How to Manage Risk in a Hardening Market
A financial market that’s in correction territory, coronavirus pandemic fears and an insurance industry hard market for the first time in years. Are these issues related or becoming more so? What’s an insured to think right now?
The rapidly hardening insurance market is the result of several factors that can be summed up by saying that we’re paying today for our prior sins. The industry has had persistent high loss ratios since 2013, primarily caused by an increase in frequency of severe property and liability losses and spiraling litigation costs with ever higher jury awards.
Even if you haven’t had a particularly poor loss record, insured losses in the aggregate have steadily been rising without corresponding rate increases until just recently.
While insurers are now taking in more premiums, they aren’t offsetting the increasing losses they’ve been paying out. Even worse, the risks they insured in prior years appear to have been underpriced and are developing at a faster rate than expected.
Changing Market Cycles
In prior hard insurance markets, we’ve seen enthusiasm to increase insurance prices tamped down, typically after a six- to 12-month period. The ability to quickly move capital into the market to take advantage of the higher returns usually offsets the price increases in a typical supply-and-demand scenario. That hasn’t happened yet and unfortunately, based on how the losses for prior years are developing, it’s not likely to happen anytime soon.
In fact, many insurers, including Berkshire Hathaway and Liberty Mutual, recently reported unexpected fourth quarter 2019 underwriting losses. New capital is going to wait on the sidelines and see some market stabilization before moving back in to start the price reduction cycle again.
A global economy that’s currently reacting to coronavirus and supply chain disruption isn’t going to help. As liquidity decreases, investors with capital to deploy are going to look for relatively safe havens to boost returns, not to a disrupted marketplace. Alas, the current insurance marketplace is likely to be hard for a while yet.
This leaves us in the midst of rising insurance rates at a time when business risks are seemingly more prevalent than ever. Cyber breaches, climate change, pandemic, trade and political risks are at the top of mind for most business leaders. Now is prime time for companies to take a thoughtful step back and reassess how they view and manage risk within their organization.
Insureds with a strong risk management perspective and a track record of low claim activity don’t necessarily have to be swept up in the insurance market drama.
Taking a holistic view of risk can help identify ways to treat risk beyond just buying insurance. Analytical tools like risk maps, 360 reviews, gap analyses and a focus on total cost of risk can help companies take a broader approach to managing and financing their overall business risks. Higher deductibles and self-insurance — either through a captive or other self-funding mechanism — are also ways to mitigate the continuing rate increases in the insurance market.