With uncertainty still the word of the day for the travel, leisure and hospitality sectors, we are truly loathe to add to the list of concerns that are already piling up on your desk. Yet, our latest market update simply cannot be ignored. As a statutory and practical necessity, whatever is happening in the outside world, insurance still has to be bought and managed.
Trends in the insurance market:
Insurance rates have been extremely low since the financial crisis of 2007/8. The market has been highly competitive, with plenty of capacity and considerable underwriter appetite for new risks. All of that has changed over the course of the last two years, with rates spiking across the board and wholesale withdrawal from unfavoured sectors and classes of cover.
The most recent comprehensive UK quarterly survey showed a 35% rise in rates across all lines, marking the fourteenth consecutive quarter of increases. While this is bad news in itself, it also masks a much more worrying picture. Some complex classes, such as Directors and Officers, Business Interruption and Cyber have risen by averages as high as 93%.
The headlines also mask considerable differences between sectors. While uncertainty has affected businesses of all types, few have had to navigate as much as the leisure, hospitality and travel industries. This uncertainty creates a complex risk environment that is unattractive to an industry built on predictability and probability.
Traditionally, insurance has been a notoriously cyclical business. With periods of low rates (a ‘soft’ market) offset, by drastic upwards swings in price (a ‘hard’ market). However, there are good reasons to believe that rates will not simply drop back to recent norms in the years ahead:
- The soft market prior to this recent rise was of unprecedented duration. Soft markets usually see looser underwriting standards as insurers compete for more business, over time, these lead to increased losses and hence, rising prices. Rather like a volcano that has not erupted for a very long time, the sheer accumulation of losses brewing over the last decade and a half may well lead to a more powerful eruption. Insurers are preparing for this by taking a harsher approach to underwriting.
- Insurers traditionally make money in two ways: firstly, they seek to charge more in premiums than they pay out in claims (underwriting profit), secondly, they invest premium income they receive (investment profit). Interest rates have been at historic lows for a very long period of time, this means that insurers have received diminished investment returns, putting strain on their business model.
- During times of economic uncertainty and dislocation, insurance claims often increase. Acts such as arson, fraud, or simply business failure all create additional losses for the industry in addition to the myriad ways in which continued focus on efficiency can work to reduce the inbuilt business resilience that mitigates many insurance risks.
- The pandemic did also cause some direct losses to the industry, with global estimates ranging widely between $40bn and $200bn.
- Finally, there is a growing realisation that some of the newer forms of insurance, most especially cyber, carry potential losses that are not at all well understood.
Taken together, all of these factors create an extremely difficult and volatile market environment that will not quickly disappear in the months ahead. The conclusion is clear, companies will need to develop new approaches to insurance procurement that go beyond what has been required in recent years.
The changing shape of risk:
Those in the leisure, travel and hospitality industries were already well versed in managing infectious disease risks. However, the insurance industry is less concerned about losses stemming directly from Covid-19 and more on the choices we make in reaction to the pandemic. This is because loss events triggered by Covid-19 itself are unlikely to be covered at all as wordings have been altered to remove any risk of leaving insurers on the hook (and in the process, they have often also removed vast swathes of unrelated cover for localised infectious disease or illness). Instead, it is the way in which a business’ management reacts to the changing rules and regulations that may cause increased claims for losses that are covered.
With ever changing rules and regulations, business leaders are forced to make significant decisions at speed. In this context the odds of a miscalculation are considerable. By way of example, a hotelier that fails to adapt its operations in line with complex guidance may find that employees, customers, agents or regulators make claims against it. Similarly, a large travel operator that is not sufficiently nimble when navigating the new ‘traffic light’ system may find that investors make claims against its directors for negligent performance.
It is precisely this complexity that is so off-putting for insurers. As a result, Employers’ Liability Insurance and Directors’ and Officers’ cover are going to be particularly hard to come by in the period ahead.
On top of this, external threats to businesses of all types are also on the rise. Cyber crime has risen markedly in the pandemic as we become more dependent on remote access and online transactions. For travel, hospitality and leisure firms, which face both financial and data risks, this will be an important area of focus. However, here too, the insurance market is in retreat, with much reduced appetite for these difficult to quantify risks.
What does the hard market mean for your business?
The nature of your activities mean that your most important lines are Public (or Tour Operator) Liability, Employers’ Liability insurance and Directors’ and Officers’ insurance (D&O). Unfortunately, each of these areas is considered to be a complex risk and has been prone to above average increases. By way of example, an Airmic (the association for risk and insurance managers) survey showed that 20% of respondents had experienced an increase of over 400% in the cost of their D&O programmes – and that was last year, before the latest rate rises.
Worse, while price rises are the most obvious symptom of a hard market, they are far from the only one. Here are some of the things that you should look out for as you plan your renewal:
- Erosion of coverage: insurers will seek to reduce the extent of the coverage they offer through careful and sometimes subtle amendments to policy wordings. We’ve already seen this happening to our clients, and particular areas to keep an eye on are infectious disease clauses, which are often being removed wholesale or extremely broad exclusions added. Unfortunately, brokers often fail to point these changes out to their clients or, in some cases, are not aware of them themselves.
