The cost of insurance is always fluctuating, much to the frustration of consumers. In recent years, we've witnessed a series of natural disaster losses, low investment returns, low-interest rates and of course the COVID-19 pandemic, all contributing to economic uncertainty.
Insurance moves in cycles, between what is referred to as a ‘soft market’, which means there is an influx of capital, allowing a large number of insurers to provide underwriting capacity, then moving into a ‘hard market’. This in basic terms, is where insurers are paying out on a large amount of claims, but with less money coming in. We are now encountering an unavoidable hardening of the insurance market.
The worst impact seems to be upon financial lines insurances such as directors’ and officers’ liability and professional indemnity insurances. These are both key insurances for many recruiters, especially in an increasingly litigious society.
What are the contributing factors to a hardening insurance market?
It would be easy to simply blame COVID-19 and its impact on the economy, but it is more of a compounding effect of a number of major issues, which have created something of a perfect storm.
- European Union Legislation, Solvency II, from 2016, required insurers to double their solvency margin by 2021,1 which has led to insurers either reducing their capacity or increasing their premium, or in some cases, both.
- Floods and natural disasters, like forest fires, have cost insurers billions of pounds in claims payments. Property insurances were particularly affected.
- Reinsurance costs as a result of point 2 have rocketed, as many of the reinsurance companies are based in London, and are increasing costs to insurers. This cost is simply passed on to the consumer.
- Personal injury settlements are increasing due to a revision of the Ogden Rates,2 which govern payments to people with long-term injuries following an accident (usually claims through employers' liability and motor injury claims).
- HMRC will be doubling their efforts to investigate tax fraud, and improper use of the furlough scheme and loans scheme during the pandemic.3 This will affect advisors like accountants, and their professional indemnity insurances will be challenged by clients. Directors and senior officials within businesses will also be under the spotlight,4 and directors’ and officers’ liability premiums have rocketed as a result of the pending investigations.
- The insurance industry is also braced for an increase in employment disputes as the furlough scheme ends and redundancies are likely to increase substantially, leading to more claims under employment practice liabilities, and commercial legal expenses policies.
- COVID-19 claims for event cancellation has also cost insurers billions, together with the growing number of successful business interruption claims. Insurers are having to set aside far more from reserves following the legal judgement regarding the insurer’s policy wordings on business interruption claims.
It is evident that the impact of this combination of events, has brought about the onset of a hardening market, and one that is likely to continue for some time yet.
How can recruiters protect themselves from rising insurance costs?
Whilst a certain degree of cost increases may seem inevitable in the current market, it has never been more essential to engage with a specialist insurance advisor to review your covers, and seek advice on the availability of quality comprehensive cover at reasonable costs. By reviewing your recruitment insurance arrangements you can ensure you are dealing with a professional that understands your unique risks, and who can best present your risk and negotiate with insurers during these difficult times.
1. https://www.pinsentmasons.com/out-law/guides/solvency-ii-the-eu-regulatory-regime-for-insurers#:~:text=The EU's Solvency II Directive,reinsurance directive and various others.