Businesses need to fight smarter for good insurance policies

Now, with a looming recession, explosion in malicious cyber activity and prolonged political and financial market instability, there is little cause to be optimistic.

It means the insurance market is going through the longest ‘hard’ phase in history, with prices spiking, cover being withdrawn and dispute rates soaring.

While some reporting around the issue has predicted a softening of market conditions, the seriousness of risk is being immensely underestimated and it is likely that buying insurance is going to remain challenging for a lot longer than anticipated.

These problems were explored in detail in the World Economic Forum’s latest 2023 Global Risks Report, which notes that everyone is being hit by the problems facing the global economy, meaning risks are on the rise and rewards are becoming harder to secure.

The insurance market is broken, and the old-fashioned way of buying insurance will not get businesses the outcome they need in this environment.

According to our analysis of data from the world’s largest broker, Marsh, since 2018 premium rates for commercial insurance have risen inexorably to reach a 100 per cent cumulative increase by Q3 2022.

This masks a far worse picture for some classes, such as cyber insurance or financial lines overall, which have risen by more than 250 per cent over the same period.

As a result, businesses should be well braced to tackle a challenging market and know what to expect.

This includes continued, albeit slower, increases in insurance rates. While serious increases have already occurred, businesses can expect a slowdown in increases in some areas such as D&O or PI which were severely hit early in the hard market but also a worsening claims environment.

Policy quality

Just as insurance rates will continue to increase, businesses should be aware of a sustained and serious erosion of policy quality.

In any hard market, insurers often look to subtly alter the policies they write in order to withdraw swathes of cover and mitigate their exposure to an increase in claims costs. We have seen this extensively throughout this hard market, including the very public and ongoing conflict around Covid business interruption policies.

It is also the case that definitions in policy wordings are narrowed and exclusions broadened while the legal terms governing how policies operate get tighter and more difficult to negotiate.

Given the reduction in cover and spiking of insurance rates, it should come as no surprise that we have also seen a major increase in claims disputes.

There have been several high-profile cases where knee-jerk reactions to amend policy wordings and exclusions have worked against policyholders.

We only need to look at the infectious disease exclusions post-Covid, ransomware co-insurance clauses following the cyber claim uptick, sanctions clauses post-Ukraine, cladding exclusions after Grenfell and D&O insolvency exclusions.

Therefore, for businesses reviewing their policies, the devil remains in the detail and policyholders need to look closely at their policies and identify the material areas where cover has been removed or reduced.

Buying insurance in a hard market is also selling risk.

Extra attention needs to be paid to changes to sub limits, definitions of insured events or insured people/entities, pre-conditions of cover and how policy extensions and exclusions are framed. Some such changes are harder to spot than others.

When it is time to start the renewal process, businesses should start around six months before the renewal date, meet a wide range of insurers and explore the potential market for their risks more vigorously. Buying insurance in a hard market is also selling risk.

Claim disputes

Given the reduction in cover and spiking of insurance rates, it should come as no surprise that we have also seen a major increase in claims disputes.

The Mactavish claim litigation index showed that in 2022 there was a threefold increase in the rate of court disputes where policyholders have to sue their insurers to get claims paid.

And that is just the tip of the iceberg. Only a small proportion of claims end up in court at all; far more are being repudiated, settled unfavourably or negotiated more aggressively.

If businesses do suffer a major claim in this environment, it is vital to tread carefully to avoid a policy breach and to present and negotiate your claim optimally from day one.

Extra attention needs to be paid to changes.

At the most basic level, businesses cannot expect to be protected against any risk if they do not know and explain the extent of their risk exposures.

They need to conduct detailed analysis of their risk exposures, respond to insurer requests with as much information as possible, detailing risk management procedures and providing supporting documentation to evidence their processes.

If businesses get the above right, they are in a prime position to be able to defend any claim they do need to make, but also to immediately start driving competition for their risk by building insurer dialogue early and negotiating policy details.

They should consider alternative forms of tender, such as engaging with more than one broker but encouraging them to provide a market-backed solution with firm wording commitments as part of their bid.

If businesses get the above right, they are in a prime position to be able to defend any claim they do need to make.

This will give businesses a much broader and clearer view of the marketplace and the perception of their risk, while enabling them to manage the conflicts of interest and opaque commission arrangements, which remain rife in the insurance market.

The insurance market is broken, and the old-fashioned way of buying insurance will not get businesses the outcome they need in this environment. Just as insurers are prepared to reduce cover and increase premiums in order to preserve their capital, businesses need to be willing to fight smart to do the same.

They should not find out the full force of the hard market the hard way but instead differentiate their risk through early risk marketing, quality disclosure, scrutinising policy wordings and driving competition throughout the renewal process.

Bruce Hepburn is chief executive and founder of Mactavish