Whether it be business insurance, your home and contents, or car insurance, there is currently significant upward pressure on insurance premiums. In some cases, premium hikes are also accompanied by restrictions on coverage features. In the insurance industry, this is known as a ‘hardening insurance market’.

A hardening insurance market can be attributed to several factors. Below, we seek to help you understand:

• The hardening insurance market
• Why insurance premium rates are rising
• What a hardening insurance market means for you
• How an insurance broker can help you achieve the best value from your insurance program

What is a hard insurance market?

Insurance markets are cyclical based on a number of factors that either push insurance premiums upwards, or downwards. The terms used to define these two different market conditions are a ‘hard insurance market’ or a ‘soft insurance market’.

Soft insurance market – A soft insurance market cycle has lower insurance premiums, higher coverage limits available, more flexible policy conditions, and greater availability of coverage.

Hard insurance market – In the insurance industry, a hard market is the upswing in a market cycle, where premiums increase and capacity for most types of insurance decreases. In general, a hard insurance market is characterised by:

• Decreased available cover limits (e.g. Sums Insured)
• Limited cover availability
• Restrictions in insurer risk appetite
• Tightening policy conditions

A hard market can be caused by several factors, including falling investment returns for insurers, increases in frequency or severity of claims, and regulatory intervention against the interests of insurers.

At present, it is evident that most lines of insurance in Australia, and in fact worldwide, are experiencing a hard insurance market.

Figure 1. below helps to illustrate the insurance market cycle in visual terms (Source: Berkley Insurance Australia)

Why are insurance premiums increasing?

At present, insurers are facing pressures from all directions which has impacted pricing and led to hard insurance market conditions. Driving factors behind current hard market conditions are outlined below:

Interest rates

The present low interest rate environment means that insurers can no longer rely on their investment returns to bolster unprofitable results. In response, insurers focus on underwriting profitability by raising premiums, tightening underwriting guidelines and being more selective about risks they choose to insure. If insurers don’t act prudently, it can affect profitability, financial viability, and their ability to pay claims. 

Claims

1. 1. The increasing cost of insurance claims
      In general, the cost of insurance claims are increasing because of social inflation. This is the societal trend towards increased litigation, broader contract terms, plaintiff-friendly legal decisions, and larger jury awards. An example of this is the increased number of Class Actions in recent years e.g. Commonwealth Bank, Takata airbags, Volkswagen.
   2. Increase in catastrophes / no. of insurance claims
      Additional to the rising cost of insurance claims, the frequency of insurance claims is on the rise, most notably due to an increase in the number of natural catastrophes. In 2020 an unprecedented number of catastrophes were declared by the Insurance Council of Australia. From the horrific bushfires of 2019/20, severe hailstorms to flooding, the number of insurance claims lodged has continued its upward spiral. Sadly, serious NSW floods in March 2021 have seen this trend continue, putting further pressure on insurer profitability and the need to increase premiums due to the number of claims payouts.

Insurers must take action to survive

In hard market conditions, the only way insurance companies can remain profitable, financially viable and continue to provide insurance cover and claims payments to the market is by:

• increasing premiums and excesses
• restricting coverage availability
• reducing level of insurance policy limits available e.g. sum insured
• tightening policy conditions e.g. extensive risk management measures may need to be in place before an insurer will offer coverage

How does a hardening insurance market translate when it comes to your insurance policy?

In general, hard insurance market conditions may see you experience the following across several policy classes:

• An increase in premium rates simply due to insurance market conditions, or your own claims history
• Your insurance excesses (deductibles) may increase
• You may not be offered coverage at renewal because an insurer can no longer provide it within their risk appetite
• You may be offered reduced coverage at renewal e.g. lower policy limits available, some coverage features may no longer be available e.g. aluminum cladding exclusion and PI Insurance
• You may encounter strict policy conditions and need to implement additional risk management measures before an insurer will agree to cover you

Other reasons insurance premiums may increase

Claims history

• If you have experienced one or more claims in the last five years, particularly if you were deemed at fault, insurers may perceive you as a greater risk to insure, and will increase your insurance premium at renewal accordingly.

Increase in sum insured e.g. purchase of new assets

• Policy holders who wish to increase their sum insured, e.g. to include a new asset, new business machinery or account for an increased property value following a renovation, will be subject to increased premiums due to an increase in the value of the insured items. This is because in a total loss, the replacement cost / cost of the claim incurred to the insurer would be higher.

Change in address

• Your premium may increase when you change address because the new location may have different risk exposures e.g. increased crime rates, it may be located in a flood plain, or have a greater bushfire risk.

Change in business activity e.g. higher risk

• Businesses which change or expand to include a new business activity on their insurance schedule, which is deemed a higher risk by the insurer can be subject to premium increases.
• It is essential that you inform the relevant insurer(s) of any changes to ensure you do not experience coverage issues in a claim.
• Duty of Disclosure: Under the Insurance Contracts Act 1984, it is your duty to disclose to your insurer anything that you know, or could reasonably be expected to know is relevant to an insurer’s decision on whether to accept the risk of insurance, and on what terms.

Change in tenants’ business activities

• Even though you’re not involved in your tenants’ business(es), the commercial activities they undertake has an impact your property insurance. As above, if your tenant changes their business activities, or you have a new tenant with different business activities to that recorded in your commercial property insurance schedule, it can lead to an increase in insurance premium applied.
• Again, under the Insurance Contracts Act 1984, it is your duty ensure tenant business activities are disclosed and listed correctly on your policy, to avoid coverage issues in an insurance claim.

How can an insurance broker help combat these premium increases?

Professional advice & specialist knowledge

An insurance broker provides professional advice on the most suitable, and best available cover to protect your business and / or assets. They assess your risks, advise you on essential covers, and also how you can structure coverage in the most cost effective way. For example, adjustment of coverage limits, excesses, cover exclusions.

Exclusive insurance markets and products

CBN Authorised Brokers have access to broker-only insurance markets with exclusive insurance policy wordings and premium rates. For you, this can mean more cost-effective premiums and policy coverage inclusions than is available to the general public, delivering better value when it comes to your insurance coverage.

As Australia’s largest insurance authorised broker network, and a member of the Steadfast group, CBN are able to negotiate and achieve these benefits for clients through economies of scale.

Claims – we advocate for you to achieve the best possible settlement

In an insurance claim CBN Authorised Brokers advocate for you. Brokers work hard to resolve your claim efficiently, communicating with you at each key stage. The technical knowledge of an insurance broker and strong insurer relationships can make all the difference when negotiating to achieve the best possible claim outcome.

Payment options

CBN Brokers can offer clients premium funding facilities. Premium funding can be utilised to pay your insurance premiums monthly, spreading the cost over 10 monthly payments. This can ease the financial strain of a lump sum payment, freeing up cashflow in your business for more immediate needs.

To achieve the best possible value from your insurance coverage, with quality professional advice, connect with a CBN Authorised Broker.

Connect with a CBN Broker

Resources:

• What is a hard insurance market?
• Why is the insurance market hardening?
• Why do my insurance premiums keep rising?
• Why are my premiums so high?
• How to cut your insurance premiums and still get sufficient coverage
• What COVID-19 means for Australian insurance and your future premiums
• Factors influencing your insurance premiums 
• Insuring your home may get harder and more expensive as climate change increases risks

This article provides information rather than financial product or other advice. The content of this article, including any information contained in it, has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the information, taking these matters into account, before you act on any information. In particular, you should review the product disclosure statement for any product that the information relates to it before acquiring the product.  

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