The COVID-19 pandemic has affected us all in many different ways.
From changes to the way we work, shop and socialise to the direct impact on our income and finances.
The insurance market is no different and is experiencing what is known as a hardening market.
You may well think “why should I be concerned?”. The answer to that is relatively simple – but with a more complex explanation. Insurance costs are increasing due to a number of reasons – many of which were causing an impact prior to COVID-19. Adding the pandemic into an already hardening insurance market has led to difficult times.
Here we take you through these reasons and explain the terminology that you may well come across. More importantly, we outline how you can help to minimise the impact on your business.
Solvency II – launched in 2016, Solvency II (replacing Solvency I) which applies across the whole of the EU, has meant that insurance companies’ spare capital requirements have more than doubled. This has caused a number of insurers to leave the market whilst others have significantly reduced their capacity. Solvency II has also created a significant barrier to entry meaning that lost capacity in most cases is not being replaced.
Solvency margins are set by regulators and stipulate the minimum surplus assets the insurer has to hold over and above their liabilities. For example, if an insurer has to hold a solvency margin of at least £500M and their liabilities are £400M, they will need to make sure they hold assets of last least £900M
Over the last 30 years, over 30 UK insurance companies have gone bankrupt.
Ogden Table Rates – when Liz Truss, the then Minister of Justice, changed the Ogden table rate from 2.5% to minus 0.75% it meant that insurance companies had to pay out far more on larger personal injury claims. Insurers were hopeful the rate would return into positive territory in 2019. However, they were disappointed as the Government have pretty much locked into a rate of minus 0.25% in England and Wales and minus 0.75% for Scotland, further impacting settlements. This means that rates now have to be set accordingly.
Example of an Ogden Settlement
A serious brain injury to a person of 21 years of age at date of settlement:
At 2.5% rate – claim would settle at £9,072,028 with a future loss element of £8,242,086.
At – 0.75% rate – claim would settle at £20,020,103 with a future loss element of £19,193,161
This is an increase of 121% so insurers clearly have to consider if the premiums they have been charging are sufficient which were based on the old Ogden rate and many are having to increase their rates to ensure they hold sufficient reserves to pay personal injury claims in the future.
The negative Ogden table rates are here to stay. This means you should consider whether your current policy limits for Employers Liability, Public Liability and Product liability are sufficient.
Property premium rates – these were already far too low in the in the UK as we entered 2020. For most insurance providers, property had become a class of business which had turned into a loss-making enterprise. The soft rating had meant the maths was no longer adding up. Even if we ignored the terrible recent events, property rates needed to go up considerably in 2020 just to balance the books.
Storms and flooding – There was a terrible start to 2020 with storms Dennis and Ciara both causing significant damage. With property business already losing money, the last thing UK insurers needed were floods that could end up costing well over £400m. Climate change is causing insurance companies to struggle with correctly predicting floods, and they need to build up a pot of money to take care of the next set of bad floods which will inevitably be on their way.
If your business is in a flood-risk area, we can help with specialist flood insurance solutions. Talk to us to find out more about a unique flood risk insurance solution.
Coronavirus – “the COVID-19 pandemic will be the most expensive event ever to hit the insurance world” – the words of John Neal, CEO of Lloyd’s of London. It is estimated that the combination of insurance claims and investment losses will cost the worldwide industry in excess of £200 billion, making it the most expensive insurance event ever. The FCA test cases which started in July will have a significant bearing on how much the UK insurance industry will have to pay out in Business Interruption losses relating to COVID-19. With these losses coming on top of storms Dennis and Ciara, then to quote John Neal again ‘The chances of the market making anything other than a notable loss are zero’.
Reinsurance – Reinsurance is a key component of an insurer’s pricing model and reinsurance rates will rise significantly and capacity reduce come the renewal time for their treaties. Insurance providers will have no option other than to reflect these increases in their rates.
Interest rates – when interest rates are high, insurers can get away with a certain amount of underwriting losses as their investment income will bail them out. Not so now, as the current interest rates are the lowest in the Bank of England near 300-year history, insurance companies will therefore have to write business for profit and put up premium rates.
What can you do to help minimise the impact on your business?
- Talk to us – It’s likely that your business has changed and adapted to the pandemic and you’re facing new challenges. By discussing your needs and concerns well ahead of your renewal date we can review your current arrangements and look at options and alternatives. By having all the information we need in plenty of time, we will be best placed to approach the market for you and negotiate the best terms with the insurers.
- Invest in Risk Management: There are many things you can do to help mitigate some of the risks your business faces. There are solutions to help with protection for your property, such as improved security, fire and flood protection, as well as technology including dash-cams and telematics for your fleet of vehicles.When it comes to Health & Safety, we have partnered with Xact Group to deliver risk management solutions. Xact has gained a reputation for producing industry standard management systems and detailed risk assessments which are tailored to your specific business sector.
- Stick with insurance companies you can trust. Beware of placing your insurance with offshore based insurance companies and/or those with poor financial security ratings. We will always avoid placing cover for our clients with such companies.