- The increasing use of ‘panels’ and ‘facilities’: this is a long-running trend in which brokers place their clients’ risks into pre-arranged vehicles underwritten by their preferred insurers. This approach leads to increased standardisation and broker reluctance to negotiate changes for their clients – meaning policies may be wholly unfit for your specific needs. They may also generate higher commission revenues for the brokers in question, exacerbating the existing potential for conflicts of interest to arise as prices increase.
- Higher deductibles: expect to see deductibles increase across all the types of insurance you buy. This will help mitigate price increases (in some instances), but may also substantially increase your retained risk and should be assessed carefully.
- Reduced broker service: since the ‘hard’ market affects the vast majority of businesses, brokers are put under real strain as they are fighting fires on behalf of every client on their books. The Airmic survey we mentioned also revealed that 67% of members had experienced poor or late communication from their insurance partners – up from 43% the year before. With less time to spend on your case – just when you need it most – it is essential that you take control of the process yourself.
- A harsher claims environment: our own research shows that 45% of complex claims are disputed. They take an average of three years to settle and the typical final payment from the insurer is only 60% of the value of the claim – and those are the figures for ‘soft’ market conditions. In the current environment insurers will seek to pay fewer claims, and to pay them more slowly, thus shoring up their own reserves.
Spotlight on disclosure: why miscommunication could be your biggest risk
One area which insurers are increasingly focused on is ‘disclosure’. Put simply, this entails an insurer claiming that they were not sufficiently informed of some aspect of a risk or organisation’s operations and that, were they fully aware of the facts, they would not have covered the risk – or not on the terms they offered at the time. This area of law was fundamentally revised by the Insurance Act 2015 (the Act) – although few disputes have reached the courts to set precedent in the years since.
Mactavish was heavily involved in the Act, which set out to clarify exactly how disclosure should work and to create a fairer system for remedying disputes. The Act protects policyholders by defining the Duty of Fair Presentation, but it also requires that they meet certain standards. In very simple terms, policyholders must pass on relevant information that falls into three categories: the knowledge of senior management, knowledge of those involved in insurance (including the broker, where relevant) and knowledge that could be gleaned by conducting a ‘reasonable search’ of the organisation. Any policyholder that cannot demonstrate that it processed and communicated the information it held under these three headings is at risk of a dispute. Since the situation on the ground is changing so rapidly, it will be particularly difficult to keep your insurers abreast of everything they may later claim they should have known. The result may be invalidated cover.
Importantly, since relatively few disputes of this type have actually reached the courts, there is a degree of ambiguity about how judges will interpret them. If we are right in believing that claims disputes will increase in the years ahead, this is likely to form a major battleground between insurers and insureds.
The situation will be exacerbated by the use of panels and facilities we discuss above, and the way in which smaller policyholder organisations are being asked to use online questionnaires in order to access them. While the questionnaires may indicate what a particular insurer is interested in, they are blunt instruments that often limit the policyholder to ‘yes/no’ answers. They are also unlikely to be deemed to void the stipulations contained in the Duty or Fair Presentation, or to remove the need to carry out a reasonable search prior to submission, or proactively disclose relevant detail beyond the questionnaire’s scope. For complex organisations, with unusual risk profiles, they may well be wholly inadequate.
What can you do to mitigate the impact of the ‘hard’ market?
At Mactavish, we take the view that the way in which the insurance market operates today is no longer fit for purpose. Wild swings in prices, commoditised approaches to policy construction and placement, and a patchy record on claims are all symptoms of a market that is imbalanced in favour of insurers and brokers.
Last year, we produced a high-profile report that showed that some brokers receive commissions, fees and other income from insurers that constituted up to 80% of their revenue, with only the remainder coming from fees paid by policyholders. Worse, much of this income is linked to the price of premiums, meaning that brokers may stand to make more money as policyholder costs rise. This is a serious misalignment of interests.
We have set out to right this imbalance by creating a fairer market for policyholders. We do not receive a single penny of our income from insurers or brokers, meaning that we represent the interests of our clients at all times and without the risk of any conflicts of interest.
We also base our approach on technical excellence and our heritage in driving legal reform and working on policy wordings for FTSE 100 companies means that we have an unparalleled understanding of how policies work in practice.
We leverage our expertise to do four things for our clients:
- We improve the quality of the cover they buy
- We drive down costs
- We take away the burden of managing insurance
- We resolve large claims
Today, we serve major public companies like BT, Dixons Carphone and the National Trust and have a growing client base in the travel, hospitality and leisure sectors, including highly respected firms like On the Beach plc.
We do things differently – and we get results.
If your business cannot afford to pay more for lower quality insurance, or if your balance sheet would struggle to absorb a large loss, we are here to help.
If you would like to discuss your insurance challenges you can contact James O’Connor at:
020 7046 7956