Publications
Intermediary October 2003
Back to Intermediary October 2003 Contents
Many of those involved in the marine services industry will have experienced the damaging side-effects of the current hard insurance cycle. Professional indemnity insurance is one particular area where the hard market has been most acute, with huge premium increases, reduced cover and, in some cases, insurance being withdrawn entirely. The increase in insurance costs has hit hard and hurt at every level.
Those who have experienced it will know the consequences of the hard market and the widespread difficulties in finding the appropriate insurance cover at a reasonable price. However, the reasons behind the situation may not be fully understood or indeed have been adequately explained by their insurance advisers. Vague throw away comments about market cycles, underwriting profits and most prevalent of all, the aftermath of the 11th September, 2001 World Trade Centre attacks, are all routinely utilised by insurance providers as reasons for premium increases and coverage restrictions. However, the true reasons, particularly in the area of professional indemnity insurance, may not be fully appreciated by those seeking such cover.
Of course, insurance markets are, like all financial markets, cyclical by nature and, following the extensive soft market period between 1995 and 2000, when premiums had fallen to extremely low levels, it had been inevitable for some time that the insurance market would harden in due course.
However, the severity of the hardening process, particularly in the areas of liability insurance (employers liability being the worst hit, followed by professional indemnity) took many by surprise and was caused by a number of contributing factors, beyond the inevitable up-turn of the cycle.
Profitability of insurers
An Office of Fair Trading summary of findings on the UK liability insurance market published in June 2003 ('the OFT report') states that liability insurers as a group have been making underwriting losses for the last decade with ratios of 120% - i.e. claims plus expenses exceeded premium income by 20%. This position was clearly unsustainable and appeared to result from insurers routinely ignoring the commercial realities of business in order to achieve short-term growth over long-term stability and profitability.
The increase in external corporate investors, often American, particularly into the Lloyds market, led to a stronger demand to restore profitability and rate on return. However, this drive to return to profitably may have been more gradual had other factors not intervened.
Performance of the Investment market
During the soft market, insurers had, to a large degree, offset their underwriting losses
with investment returns, especially when you consider that in liability insurances there is often an extended period between receipt of the premium and the claims payment. The downturn in the investment market after 2000 ended insurers ability to underwrite unprofitably whilst recovering these losses in the stock market.
Reinsurance capacity problems
The reinsurance market has hardened significantly in recent years, with major reinsurers of liabilities increasing the cost of cover for direct insurers by between 60% and 80%, while also being more selective about the risks they took on and providing less cover, which in turn meant that direct insurers had to take on a greater amount of risk themselves. Restrictions in cover, such as in respect of asbestos, also had a widespread affect on the ability of the direct insurance market to provide cover.
Insurer insolvencies
While the number of insurer insolvencies in recent years has not been as large as thought likely at one stage, the collapse of the Independent Insurance Company was nonetheless significant. As a major insurer of Employer's Liability insurance, compulsory in the UK, all claims which were not met by this organisation, were subject to recovery under the Financial Services Compensation Scheme (previously the Policyholders