A market divided
Avoided the worst: WTW’s Trent Williams says the Australian market remained calm despite many challenges
Caution is the word as the mid-year renewals suggest risk appetite is improving – but not for property in catastrophe areas
By Bernice Han
Heading into the mid-year renewals brokers big and small knew it was going to be another tough one – much as it has been for the past couple of hard market years.
As it turns out they were not far off the mark. Premium rates are still going up, depending on insurers’ take of the risks they’re presented with.
As for policy terms and conditions, complex accounts remain as onerous as ever.
Last year’s catastrophic floods added extra pressure on pricing, particularly for risks with prior claims history and insureds residing in disaster-prone areas. Brokers saw the outcome of the January reinsurance treaties and were prepared for mid-year challenges.
“After the treaty renewals at the start of the year, it’s fair to say we feared the worst,” WTW Head of Broking Trent Williams tells Insurance News.
“Since then, New Zealand has had floods, and a cyclone but the market throughout Australasia has been relatively calm. Capacity is returning and insurers are competing for good risks, particularly around Property and Directors’ & Officers’.”
While brokers contacted by Insurance News said they were braced for the worst, the mid-year negotiations have nevertheless left them with a sense of optimism.
They say there is a discernible improvement in insurers’ overall risk appetite as a new wave of foreign players enter the Australian market bringing with them capacity and competition.
“A clear positive for our market is the increased capacity,” Mr Williams says. “Five major international insurers see Australia as a growing market and have either already set up or are about to set up here.
“This investment, and long-term commitment to the Australian market, is in contrast to the past three to four years. A flow-on effect is that traditional players here have needed to adjust their risk appetites.”
Underwriting agencies, particularly those backed by Lloyd’s, are making their presence felt. For example, Lloyd’s Syndicate Probitas 1492 recently opened an office here and in July Rhodian Group unveiled its first underwriting agency, Halo, a property and liability specialist backed by Lloyd’s. Rhodian Group launched in February, declaring its goal was to “create and incubate” agencies in the Australian market.
But brokers expect more availability of cover rather than cheaper prices. “I’m pleasantly surprised by all these London markets looking to set up and establish here. The net effect means that competition will return, which is great for clients,” Mr Williams says.
“It’s been a long time coming and it doesn’t mean that there’s going to be reductions in premiums, but there is competition which is pleasing.”
Marsh’s latest Global Insurance Market Index shows pricing growth in the Australian market slowed in the second quarter, rising a mere 2%. It’s the fifth straight quarter of single-digit rate increases.
Financial and professional lines prices contracted for the first time in more than 17 quarters, falling 8% in the June quarter. Directors’ and officers’ rates declined 10% or more as competition remained strong for both primary and excess layers from both new and legacy insurers, says Marsh.
Cyber gained 8%, markedly slower than the 25% rise seen in the first quarter. Marsh says increased competition among insurers opened up more options for clients and that risk information remained important to underwriters, particularly regarding an organisation’s ability to mitigate ransomware threats.
Property was up 5% after rising 8% in the previous quarter. But loss impacted and cat-exposed clients are seeing the highest increases.
Marsh Deputy Head of Global Placement Pacific Scott Eccleston says generally the market has improved as insurers have achieved “rate adequacy”.
“From what we have seen in the June quarter, conditions in the marketplace are actually getting better,” he tells Insurance News. “There’s more focus on premium growth from insurers, but I would still classify them as being cautious.
“If the risk has achieved rate adequacy then we are starting to see a lot more competition in the market. Insurers want to retain the business that they have, but not at any cost.”
However, for some lines of business the worst is far from over. Property is an obvious case in point for obvious reasons. Accounts with prior claims or which are located in high-hazard areas are still seeing rate increases in excess of the average.
Mr Eccleston says the property market is in a “multi-speed phase, with those risks in nat-cat zones and/or with recent loss records experiencing far more challenging conditions”.
Improving market: Marsh’s Scott Eccleston says insurers have achieved rate adequacy
“Risk mitigation, contingency planning and lessons learned from past events is critical to differentiating your risk to your peers’ and outperforming comparable programs,” he says. “Effort in presenting your risk profile should be rewarded.”
Sydney brokerage Bellrock Broking says in a July maket update it is seeing similar trends. “Overall, market conditions are better for insureds,” says the broker, which specialises in property, corporate insurance and professional risk insurance.
The market update says the insurance cycle is exhibiting characteristics of “1 o’clock”, meaning the market is seeing an inflow of capital.
“Our view is that this is being driven particularly by new market entrants and capacity,” it says.
Headline inflation appears to be tapering off, but cost pressures from shortages of tradespeople and building materials remain, which means insurers are to responding accordingly in their property pricing.
“The significant rise in the cost of construction materials, paired with labour shortages and global instability, continues to impact supply chains,” the market update says.
“The consequence is that replacement values are increasing. To meet the rise, insurers must deploy more capacity. If declared values are not adjusted appropriately this presents under-insurance risk to policyholders.”
The update says insurers now seem to be focusing on property values, which often requires new insurance replacement valuations.
“What is common is that accurate building replacement values have never been more critical. The rise in the cost of construction and high inflation are to blame.”
Melbourne-based broker Honan says the impact of natural catastrophes globally, combined with restrictions from the January 1 treaty reinsurance renewals, have spilled into the property insurance space for sporting associations.
National Head of Corporate Insurance and Risk Solutions Poppy Foxton says insurers are restricting cover for clubs that are located near a river or watercourse.
“This has a direct impact on many sporting associations, as their zoning and clubhouse locations are often situated in low-lying areas or where residential construction is not permitted,” she tells Insurance News.
“As a result, many sporting organisations are required to self-fund, increasing the risk exposure for future major catastrophes.”
In the cyber line, conditions have stabilised because of new capacity and existing market carriers are expanding their appetite, says WTW Cyber and Technology Risk Specialist Ben Di Marco.
“We expect market conditions to remain competitive in the short term, but we could see hardening towards the end of the year, or early next year, if the rate of catastrophic cyber events impacting Australian organisations continues,” he says.
Some concern remains for aggregation risks, which could materially impact carriers’ claim losses.
“This has seen a variety of language being introduced to address matters such as widespread impacts events, nation state attacks, acts of war which may involve offensive cyber activities, and infrastructure-related exclusions.”
The Bellrock Broking market update says as a precondition to writing or renewing cover and determining a premium, insurers want to know how existing technology and internal standards are leveraged in pursuit of an effective risk management framework.
Insurers are also increasingly looking an organisations’ third-party arrangements.
“This requires visibility…and evidence that the organisation has considered the known risks of its supply chain, are actively managing these risks and have consistent monitoring in place.
“Insurers are looking closely at managing known risks through supply contracts with limits of liability, assurances regarding cyber security posture and right of audit.”
The broker says quantifying systemic cyber risks like supply chain attacks will continue to be a focus for the insurance industry now and into the future.
