history and risk profile.
The Ogden 'discount' rate change has raised the question of whether EL and PL indemnity limits are adequate.
The discount rate is also the big factor affecting UK Liability (Employers’ Liability and Public Liability) insurance. Many insurers have found the cost of reinsurance rising as a result of the new -0.75% rate, and they are attempting to pass on at least some of these costs to insurance buyers. This is especially the case for those trades where there is perceived to be a higher propensity for large lump-sum payments.
In some instances, however, there is a market disconnect between changes in the reinsurance market (and reinsurers’ and insurers’ calls for increased rates), and the competitive rates still available to many UK companies.
The discount rate change has also raised the question of whether EL and PL indemnity limits are adequate. With the pay-out for large-scale bodily-injury claims now potentially much higher than before, large EL or PL claims involving multiple parties could well exceed these limits. The Grenfell Tower tragedy, where PL claims could be very considerable, has sadly illustrated the potential exposures property owners face.
The UK Property insurance market is still perceived by insurers as a solid, relatively low-risk investment.
Going forward, there is some uncertainty over the full effects of the discount rate reduction, after a Government proposal was raised in September to partially reverse the reduction. Such a change has not been confirmed, however, and it is unclear how soon such a legislative change could be made.
Property rates have increased dramatically in the heavily affected Caribbean, and to a lesser extent in the US, but in the UK and other parts of world (eg, Asia) any changes are less likely.
The UK Property insurance market is still perceived by insurers as a solid, relatively low-risk investment: it constitutes a diversified class, and there have been no significant natural catastrophe losses in the UK for some considerable time, save for extensive flooding in certain areas. Competition remains fierce, with fresh capital available to fill the place of any pricing inconsistencies.
The early signs are that Property insurance rates for Q1 2018 will probably remain favourable to buyers, with reductions likely for companies with no catastrophe exposures. Cover enhancements, such as breadth of wording and deductible levels, are also becoming more common.
Tips for buyers
For motor insurance, it will be important for companies to demonstrate the role of risk management in managing the fleet risk.
In a transitional insurance market, it is not unusual for insurers to adopt firmer rates for renewals than when seeking new business. Keeping an open mind to the possibility of competition may therefore help companies to get the best deal.
For Property insurance, there may be some tightening of contract conditions and policy wordings. In particular, levels of cyber coverage provided in Property insurance policies could come under more scrutiny. Insurers may apply increased underwriting stringency and require more underwriting information to fully assess the risk. This will present an opportunity for companies with strong risk management standards and claims history to distinguish themselves and thereby secure a better deal.
For EL and PL insurance, companies should work to ensure that their indemnity limits are adequate. The costs of increasing these indemnity limits are often low compared with the added protection they provide.
For Motor insurance, it will be important for companies to demonstrate the role of risk management in managing the fleet risk. Controlling the key factors that lead to accidents and demonstrating a reduced propensity for large losses will generate appetite and competition for your risk, mitigating any pressure on rates from insurers.
Overall, preparation is the key to success. An early, comprehensive renewal strategy is critical to achieving a successful renewal. This enables buyers to control the impact of any potential restrictions in market coverage. Preparing analytical claims data well in advance of going to market can pay dividends. Complete and accurate underwriting information is a prerequisite, along with the ability to demonstrate risk management practices.