Hard insurance market or just a new norm?

September 15, 2023

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Insurance is an effective financial tool allowing entities to transfer risk to a third party, providing protection from profit and loss (P&L) volatility and enabling growth by allowing other risks to be absorbed, while insurable risks are hedged. Oftentimes, insurance is a business requirement imposed by business partners and lenders. The bottomline is that businesses need the insurance market to be viable, and thus reliable to pay claims as they arise in the short and longer term. As with the saying, “Vegas was not built on winners”, the insurance market cannot survive in the longer term if the cost of claims exceeds the premium received. That may have worked in a higher investment income environment, but it is not the case today.

Seasoned risk managers spent more than a decade prior to 2018 wondering when the underwriting side of insurance would catch up with the claims side — leading to increased premiums, reduced capacity and restricted terms and conditions. While it wasn’t our wish, that soon became reality; what is now described as a hard market. While the market walks like a duck and talks like a duck, is the market “hard” in the cyclical sense or is this the new norm? And what are risk managers to do about it?

Evaluating the current market

As I consider the current state of the market and the factors that drive claims and the associated costs, I conclude that the market is at an equilibrium – a new norm, if you will. We might see peaks and valleys among lines, insured and years, but if you’re waiting for rates, terms and capacity to return to the 2010 level, you may want to pack a sack lunch. More specifically, consider what’s in the news currently: climate change, rising sea temperatures, hottest summer on record, increased wildfires and floods, not to mention heightened level of losses from secondary perils. Throw in the continued supply chain disruptions, delays in repairs and inflation (social and economic), and there is little chance of lower rates and improved terms returning anytime soon.

What’s next for risk managers?

The question for risk managers around the world is, “what are you going to do about the hard market?” Waiting for the market to turn (while paying heightened premiums) is not a wise choice. Certainly, risk management tools and options like increased retentions, captives and mitigation are being utilized. However, with increased retentions and captives, the underlying risk remains with the insured. In terms of mitigation, the key is evaluating the ROI, identifying the appropriate risk to mitigate and measuring the effectiveness of the method.

With significant risk now remaining with the insured, it is more critical than ever that entities:

  • Have clear visibility to the total cost of risk (“TCOR”);
  • Fully understand and have pressure tested their loss modeling in light of changed conditions;
  • Are taking full advantage of technology and data analytics leading to better claim outcomes.

Elaborating on these considerations, you can see how interrelated they are to each other and to the underlying data, which is critical for your program. First, in order to have clear visibility to your entity’s TCOR, you need to ensure you have complete and accurate historical data. Second, with so much changing in the risk space, it is important to recognize that extrapolating the historical data forward may not be reflective of the future losses – particularly with long tail claims, but also true for projecting property losses. That is, if you fail to factor in the ever-developing weather, liability and inflationary patterns, your projections will likely be understated. Third, utilizing cutting edge technology and data analytics, your claims partner can favorably impact your claims outcomes, whether it’s through cost savings, litigation avoidance, speed to closure or improved claims experience. Failure to do so unfavorably impacts your TCOR, and potentially and unnecessarily places your brand at heightened risk of harm.

Managing your total cost of risk

The best time to determine your risk partners is before a loss occurs — and Sedgwick can help. For organizations that successfully navigate risk, comes reward. None of us know what the remainder of 2023 will bring, but in the unexpected, you can be sure that Sedgwick will be here for you, watching trends, sharing ideas, offering support, bringing the best of our global and local resources, and imagining what’s next.

Tags: Carrier, insurance industry, insurance market, market trends, Risk management, Risk managers, Third party administration