Head to Head: Commercial rates

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This year’s Airmic conference, taking place at Birmingham’s International Convention Centre, will see insurers and risk managers come together to share experiences and influence forward thinking. Post asked some leading industry figures to go head-to-head on the burning issues.

Are increases in commercial rates necessary?

NO, says John Hurrell, chief executive, Association of Insurance and Risk Managers

John Hurrell is chief executive of the Association of Insurance and Risk ManagersThe sustained low rates buyers have enjoyed for more than a decade are not, in Airmic’s view, the result of a cyclical soft market – they represent a long-term change. Like a growing number of observers, and even underwriters, we believe the old cycle to be a thing of the past. Low rates no longer have to be ‘corrected’ by a surge in prices, although, of course, prices will have to rise one day, if only to keep pace with inflation.

Airmic has long believed the so-called ‘soft market’ represents the new normal – a theory that was put to the test in 2011. Insured losses worldwide topped $100bn, making it the second most expensive year in history. And yet, as our benchmark survey afterwards demonstrated, rates did not go up in response. Certain types of business did become more expensive, but were offset by those that moved downwards.

Since then, rates have remained stable and probably fallen slightly, while new capital has continued to pour in. It may take a truly cataclysmic event or series of events to produce a fundamental shift.

So what is the reason for this? Current market conditions reflect well on the insurance industry. For years it has been encouraging and providing incentives for better risk management, and this has inevitably helped to reduce losses. With far more sophisticated use of data, improved risk selection and the disciplines imposed by enterprise risk management-based underwriting frameworks, it has been possible for many insurers to continue to make solid profits, despite the
low-rate environment.

One area where we do see potential for price rises, however, is in return for more certainty around coverage. For example, it is totally legitimate for insurers to seek higher premiums in return for wider policy wordings or the removal of exclusions.

However, in our view, the main driver for increased rates will come if and when the underlying exposures rise. Climate change could be the catalyst, and there are several types of emerging risk that need close scrutiny. But there is now so much surplus capital in the market that even a significant cat event or two could be absorbed without impacting on pricing. In this vein, we fully expect buyers to continue enjoying the current benign environment.

YES, says Caroline Pritchard, head of customer, distribution & marketing, Zurich Global Corporate UK

Caroline Pritchard is head of customer distribution and marketing at Zurich Global Corporate UK “People say, ‘How can you sell this for such a low price?’. I say, ‘Because it’s total crap.’” With these words Gerald Ratner wiped £500m from the value of Ratner’s jewellers in a speech in 1991.

There are a number of factors that have contributed to the competitive rates experienced in the commercial insurance market in the past few years. Overcapacity driven by relatively stable investment returns, a benign catastrophe experience and results buoyed by reserve releases have all played a role.

There is no indication of a significant shift that will change these market dynamics in the short term. Without question, this is predominantly a “buyer’s market”, and commercial customers have been the beneficiary through reduced premiums.

The key question is the long-term sustainability of this model. To Ratner’s point, you can sell something at a low price, but there has to be a compromise – and this is often the quality of the product.

We believe insurers that aspire to be a partner to their customers rather than merely a provider of a capacity require a reasonable return. As customers become increasingly global and complex, investment in network capability, risk engineering, consulting and the technology to deliver risk insight increases – necessitating higher rates.

Moreover, as the world becomes riskier with urbanisation, interdependency and the increasing significance of non-physical risks taking place, investment is also required to support the development of products that respond to these emerging risks across segments and geographies.

The broker model consistently delivers margins of 20%. Insurers rarely achieve even half this. With such tight margins, it is difficult to drive continuous improvement and to maintain investment in new propositions for the customer.

Although further reductions in ratings deliver short-term gains for buyers, eventually this will compromise insurers’ abilities to deliver premium products in the future – and will push the industry backwards.

Ultimately, it is for the buyer to decide. You will get the industry and the product that you are willing to pay for. For many, the best solution is represented by a combination of capability and capacity – rather than a blanket approach to seek the cheapest alternative.

This article was published in the 12 June edition of Post magazine.

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