‘Keep off the slide’

As the market turns, there are already reports of ‘nuts’ behaviour from some underwriters

By Bernice Han

The mid-year renewals have confirmed the hard pricing cycle is over, giving Australian businesses much-needed relief as they confront other cost pressures.

The signs have been there in the lead-up to June 30 – arguably still the busiest time of year for the industry as companies prepare for the start of a new fiscal period.

While rates are still going up, the pace has eased. Single-digit rises are increasingly the norm in many product classes.

For accounts with loss-free histories, price reductions of more than 10% are not all that surprising.

Current market conditions have been labelled soft, but Steadfast chief executive Robert Kelly doesn’t see it that way.

“I don’t consider what I’m seeing to be soft. I consider it to be moderating,” he tells Insurance News. “A soft market is usually where you have a reversal of pricing and we’re not getting that.”

A recent property line update from Willis – a WTW broking business – predicted rate movements of minus 10% to minus 15% for Australian accounts with no or limited natural catastrophe exposure or no losses. For clients with challenging risks, movements of minus 5% to plus 5% are likely.

“On the back of improved financial performance, the market sought to increase participation on accounts and/or offer capacity on more challenging business that had not been within appetite in previous years throughout tighter market conditions,” the April update says.

“This commenced the softening of pricing and improvement in policy terms and conditions as insurers sought to increase market share.”

The California wildfires have yet to dent appetites, according to Willis and others in the industry.

James Baum, WTW’s head of Pacific, tells Insurance News: “There’s enough resilience in the market that an individual natural catastrophe is not going to dampen the momentum of the market.

“It is likely that the rate environment will continue to soften.”

He adds: “If you look at organisations that tick the boxes … they are definitely seeing reductions, and seeing quite big reductions.

“Insurance markets over the past five years have overcorrected themselves. So now what we’re starting to see is insurers are returning to this competitive footing where they are actively searching and competing on price for new business.”

The market conditions have no doubt been warmly received by clients. However, some early worrying signs on underwriting discipline have emerged.

Mr Baum says there’s a risk brokers, insurers and clients focus too much on short-term strategy.

“Insurers have operated in a sustained period of rate increase and, having overcorrected, they are now more willing to be competitive in terms of price on those clients who are well positioned geographically, with strong risk management ethos.

“For us, we always ensure that placement decisions are in line with clients’ long-term strategies.

“It should not just be simply about price. Critically, we work with our clients to understand what their holistic risk financing strategy should be. Our clients have never been more sophisticated in their approach to the various elements of risk transfer.

“That said, we always work with them to ensure the pricing on their programs is competitive relative to their peers.

“It is also worth remembering that the pricing now still sits above where the pricing was at the end of the last soft market, and that we should continue to expect rate reductions for the foreseeable future.”

Lloyd’s recently flagged concerns over underwriting discipline among its syndicates.

Chief underwriting officer Rachel Turk says the market is best described as “fragile”, with little consistency of views among managing agents around rating and adequacy.

Patrick Tiernan – the former chief of markets who became chief executive in June – told Lloyd’s members he “will continue to apply heightened scrutiny because sustained profitability through the cycle is the foundation that supports every ambition we have.

“We are currently using surgical tools, but if the market doesn’t self-diagnose, we will have to bring out the blunt instruments in short order. This will be a travesty given all you have achieved in the last five years.”

Mr Tiernan notes that moderating underwriting conditions “typically manifest as slides, not ladders, and it’s pretty tricky to course-correct when halfway down and picking up speed”.

Good Cover principal broker Matt Williamson, who advises clients across industries including hospitality and construction, says there are a lot of “undisciplined underwriters in the marketplace at the moment. All of a sudden, everyone decided, ‘Let’s go nuts,’ and they went nuts.”

Prices move up and down, he says, but “it shouldn’t fall off a cliff, and then once the claims come in it shoots back to these massive contractions in risk appetite. We want insurers to be here for a long time and we want them to be consistent with their appetite.”

He says “large discounts” are being offered in professional indemnity and property lines. High-quality assets are generally receiving “serious” rate reductions.

“Don’t get me wrong. We want the price to go down for clients, but you want it to be consistent and across the board,” Mr Williamson tells Insurance News.

“What we’re seeing now is a disjointed marketplace where consistency’s been thrown out of the door.

“Inevitably, that leads to a very soft market, then inevitably it turns into a hard market, and that’s when all of those businesses that are not within insurers’ core risk appetite, they will suffer greatly.”

