With race lovers flocking to Royal Ascot this week, Jane Bernstein reports on a bloodstock insurance market still hampered by soft rates and self-insurance.
Insurers in the bloodstock sector could be forgiven for feeling the odds are stacked against them. Significant ongoing challenges range from over-capacity and pressure on rates to a tendency for owners to self-insure. There is, however, some optimism and a confidence that the right mix of expertise and determination will keep insurers firmly in the race, even when the going is tough.
A tendency for racehorse owners to self-insure continues to challenge insurers in this sector — and the problem is not going away. Phil Needham, portfolio manager for bloodstock at QBE Europe, agrees. "Self-insurance remains a significant threat," he asserts, adding: "Current owners continue to look for ways to reduce costs and this includes insurance."
Juliet Redfern, senior equine underwriter for Markel International, points out that self-insurance is always a factor in this market due to the non-compulsory nature of the class. While it is often true that this declines in a soft market, Ms Redfern explains that the current cycle has been accompanied by a very tough economic climate, which has made buyers think more about their insurance spend.
In terms of wider underlying causes, there is also a view that where bloodstock is not the primary business of owners, the stark choice in a harsh economic environment may be between self-insuring or even exiting ownership completely.
On a more optimistic note, David Ashby, managing director and class underwriter at Amlin Plus, observes that self-insurance tends to be self limiting — as people who pursue this option, and then have a loss, pick up insurance again.
Guy Morrison, chief underwriting officer of global equine at XL Insurance, says self-insurance is not just a problem for insurers, observing that racehorse owners also need to be aware of the dangers. "We are still in the grip of the recession and there are tough business decisions to be made. Whether you're a racehorse owner of three horses or a commercial breeder and this is your livelihood, you are going to be looking at all of your business costs, including insurance."
It must be tempting for an owner who has not had a claim for five years to shy away from the open insurance market but, as Mr Morrison observes: "The very wealthy may be able to self-insure, but for some of the smaller operations it can be business threatening."
Hedging the bets
With no significant evidence of developments to reverse the trend of self-insurance, it may well be in insurers' interests to offer more flexible options to their clients. Mr Ashby argues, for example, that on higher value animals and larger schedules, alternative risk transfer is available — such as captives — that can work with self-insurance and mitigate the owner's risk.
Mr Morrison emphasises that his advice for anyone considering self-insurance would be to talk to a broker. "There are options to reduce insurance costs and the broker is best placed to advise," he asserts. It is certainly important for racehorse owners to be aware of the potential, for example, of insuring a brood mare for a percentage of her full value, which would mean they would have some protection should she die.
Mr Morrison also points to deductible options for those owners with a schedule of horses where the cost of insuring all of them might be prohibitive. In this case, the insured accepts a certain level of losses before the insurance starts paying. "It's a form of co-insurance but it is better than not insuring at all," he explains.
The difficult climate for racehorse owners has long been exacerbated by falling prize money. It follows, then, that one of the most significant developments recently has been an initiative — known as the Horsemen's Tariff — which aims to address this and provide owners with recommendations on minimum prize money levels (see box, right).
The Horsemen's Tariff has been gaining momentum and significant support among racehorse owners. But perhaps a more pressing question for insurers is whether it will have any impact on the trends in self-insurance. If racehorse owners are able to feel more secure in terms of potential prize money, are they more likely to invest in more comprehensive insurance?
Interestingly, bloodstock insurers have not greeted this initiative with any great optimism. Mr Morrison explains: "Any increase in levels of prize money has got to be welcomed but I don't think it will have a huge amount of relevance to the insurance purchaser. The reality is that most people who have horses don't win much prize money anyway. Only the lucky few get into the winners' enclosure. So it is unlikely to have much influence on their decision-making process in terms of whether to buy insurance at renewal ."
Unfortunately, it is often the high profile accidents and fatalities that prove more influential in determining whether racehorse owners look for insurance. Mr Morrison explains: "A high profile loss situation does concentrate everyone's minds on the fact that it is the unforeseen accident that causes a claim. These unexpected losses highlight that self-insurance is actually a high-risk strategy and could well be a false economy. As much as these incidents are regrettable and nobody likes to hear of them, unfortunately they also serve to remind people of the importance of insuring their horses."
Runners and riders
Self-insurance is not the only issue currently on the minds of bloodstock insurers, with overcapacity representing another ongoing problem for the sector. For Mr Needham, overcapacity remains the major market issue and he warns that until this is addressed, rates will remain insufficient.
Mr Morrison predicts that there will be little movement until the autumn, when syndicates make decisions about capital allocation for 2012. Until then, he says, capacity is likely to remain static.
With rates under significant pressure, industry experts appear resigned to the prospect of an ongoing soft market. In fact, Mr Needham describes these as: "The toughest conditions I have seen in nearly 40 years in the market."
