‘The slide can’t continue’

Aon’s commercial risk experts talk trends, technology and why the soft market won’t last

By John Deex

There’s no doubt about it, buyers of commercial insurance are in a much better place right now.

Aon says clients are paying twice what they paid in 2019 after a sustained hard market, but soft conditions set in last year and its latest Global Insurance Market Overview has prices in the Pacific region dropping between 11% and 20% in the third quarter, with capacity abundant.

“The trend for reductions has broadened and pricing competition has accelerated for the most sought-after risks,” the report says.

Double-digit rate reductions are common in property risks in key markets, including Australia. Cyber remains soft, and directors and officers “highly competitive”.

But the broker’s global CEO of commercial risk Joe Peiser, who visited Australia from London in October, doubts these buyer-friendly conditions will last long. He says the property market will probably soften throughout next year before flattening.

“We are advising our clients that this is a correction of the market, as opposed to a long, sustained soft market,” he tells Insurance News.

“The fundamentals of the business haven’t changed. Loss activity has not dwindled.

“And I think there’s greater capital management and capital discipline today than any time in the 40 years I’ve been in the business. It’s not going to continue to slide down.”

Aon’s market overview says, for now, most major lines in Australia remain soft.

Insurer growth ambitions and recent strong performance, together with a period of benign natural catastrophe losses, continue to drive competitive conditions for buyers.

Singapore-based Asia-Pacific head of commercial risk Terence Williams says Australia is often “at the forefront” of market shifts.

“It sees the hard market first, it sees the soft market first. A lot’s happened in the past 12 or 18 months. It’s been very acute, but we are seeing things slow down.”

Mr Peiser says local clients and brokers are “quite traditional” in the way they buy insurance, and this can result in steep peaks and troughs.

But increasingly, clients are considering alternative risk transfer mechanisms such as captives or parametrics as they seek longer-term stability.

Managing risks

In October, Aon released results from its biennial Global Risk Management Survey. Cyber topped the risk list – no surprises there – but geopolitical uncertainty caught the eye, soaring 30 places to ninth slot.

According to the report, the top 10 current risks are cyber, business interruption, economic slowdown, regulatory change, increasing competition, commodity price risk, supply chain failure, damage to reputation or brand, geopolitical uncertainty, and cash flow and liquidity risk.

“Supply chains are impacted by geopolitical events and our clients want to know, what are the exposures?” Mr Peiser says. “How are their supply chains exposed, not just at a first or second level, but down three, four levels, and what can they do about it?”

Aon believes the continued dominance of cyber is well justified. Attacks are increasing “exponentially”, and while they don’t always result in significant losses, the threat is always there.

Mr Williams highlights this year’s Jaguar Land Rover breach in the UK – which forced the government to step in with a £1.5 billion loan to support suppliers – as something that could easily happen here.

“[Cyber risk] is everywhere. It is prevalent. The losses continue to mount up, and businesses continue to face challenges.”

Climate change sits ninth in the list of future risks, but it doesn’t make the top 10 current risks. However, Mr Peiser does not think that’s a sign of complacency, with business at Aon’s climate consulting practice up 25% this year.

He says climate has become “political” and that some in the US believe it is “yesterday’s issue”.

“But that’s in politics, right? Not in business. Businesspeople are still concerned about climate.”

Mr Williams believes it is a mistake to look at each risk on its own, because it is how they connect that is crucial.

The report explains how technology risks affect workforce dynamics, geopolitical instability impacts supply chains and influences the regulatory landscape, and climate change “intensifies all of these and more”.

“When you start thinking about issues on a connected or interconnected basis, you quickly realise how exponential they become,” Mr Williams says.

Does Aon expect more government intervention to help insure troublesome risks such as flood or cyber?

Not necessarily. With flood, Mr Peiser says better modelling is enabling commercial insurers to take on more risk, not less.

“The reason there’s been government intervention has primarily been because we’ve been unable to model flood as an industry very well.

“That’s changing quite a bit over the past five or 10 years. We now have better modelling for flood, and I think you’re going to see more private market flood rather than relying on government.”

Tech modernisation

Rapidly evolving technology has the potential to reshape the industry, and Aon is driving change, launching a tech modernisation program two years ago and developing broker “analyser” tools that advise clients on exposures.

There are analysers available in the US for property, D&O, cyber and casualty. The property and cyber tools are available in other markets, including Australia.

The analysers advise clients on exposures, loss experience, the quantum of loss faced, and how that changes under stress testing.

“They have been received extremely well by our clients, and we’re very bullish about them,” Mr Peiser says.

Next up is a series of diagnostic tools for each major product line, to examine underlying causes of loss.

“The analysers give you an idea of what your exposure to loss is. That gives you a curve, and the diagnostics are designed around, how do we bring that curve down and really impact the client’s total cost of risk?”

Finally, Aon is also building a global digital placement platform that will connect its brokers with the marketplace “and capture every quote, every product line in every geography, for every industry and every segment size”.

It was launched in Chicago in June and will be expanded to other US cities, then beyond.

“We have a three-year plan to roll this out around the world,” Mr Peiser says. “So it will come to Australia. In its fullest form, it will enable us to tell clients how the worldwide market is pricing risk in real time.

“It’ll be tied to exposures, to losses, to program structure, to industry. We think it’s the most important thing that Aon is working on.”

The platform will enable Aon to “make smarter decisions” with clients about where to place their business. But it will also help uncover where there are  dislocations in the market, and therefore opportunities for insurers.

Aon acknowledges concerns around artificial intelligence and the impact it might have on staff and training, but believes technology overall will bring positives.

Mr Peiser says figuring out how to train new people in a changed landscape is a priority.

But he adds the “dirty little secret” is that a lot of the work that will be done by technology isn’t getting done at the moment, because there is too much of it. He believes technology will help companies make better underwriting decisions, and reduce mistakes.

“When you look at technological advances over the history of humanity, since the Industrial Revolution, every one of them has resulted in greater wealth and greater employment. Why would this one be the first one that drives down employment?”

Mr Williams believes the industry is “a long way behind the curve” in terms of technology, and AI provides the best opportunity to catch up.

He also wants to use technology to address low levels of insurance penetration.

Attracting talent

The insurance industry is struggling to attract enough new talent to replace a generation of experienced professionals who are about to retire.

But while Mr Williams accepts bringing in new blood remains a challenge, he believes it falls on industry participants to drive recruitment.

He says recruitment slowed during the covid pandemic but “the future is looking very good” as Aon rolls out programs around the world to bring in graduates.

The industry still suffers reputational issues, but Mr Peiser says companies such as Aon are a good choice for younger people looking for meaningful careers.

“That cohort, they are often looking for corporations and industries that are considered favourable, from an environmental standpoint and so on, and insurance actually ticks good boxes when it comes to that. So I think that’s helped us with recruiting.

“But it is true that, with the exception of Bermuda and maybe parts of London, insurance has a pretty bad reputation among young people who don’t have family in the business, because all they hear about are health insurance, personal lines, and they are viewed very negatively. Once they get in, they love it, right? It’s a hidden jewel.”