This thought leadership piece was kindly provided by Protean Risk. For more information, please contact Tom Spraggs (TomSpraggs@proteanrisk.com).
How firms can navigate the challenging insurance market
Firms in the asset management sector are paying more for their insurance cover than they were back at the start of 2019. Many firms have, in fact, suffered two successive renewal rate increases and could now be paying 25%, 50% or even more for the same (or sometimes less) insurance cover. They might be forgiven for expecting some respite this year, but market commentators are, almost universally, stating that rates are continuing to rise with some suggesting 20-30% being ‘normal’.
What is driving these harsh market conditions? How can investment managers, fund directors, private equity and venture capital firms combat the market and ensure they secure the best possible outcome at their renewal? Not just a competitive price, but the coverage and the quality of service they require, especially the support of specialists knowledgeable in their sector and in the event of a potential claim.
A combination of factors
To consider what has happened we need to go back to those softer market conditions of 2016. Many small and medium sized firms were being insured under specialist facilities that had been designed to offer broad insurance cover at low cost. Intense competition was driving a focus on premium volume rather than profitability and this was extending across the market, from the smallest to the largest risks.
Historically, some capital eroding event triggers fundamental changes in the market, for example a huge natural catastrophe such as a hurricane hitting North America. The Swiss Re Institute provides an annual report of insured losses from global disaster events and in the past four years we have witnessed three of the costliest years they have ever recorded. 2017 was the costliest at USD144 billion, with 2018 and 2020 costing USD93 billion and USD83 billion, respectively.
However, these events have been reported as earning eroding rather than capital eroding, and market commentators suggested that 2019 market capacity was largely in line with 2018. Alongside these events were some fundamental shifts in market planning and interventions. Perhaps the most reported was Lloyd’s of London instigating the ‘Decile 10’ reviews after incurring significant losses in 2017 and again in 2018. This required syndicates to identify the worst performing 10% of their business and a plan for improvement.
COVID accelerates rate rises
It was these adjustments that triggered a reduction in competition and rates to rise. A number of insurance providers withdrew from selected markets and classes of insurance. Those facilities that had underwritten a substantial proportion of asset management risks disappeared. Firms that had previously enjoyed the broad cover and highly competitive premiums had to find new insurers on the open market. With less competition and more choice those insurers still in the market for asset management risks could be more selective and dictate their terms as they focused on restoring the profitability to their book of business.
Then along came COVID-19 which has undoubtedly accelerated rate rises and market caution. In September 2020 Lloyd’s of London reported a healthy combined ratio (a measure of underwriting profitability) of 91.4% but adjusting this for COVID-19 losses pushed this figure to 110.4%. A half-year pre-tax profit of GBP1 billion became a GBP400 million loss.
The fact that we have seen minimal direct or indirect COVID-19 asset management claims does not make the sector immune from its affect. Insurers are cautious about the risk environment, as they know from experience that recessions can lead to an increase in claims. Individual underwriters are under pressure to underwrite risks conservatively and are more focused on renewals rather than new business.
Many clients and prospective clients are wondering how they can secure the best renewal outcome and how long these market conditions will last.
Need for specialists
Now more than ever asset managers need to be assured about the insurance broker service they receive.
Does their insurance broker have a depth of knowledge about the insurance market for asset managers generally, and more specifically related to different aspects of the sector? There are segments of the asset management sector that have been more affected than others, for example firms involved in real estate and credit are seeing rises of 40-50% if their incumbent can still continue to quote.
Do they have the relationships with insurers that are interested in new business and understand how they can present their risk in a favourable way which will secure the best terms? Navigating the insurance market has certainly become more complicated and challenging. Without relationships and knowledge, it’s impossible to present a firm’s risk in the right way and to get the best outcome. That does not just mean the cheapest premium now but a broader view of ‘value for money’ and making sure that the cover and policy are appropriate.
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