Chris Williams, bloodstock underwriter at Brit Insurance, agrees: "The bloodstock sector is currently at the bottom of the cycle and underlying results mean pricing requires correction to stabilise the market." He adds that it is critical for underwriters to work closely with brokers, "to carefully manage clients' realistic pricing expectations, as rates need to rise".
There are no immediate signs, however, that rates are set to harden, although within the context of wider insurance events, it seems unlikely that the sector can remain static forever. Chris Williamson, managing director at Hughes-Gibb — Willis' specialist bloodstock division, explains: "One of the key drivers for the bloodstock sector will continue to be what happens in the wider insurance market.
"If this hardens as a result of further cat losses and capital providers can achieve higher returns in other classes this will inevitably increase the pressure on bloodstock insurers to move rates up. We saw a similar scenario when the wider insurance market hardened after 11 September 2001."
Whether a return to healthier economic times will have a significant impact, there is a sense that any improvement is most likely to be gradual, rather than a quick fix. Mr Ashby predicts that, given overcapacity and rates below profitable levels, underwriting levels will not improve for some time. He adds that the prices of racehorses are not yet strong enough to indicate a return to the good times.
Given the restrictions of a soft market for insurers and the financial pressures on racehorse owners, the insurance industry needs to be able to offer both high service standards and value for money. Sadie Ryan, membership manager at the Racehorse Owners Association, observes: "Tailored products and standards of service provide owners with choice but the decision to insure is likely to be price-sensitive."
Mr Williamson recognises that "given the downturn in the bloodstock industry, clients have had to cut their cloth accordingly and often have a lower budget for insurance". He observes that it is therefore imperative in this climate to fully understand the clients' needs and "be able to tailor a product for them with the best markets, price and terms."
Mr Williamson argues that claims experience is of particular importance. "Ensuring we provide a truly excellent claims service is an area where we invest a significant amount of time and resource. There has been a historical tendency in the industry to view claims departments as a 'cost centre' given they don't directly generate revenue but, ultimately, clients only get to experience the value of the product they have purchased when they have a claim.
"In our opinion providing a genuinely exceptional claims service for clients provides them with the best evidence of the value the industry can deliver and also acts as a very powerful new business generation tool."
Despite the difficulties, this remains a sector with opportunities where growth is possible. Markel has made a number of acquisitions in the past 12 months. In October last year, it announced expansion of its bloodstock and livestock business with the acquisition of the renewal rights of the bloodstock and livestock book then written by Talbot Underwriting.
The deal followed two equine and livestock acquisitions by Markel in 2010. Markel International acquired French insurance broker and coverholder Le Centaure in July, and, in August, Markel Insurance Company — part of Markel Corporation, the parent company of Markel International — acquired American Live Stock.
So, is there more acquisition in the pipeline for Markel in this sector? "If the right opportunity came along, it would be given serious consideration," comments Ms Redfern.
Asked whether geographic diversification helps to spread the risks inherent in writing in the UK alone, Ms Redfern says the geographic spread is important, although she points out that the soft market and economic climate are not exclusive to the UK, adding: "The acquisitions also improve our ability to be able to offer domestic capacity to local markets particularly on lower valued animals."
In the context of the many challenges in the UK market currently, it would seem risky to focus solely on this territory. In fact, as Mr Morrison points out, most of the syndicates involved in bloodstock insurance at Lloyd's already write a fairly global book. Mr Ashby agrees: "Most insurers are already operating internationally."
As this year's Ascot season gets underway, the hats and the trophies will provide welcome distractions for horse racing enthusiasts, from the problems of prize money and bloodstock values. But there are some nuggets of good news on the horizon too, with many owners optimistic about the impact of the Horsemen's Tariff.
The insurance industry can take some comfort from the fact that the sector is likely to benefit — however slowly — from an economic recovery. But insurers cannot afford to sit back and wait. It will be important to work with owners on issues like co-insurance and claims service. This is not a sector for the faint-hearted and the winners will certainly need some staying power.
The horsemen's tariff
The Horsemen's Tariff has been welcomed as an initiative that could help reverse the decline in prize money. So, how exactly does the tariff work and has it attracted much support?
Sadie Ryan, membership manager for the Racehorse Owners Association summarises some of the key issues: "The aim of the Horsemen's Tariff is to provide recommendations from the Horsemen's Group on minimum prize money levels. The tariff was introduced in February for jump races, and in April for flat races. The tariff largely replaces the British Horseracing Authority minimum values that were discontinued from the beginning of the year. A comparison of race values and the tariff appears on the ROA website in a daily update at racehorseowners.net
"The Horsemen's Charter has been signed by more than 2200 supporters of the Horsemen's Tariff."
- Roundtable: Is a single customer view taking off in insurance?
- O’Connor replaces Fairchild at the helm of Broker Network
- Analysis: The mystery of the missing Insurance Fraud Taskforce report
- Home insurance insurtech Buzzvault launches
- Travel insurtech Pluto begins beta test
- Green light for UK-US insurance trade deal
- Majority of customers support a ban on dual pricing