“The potential for a large [cyber] claim out of a very small premium sits large in my mind.”
Steadfast’s Robert Kelly

Befor Insurance Solutions corporate and specialty manager Josh Ryan says financial lines products are recording the biggest reductions.

“We’re in a soft market for mostly non-asset-based products like professional indemnity, public liability,” he tells Insurance News.

“Professional indemnity is probably the biggest, followed by cyber, management insurance, public liability. I’ll be confident saying we are seeing at least a minimum of 10%.”

Steadfast’s Mr Kelly sees concerning trends in the cyber line, with underwriting agencies taking a “shortsighted” approach in the chase for business.

“There is lots and lots of competition coming into the cyber market … It’s sad how cyber is being treated like a commodity rather than a really difficult product that has to be risk managed before you do it,” he says.

Most of the capacity is coming from the London market, according to Mr Kelly.

“The potential for a large claim out of a very small premium sits large in my mind. Cyber pricing and capacity in Australia are almost getting to the stage where you get into an Uber car and the driver says, ‘Hey, have you got any cyber insurance, cos if you haven’t, I’ve got a Lloyd’s binder that is really cheap and I can sell you a policy.’ ”

Insurance Advisernet general manager of operations Andrew Borden says commercial prices have generally peaked. Competition from underwriting agencies has added to downward pressure on rates, he tells Insurance News.

“The worst is over,” he says. “That’s been particularly true in financial lines and [industrial special risk] and property. If you talk about big property accounts that are due in June, we are kind of expecting they will see 5%-10% less than last year.”

Mr Borden says insureds are in a “favourable” part of the cycle and “I don’t think it will change soon”. But there are exceptions.

“Anything that has had claims issues can be problematic. Certain higher-risk occupations still present limited appetite from underwriters and certain types of construction can also be harder to place.”

Rush hour is over

For a long time, June 30 was business clients’ preferred date for renewing their insurance policies. Not any more.

The shift started many years ago. While mid-year is still a busy period, brokers tell Insurance News the proportion of renewals taking place at other times of the year has increased markedly.

First Choice Risk Solutions general manager Andrew Hudson says when he started in the industry, about one-quarter of renewals came about June 30, to coincide with the end of the financial year.

The introduction of quarterly business activity statements in 2000 contributed to the shift away from June 30, he says.

“A lot of the reasons for June 30 renewals goes back to how accountants wanted it done. They used the accrual method rather than cash accounting,” Mr Hudson says.

“Now you’ve got quarterly BAS, it doesn’t really matter any more … there’s no real financial year, in a way.”

Mr Hudson says that since he started his brokerage nine years ago, he has talked to clients about moving to other renewal dates and explained the benefits.

“If you’ve got all your customers renewing on June 30, you can’t really do a good job.

“A flat workload rather than one peak is better for the underwriters, for the customers, and also better for us. It’s a win-win-win.”

For the client, he says it means “we can really spend more time with them and we can negotiate better and with more insurers. It doesn’t matter which brokerage you’re working for and how many staff it has.

“The caseload per broker and also per underwriter needs to be at a sustainable level where you can do a good job, otherwise things can get missed.”

He shares a recent experience of an insurer asking about his client’s fire mitigation measures, and how not sticking rigidly to a June 30 renewal date helped secure better policy terms.

“We had the time to say to the client, ‘If you want to get a quotation from this insurer, you have to arrange a fire protection company to bring their equipment and measure the flow rate of the hydrants.’ The client was able to do that and it generated some big premium savings.”

Good Cover founder Matt Williamson says there are benefits in switching to other renewal dates.

“Firstly, it takes you out of the busy period for insurers, so you’re more able to have a decent conversation with your clients and underwriters.

“And secondly, June 30 is a time to be thinking about assets, liabilities, tax deductions … you want to be talking to your accountant, not your broker.”

His clients have mostly taken up his suggestion to move away from June 30, and “it’s been fantastic”.

At Insurance Advisernet, June still brings more renewals than any other month. But the proportion of June 30 renewals has been falling steadily for years.

Its general manager of operations Andrew Borden tells Insurance News that “June 30 used to be very big for the industry. The fact it’s over-represented is a hangover from the past, but it’s nowhere near the same extent as it was.

“Larger corporates still favour a June 30 renewal date and, for our practices that deal predominantly with corporate clients, June remains a very busy month.

“For those that play in the small to mid-market space, it is far less of an issue.”

He says it is generally agreed that having renewals around mid-year is not ideal, because the underwriters are busiest then.

“It is difficult to get the attention of underwriters on new opportunities in June, due to the volume of renewals they are dealing with.

“Our advisers will actively encourage their clients to move away from June 30 primarily for that reason.”