The 'Hard Market' - What is it? What are the causes, repercussions and when will it end? Will Medical Malpractice & General Liability be the next markets we see hit?

As we know, 2019* was a difficult year for many industries that are required to carry PI insurance, which hasn’t been helped during 2020 with the stress and strains caused by the effects of the ongoing COVID-19 pandemic. 

Many companies feel they are struggling to obtain “viable” terms, either that being the level of coverage, limits, higher deductibles being applied, and so forth. As we know, there are several reasons for this, such as limited market capacities, the average loss of ≥250% over a 15-year period.

* A report published in the Insurance Insider in August of 2019 highlighted that 62% of Lloyd’s Syndicates that write Non-US PII are losing money - syndicates writing Non-US PII had made a £435m loss over 6 years. The most discussed case is the Grenfell Tower tragedy in summer 2017, which is deemed as the precursor to the hard market; however, that coupled with natural disasters, the collapse of corporate companies (such as Carillion) and reductions of supply chains (leading to project delays) has also led to increased claim pay-outs.

So, we have the discussed the causes of the PI market to harden, so let’s demonstrate some of the key characteristics of the soft & hard markets;

Characteristics of a 'Soft Market'

The characteristics of a soft market in the insurance industry include;

  • Lower insurance premiums
  • Broader coverage
  • Relaxed underwriting criteria, which means underwriting is easier
  • Increased capacity, which means insurance carriers write more policies and higher limits
  • Increased competition among insurance carriers.

Ultimately these rate reductions associated with a soft market affect the insurance carriers’ bottom line, as an insurer relies on a combination of insurance premiums and investment income to make a profit as a company.

Characteristics of a 'Hard Market'

On the other hand, the characteristics of a hard market include:

  • Higher insurance premiums
  • More stringent underwriting criteria, which means underwriting is more difficult
  • Reduced capacity, which means insurance carriers write less insurance policies
  • Less competition among insurance carriers
  • More extensive restrictions within the wording / applied endorsements
  • Excess insurers are no longer following the terms set by the underlying insurers

When will it 'End'?

This is difficult to tell for several reasons, sadly due to a global pandemic, which resulted in the UK heading to an economic recession, a lack of investment for carriers or treaties.

I believe we have a long road ahead of us; despite in 2020 having new treaties pump a significant amount with the company market(s), only provided a very “quick fix,” I believe we still have some way to go. 

Oh, and that’s only for the PI market!

We see some small increases within the medical malpractice sector & the (General Liability including Public and Employers), which I have a suspicion this may also look to harden (perhaps as much as the PI or maybe not...who knows)? Though the MM/GL space is only seeing increasing rates at the moment and very few (to no) endorsements being applied, I think the claims notifications due to the lack of income for many households will lead to possible “illegitimate” claims and potential pay-outs, or defence cost. That said, they may also be following the root causes of the PI market.

The culture of the UK is slowly becoming litigious due to the reasons mentioned within; I can imagine there will be a significant number of claim notifications hitting all sectors of the market.  

It may appear all doom and gloom for individuals, businesses, and so forth, but there is a silver lining. And that, of course, is a brokerage who knows what they are doing.

What can you do in a Hard Market when you see rates increase?

Personally, I feel market presentations are key to assisting your clients. As discussed in previous articles, if a risk is presented well & shows clearly what the insured is undertaking this aids them greatly. This can be as simple as providing a CV, demonstrating historical work and risk mitigation strategies they are putting in place. 

More information is available to us to provide clarity to an insurer, putting them at “ease” on the risk profiles to benefit the insured, which is what our role is meant to be?

Of course, the reliance of having Lloyds placement specialist, like ourselves is part of the solutions. But simple steps we can provide are ensuring the initial information presented is as detailed as possible.

Usefully steps to follow;

  • A detailed proposal form to provide as much information as possible, again reinforcing to the insurer of the client’s exposure. (Supplementary questionnaires if not “out the norm” activities).
  • Key employee CV’s, again this aims to provide an insight to the history of the employees and their capabilities within their companies.
  • Additional accreditations, again demonstrating that the insured is compliant with their regulatory boards, memberships and so forth. Also, certain memberships provide set protocols and risk management. (Or if they host training days for staff).
  • Memberships if applicable.
  • Risk management protocols.