Understanding hard markets, the causes and the knock-on effects

The global COVID-19 crisis and the knock-on effects have triggered ‘hard market’ conditions in the insurance sector. What does this all mean from an insurance and risk mitigation standpoint? Sujeeth Bishoon, Constantia P&C Chief Underwriting Officer takes us through the technical aspects of hard markets and the effects on the participants in the insurance space.

What is a hard market?

A hard market is typically characterised by an upswing in the market – when there is a high demand for insurance and a low supply of coverage available at decreased premiums. The opposite is true for a soft market – lower premiums occur and there is an increased willingness for insurance growth by multiple insurers.

The insurance market is cyclical in that it fluctuates between hard and soft markets. Certain segments, such as commercial and specialist insurance are currently experiencing a hard market. The personal lines market may be less exposed to a hard market, however there are many other dynamics in those markets currently, such as affordability, reduced motor accident exposures (due to COVID-19 related lockdowns) and a change in customer behaviours due to lower economic activity and growth.

The effects of COVID-19 on insurance markets

COVID-19 has had a significant impact on insurance markets and its effects have been a catalyst to the recent hard market conditions. Certain insurance sectors have seen spikes in claims, such as contingent business interruption, which has seen wide coverage in the press. Having said that, COVID-19 has also brought with it innovation opportunities. Opportunistic insurers have pivoted to take advantage of this and subsequently included customised cover in their offering. Incentives for less driving and limited mileage for vehicle insurance products are prime examples of this.

Some sectors have perhaps been under-priced for some time and reviews were overdue even prior to the COVID-19 crisis. The full extent of coverage for COVID-19 business interruption-related claims was not previously taken into account in terms of pricing, leaving many insurers liable for claims and potentially incurring losses. This has resulted in reinsurers taking steps to renew or endorse their treaties with insurers, with specific cover exclusion clauses. Because of this, many insurers are assessing their exposures and business interruption cover associated with infectious and contagious diseases.

Unrelated to COVID-19, competition from insurers, that are looking to maintain or gain a greater market share, can sometimes lead to soft markets. The opposite can happen when insurers exit markets. A hardening of the market can occur due to various reasons, including profitability, which could lead to premiums increasing to more reasonable risk-related levels.

The influence of global markets on local insurance markets

Catastrophic events like hurricanes and earthquakes in other countries may affect the South African insurance market due to the global exposures for reinsurers. A weak economic climate affects the investment and capital in insurance for growth.

The implications for reinsurers, insurers and intermediaries

Depending on the nature of forces that drive hard and soft markets, reinsurers may alter their terms and/or risk appetite. Sometimes the reinsurance market is the single cause for hard markets.

Insurers may apply stricter underwriting standards, reduced capacity and restricted coverage, which may result in higher premiums or decreased benefits for the same premium. Potential for increased churn within the market exists as customers become more price-sensitive (moving from one insurer to the next), or even exit the insurance market altogether, only to purchase insurance when they can afford it again.

Financially, intermediaries may struggle to grow new business and maintain existing client bases. Due to reduced income, these businesses and brokerages may rationalise expenses and consider merger opportunities with other intermediaries, to ensure sufficient scale, reduced costs and efficiencies are achieved.

The need for greater co-creation

A greater emphasis on co-creation is needed if we want to unlock shared value for all role players in the insurance space. In an ever-changing world characterised by increased fragmentation of risk, insurers and their partners need to collaborate and engage each other more than ever to develop innovative insurance solutions, and achieve more sustainable insurance market prices, even during tough times.

At Constantia, we are driven by our purpose to enable our partners’ success, we have made co-creation central to the way we work. We firmly believe that through co-creation, and by building authentic relationships with our partners, together we can unlock shared value which ultimately helps ensure sustainable growth.

The value of providing good advice

No one could have predicted the arrival and impact of COVID-19. In addition to the devastating loss of literally millions of lives, the pandemic has forced substantial change into both personal and professional life.

