Feeling the squeeze

Clients and brokers are feeling the effects of an increasingly hard market. Here’s how the professionals on the front line view the situation, and what they’re doing about it

By Bernice Han

John Allport isn’t feeling confident about getting the public liability cover for his jet boat tourist business renewed later this year. Like so many business owners, the hard insurance market is another existential problem to count alongside the slow-burning economic fallout from the pandemic.

At the moment the Tasmanian businessman has a policy issued by an offshore specialist underwriting agency operating in Singapore. It was the only offer that came up after five months of searching when his old policy expired in April.

His previous broker had approached more than 35 underwriters in Australia before the old policy ended, and the answers were always similar: no, not interested.

Just as the pandemic has severely affected so many businesses, overcoming the hard insurance market – one that blindsided many after years of budget-friendly premiums – is every bit as difficult and challenging.

In Mr Allport’s case, government restrictions introduced in March last year to curb the spread of the COVID-19 virus forced him to close Huon River Jet Boats for a few months, giving him some breathing space to look for a new insurance provider. But the task turned out more difficult than he had anticipated.

“We just didn’t know what was going to happen with the business,” he told Insurance News. “It was looking very much like an early retirement for me. I own the business. To a certain extent, the business is my superannuation.”

Battling to stay afloat: John Allport

His experience has left him feeling not too optimistic when his current policy runs out in October. He has made just two minor claims of under $10,000 since his business started in 1989, and during that time he has paid more than $300,000 in liability premiums. The way he sees it, the current situation is not necessarily a problem for his broker.

“It’s the insurers as such and their preparedness to accept risk,” Mr Allport said. “A business might be highrisk with the activities it carries out but if it’s well managed, it is not really all that high.”

But relief is a likely to be a long time coming. Insurance experts say the end of this cycle of premium rates increasing at a double-digit pace, combined with insurers’ shrinking risk appetite across many commercial classes, is at least two years away.

The latest commercial pricing update from Marsh says renewal rates in the Pacific region – in which Australia is easily the biggest market – accelerated 35% in the December quarter. It was a new record, coming after the 33% rise in the preceding September quarter and 31% in the June quarter.

The current conditions in the insurance market have, understandably, left the business community frustrated and anxious. Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, warned last year that a growing number of businesses were being forced to close because they can’t get the insurance they need as a condition of their operating licences.

Her December report on the results of her inquiry into the insurance difficulties facing businesses across the country categorised the present situation for SMEs as a “market failure” that needs immediate action from the Federal Government.

That comment is a controversial one. Many in the insurance industry say the current conditions are long overdue after years of under-pricing risks. Similarly, the stricter underwriting terms are also a necessary adjustment to reflect the significantly riskier landscape since the last hard market more than 20 years ago.

A lot has happened in that 20 years. Climate change awareness, for example, has accelerated globally, thanks to more weather-related catastrophes in increasingly densely populated areas, including Australia. Claims costs have increased, and so have the risks. Cyber risk, for example, wasn’t recognised as a major risk as recently as 10 years ago.

Chris Dardaneliotis, Director of Sterling Insurance, an underwriting agency specialising in complex and hard-to-place risks, doesn’t see the present situation as a market failure, and he’s not surprised that the “correction” has been as painful as it has.

“In the classes that we write, we were hoping for the market to harden as far back as 2013 because we could see that market pricing and practices were not sustainable,” Mr Dardaneliotis says. “But the market continued to soften until 2017.

“The professional indemnity market turned sharply in 2018 and that was followed by the general liability market in 2019, albeit slower.”

He says businesses that now can’t get insurance are not the only ones affected. “The entire market is caught up,” he told Insurance News. “It involves brokers, agencies, insurers, Lloyd’s and to a lesser degree, reinsurers.”

He thinks the premium plateau for the business classes that his agency operates in is still two years away.

“There may be the gradual return of capacity over the next one to two years,” Mr Dardaneliotis says. “It depends on the market’s results and if that capital can get better returns elsewhere.

“I cannot see a broadening risk appetite for another year. Naturally, the only qualifier is if an underwriter is prepared to write the exposure and at their desired terms.”

Underwriting Agencies Council General Manager William Legge says the cost of claims across the entire Australian insurance portfolio is going up and that, combined with the increase in weather-initiated catastrophes, has left insurers with no choices.

In the property space, the effects of climate change have been laid bare in the form of more severe and frequent weather events that have translated into costly claims outcomes for the industry.

“Insurers recognise that the mid-to-long-term outlook on climate change carries massive risks,” Mr Legge told Insurance News. “The industry has no choice but to assess and manage the adverse impacts.

The property insurance market in Australia has, in its entirety, not been profitable for more than a decade.

“Insurance purchasers unfortunately believed the low rates they have enjoyed for almost a decade were realistic.

“That, coupled with the low interest rates in investment markets, means insurers have to ensure their core business is able to sustain their operations.”

He says the ramifications of industry-wide changes are being felt across the underwriting agency sector, even if the lines they write are not always in the frontline of portfolios directly impacted. “Agency pricing, after all, merely reflects what the insurance market overall can offer.”

Caught in the middle of all this are the brokers. Many share the frustration of their clients whose renewal applications have been knocked back repeatedly by insurers and underwriters.

But their hands are tied because they don’t set the premiums.

“Obviously our role is to negotiate the best terms for our clients,” Strata Insurance Solutions Practice Manager Tyrone Shandiman – a Queensland-based authorised representative of Insurance Advisernet – told Insurance News.

The present conditions have exacerbated the long-running insurance affordability challenge in the state. “We’re not talking about just not getting insurance, but we are also in a hardening market,” he said. “We are starting to see insurers with a ‘take it or leave it’ position with their quotes.”

A number of brokers say explaining to clients about the current insurance market conditions and making adjustments will help to relieve some of the pressure from the situation.

JMD Ross Insurance Brokers’s Tourism Account Director Jonathan Ross, says there are insurers with varying appetites, so up-to-date knowledge of the market is also crucial.

“We do expect hard times to continue for this industry,” he told Insurance News. “Frustration often stems from the insurers not seeing the high-risk tourism operators as individuals, and judging them on their own personal claims history or risk management profile, as opposed to the underwriter’s portfolio underwriting viewpoint.

“Underwriters struggle with the tourism world if their business activities do not fit properly into one of their rating boxes, or when they are faced with overseas contracts which even the smallest tourism clients are often forced into.

“Understanding both worlds is key to bringing both parties to appropriate terms. The tourism industry seems very pleased when a broker proves that they understand their industry.”

Aon’s Branch Manager in Hobart, Debbie Spandonis, who arranged the public liability cover for Mr Allport’s jet boat business, believes the hard market gives brokers an opportunity to set themselves apart. She asked for a lot of information from Mr Allport, which also serves as an education process for clients.

“It’s been a soft market for many years,” Ms Spandonis told Insurance News. “It now comes down to really planning months in advance, well before you sit down with clients and discuss what is happening in the market and why it is happening.

“It’s really important that they can put the pieces of the puzzle together and understand why insurers are now taking the action they are taking in remediating their books of businesses, and also what that means for them in terms of their own business.”

A hard market is always challenging for brokers, who must present their clients’ risk details and claims history to insurers who have sharply reduced their risk appetite to rebuild their customer base.

Issues like commercial insurance availability and affordability will continue well into the foreseeable future, and with them will come new pressures from industry groups and politicians who have little or no sympathy – or understanding – of the hard market’s underlying causes.