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.