Businesses across the world have been forced to shut down and people who have been fortunate to have held onto their jobs, are mostly working remotely. Due to reduced income from salary cuts and/or decreased working hours, many people have been forced to sell their homes, move in with family and even going so far as to cash-in their investments just to get by.

Such changes also have a material impact on policyholders’ risk profiles and whether their current insurance cover is still appropriate or not. For instance, people who have been working from home, need to keep in mind that the address of where their vehicle is parked during the day needs to be updated with their insurer, if previously noted as the address of their employer. A sales rep who previously spent substantial time on the road, but changed their vehicle cover to personal use during the hard lockdown, should revert to their original cover when going back to work.

This is also an ideal time for brokers to proactively engage their clients and assist them to navigate these complexities by reviewing their risk profile, which will ultimately give their policyholders the peace of mind that they are adequately covered by suitable insurance solutions.

A good broker understands that their value extends beyond the sales transaction and claims administration, to regular engagement, ongoing assessments of their client’s risk profile and risk mitigating advice. It is in this area that direct insurers simply cannot compete.

With many consumers financially crippled by the pandemic and forced to draw on their investments, financial advisors should also take a proactive approach and help ease the anxiety of their clients, by scheduling time with them to review their portfolios and to answer their questions.

Ultimately, engagement and collaboration help build and establish trust, an essential ingredient to any lasting relationship. Furthermore, during these unprecedented times that have taken such an emotional toll on many, engagements with clients should be infused with a healthy dose of empathy and kindness.

Equally, insurance companies have both a responsibility and an opportunity to closely collaborate and engage with their broker partners. Following the pandemic, all organisations will be thinking differently about their businesses. As the broker has direct engagement with clients, insurers should be listening to the learnings and insights from their broker partners as part of shaping future insurance solutions. Close collaboration will also ensure that brokers are always positioned to provide the right advice to mitigate the risks of their clients.

Unfortunately, insurance is often seen as a grudge purchase, and the negative sentiment surrounding the contingent business interruption saga, has exacerbated this and severely impacted the reputation of our industry. Considering the vital role that insurance plays in enabling our economy, perhaps we as an industry should be doing a better job at emphasising the real value that we add to people’s lives?

There is no better time to demonstrate this than now. At Constantia, we believe that through co-creation, and by building authentic relationships with our partners, together we can unlock shared value to ensure sustainable growth and provide sound advice to our clients.

Keeping employees engaged

The Covid-19 pandemic and resultant lockdown restrictions continue to have a significant impact on the working environment. Enabling employees with the right hardware, software and tools to work from home is important, but ensuring that one’s employees remain engaged is critical.

Employee engagement is defined as the emotional commitment that an employee has towards their employer, their colleagues, the company’s vision and goals. Employee engagement, well-being and effectiveness are driven by numerous experience factors such as organisational stability, trust in leadership, compensation and benefits, and recognition, to name but a few.

Whilst employee engagement should always be important, the pandemic has put the spotlight on the importance of this dimension, so challenging the leadership and management skills within companies, more so than at any time in recent memory.

According to Heidi Dias, Executive Distribution & Marketing, implementing the following principles will go a long way towards ensuring that employees remain engaged:

  • Compassionate leadership and supportive management – it’s important to demonstrate awareness and empathy to the psychological, health, and financial impact of the pandemic, all of which are far reaching, by remaining accessible to your teams.
  • Communication & dialogue – with staff working from home, staying “in touch” via daily team meetings and/or one-on-one check-ins are important, to manage team performance, facilitate dialogue with employees and enable regular feedback.
  • Sharing of information – frequent and transparent sharing of information from leadership to the coalface, ensures that employees are kept up-to-date because they are reliant on the leaders to take crucial decisions that could have an impact on the organisation and, most importantly, their jobs.
  • Maintain a positive work environment – remote working has caused a blurring of lines between work and home life. It is important to encourage employees to maintain a healthy work/life balance. Ensuring the correct eating habits and partaking in regular exercise can be incredibly beneficial to manage stress and maintain balance. Furthermore, both the leadership and management team should show flexibility and be in-tune with the factors that impact employees outside of the workplace.