Welcome to FINEX GB’s Insurance Industry Market Update. In this issue, we explore the current state of the UK insurance market for financial lines insurance and discuss some of the emerging issues that insurance company clients are likely to be managing in both the life insurance and general insurance sectors.
Looking beyond the impact of COVID-19, insurance company clients are as ever being challenged by numerous emerging issues. Noteworthy themes addressed within this edition include digital transformation and associated cyber security, financial crime risk, as well as Environmental, Social and Governance (ESG), culture, accountability and change.
We discuss this theme of change and identify the potential risk implications for our clients in the industry and, in turn, the implications for their financial lines insurance policies.
Should you have any questions or wish to discuss any matters raised here, please engage with me or a member of your Willis Towers Watson FINEX team.
Premium rates: As expected, premiums have continued their upward trend across the board with more double-digit increases seen across renewals in 2021, driven particularly by the on-going uncertainty that the disruption caused by COVID-19 will impact the loss experience of both life insurers and general insurers.
This rising rate trend has been most evident in the professional indemnity (PI) and directors’ and officers’ (D&O) liability classes where primary rate increases of 25 - 35% are common and competitive excess layers are being met with even more aggressive rate rise demands from financial lines insurers who have reigned in their underwriting capital and managed down their overall aggregate exposures to any one client or industry.
Retentions: In addition to rising rates, financial lines insurers are seeking to increase self-insured retentions by incentivising Insureds, through lower premium increases, to opt to retain more primary risk.
Since the depth of the financial lines insurance capacity crunch in the summer 2020, there has been a modest improvement in underwriting capacity supply during 2021.
Aviva Insurance Limited London, HDI Global Specialty SE, Convex Insurance UK Limited, Ki Syndicate 1618, Mosaic Insurance Company, Arcadian Risk Capital and Faraday Underwriting Limited are all recent entrants to the market, looking to take advantage of rising rates, but typically only prepared to risk their capital on an excess basis. These new entrants have provided some welcome new capacity, but are yet to compete aggressively for business and therefore yet to close the overall insurance capital shortfall in the financial lines market.
As a general comment, there are signs that the worst of the market conditions and correction are behind us and that a more stable outlook is expected. Whilst this does not mean falling premium rates, the major portfolio adjustments that financial lines insurers have undertaken have been completed.
Although conditions in the financial lines insurance market appear to be stabilising, we are still in a hard point in its cycle and we expect this to remain for the rest of the year. Thorough engagement between client and underwriter is therefore critical. Financial lines insurance renewals will still be challenging, so begin the process early and allow for early engagement with key stakeholders. This approach will allow time to gather renewal information and space to negotiate with the market effectively.
Early planning should not just focus on data gathering and quoting, but also on undertaking a thorough review of coverage, the policy limits required, ensuring that your financial lines insurance purchase remains aligned to your evolving risk profile.
The UK general insurance market finds itself challenged by the recent UK Supreme Court ruling2 paving the way for UK small businesses to seek insurance pay-outs caused by COVID-19 lockdowns. As a result, it is estimated that 370,000 policyholders may claim a total of £1.2 billion ($1.6 billion) in claims.
Concern:If similar rulings are mirrored in other jurisdictions, the sector will experience far higher losses than originally anticipated. Financial lines insurers are therefore acutely aware that despite a rising insurance rate environment they and their general insurance company clients are not out of the woods yet, and this uncertainty is driving a conservative, information hungry, underwriting process.
Suggestion:Begin the renewal process well in advance of the renewal date, approximately 4-6 months in advance (depending on scale of programmes), is highly recommended. For larger firms, conducting underwriter meetings is advisable. We suggest that you seek to engage senior leaders within your business to speak directly to insurer’s concerns in order to mitigate the ‘hard market’s’ impact on renewal terms.
Being able to demonstrate outstanding performance in risk management will allow financial lines insurers to effectively differentiate your business.
After a slow start, the digital transformation of the insurance industry is now travelling at pace. Whether it is focused on enhancing the front-end customer experience or streamlining the back-office processes and procedures, technology is here to stay.
Concern:With change comes disruption and the potential from non-traditional actors, such as technology firms, to enter the market, and outcompete established firms remains. Traditional insurers are forced to adapt quickly but face a competitive disadvantage through significant regulatory cost burdens and the need to invest heavily to modernise legacy systems, whilst implementing cost cutting programmes. With such change comes risk.
Suggestions:The digital transformation of all sectors of the insurance industry has also opened a new window of opportunity to fraudsters. Modern fraud often turns adopted, new and evolving technology against businesses, and with the focus on cyber security from regulators, business counterparties and investors, the stakes have never been higher.
Concern:Further cybersecurity scrutiny by the Financial Conduct Authority (FCA) is expected to increase going forward, particularly in light of perceived heightened exposure arising from the COVID-19 pandemic and the resulting changed pattern of remote working placing further demands on network security.
Insurers are also assessing their exposure to cyber and “silent cyber” under traditional insurance policies going forward, with a view to ringfencing their aggregate exposures.
Suggestions:The insurance industry has been the target of social engineering attacks and other increasingly sophisticated methods of fraud.
ConcernFinancial crime has been and will continue to be a prominent risk for insurance industry firms as they manage and transfer significant sums of money. Some of the biggest threats remain sophisticated social engineering schemes including phishing, vishing, malware that dupes victims into providing confidential information or allowing access to funds. Modern technology allows for transaction at a distance, but that same distance allows fraudsters the space and anonymity to evolve and implement ever sophisticated schemes.
Suggestions:The Paris Agreement commitments made by member countries of the United Nations Framework Convention on Climate Change is leading to pressure on the insurance industry to curb the underwriting for fossil fuel projects.
Concern:Although ESG is an evolving area of risk, the pressures on this area from governments, regulators, shareholders and customers for greater transparency and enhanced fiduciary duty, has led to initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD)3, to seek to develop standardised climate-related disclosures to inform (amongst other considerations), insurance underwriting decisions on climate-related risks.
TCFD’s goals look to span investment, credit and other key financial decisions in categorising a financial institution’s climate risks. Complexity of due diligence for ESG related activities and reporting could result in increased regulatory investigations.
Suggestion:As increasing ESG transparency and reporting gain momentum it is important to monitor any corresponding impact on your financial investments and liabilities and consider how that translates to liabilities which are insured under financial lines policies, ensuring that coverage continues to respond appropriately.
The regulatory environment globally has given rise to multiple accountability regimes, including the Senior Managers & Certification Regime (SM&CR) in the UK, all set against a changing risk landscape of pandemics, floods, wild-fires, industry mergers & consolidation and the formation of new capital attracted by rising rates. Senior managers seeking to prudently steer their firms through such choppy waters have never been more accountable or felt more exposed.
Concern:Increased regulatory requirements and the potential for follow-on civil litigation, creates a heightened exposure.
Suggestion:Investigations coverage, definition of “insured person”, consideration of a WTW Legal Expenses Additional Protection (LEAP) policy4 (available for UK entities only) and overseas local insurance requirements should be reviewed accordingly.
1 https://www.lloyds.com/~/media/files/the-market/communications/market-bulletins/2019/07/y5258.pdf
2 https://www.fca.org.uk/news/press-releases/supreme-court-judgment-business-interruption-insurance-test-case
3 https://www.gov.uk/government/publications/uk-joint-regulator-and-government-tcfd-taskforce-interim-report-and-roadmap
4 https://www.willistowerswatson.com/en-GB/Solutions/products/legal-expenses-additional-protection
