Business Interruption – FCA test case

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The last hard market was nearly two decades ago, so for many brokers, clients and insurers, the current market conditions will be the first time they’ve experienced a ‘true’ hard market. Andy Jones, a veteran risk manager, was working for a large food manufacturer in 2002 when the hard market hit. Now Head of Operations and Proposition, Risk Consulting at RSA, Andy looks at what a hard market is, and has three simple lessons for surviving – and thriving – in these market conditions.

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The hard reality after 15+ years of soft market conditions

We’ve had a soft market for more than 15 years, in which insurers have faced the growing challenge of increasing claims costs and decreasing premiums to cover them. The market was already beginning to turn at the end of 2019 – with shrinking insurance capacity and higher premiums. Then Covid-19 hit and accelerated the whole process.

Covid-19 has already created a unique set of hard market conditions – but what can we learn from previous hard markets, and how can those lessons be applied right now?  

Hard lessons

One: relationships really matter

As a broker, you can’t rely on getting a better deal by swapping insurers when it comes to renewals each year. We’d never recommend that strategy to begin with – but in a soft market you can just about get away with it. In a hard market, that option just isn’t there.

Right now, it’s more important than ever to focus on building and strengthening your relationships with clients and insurers. So don’t leave it to the renewal date to communicate with your clients: let them know well in advance what’s happening in the market, and how that affects their premiums. If you aren’t already keeping in touch with your clients throughout the year, now is the time to start.

Brokers can also benefit from a much closer relationship with insurers. Talk to them, if you can: do the work to understand their position, discover what the underwriters will be looking for. What will help your underwriters get a fuller picture of your client, their risks, and the work they do to manage them? Then when it comes to your market presentation, you know exactly what to include.

Two: clients should manage their risks as if they were uninsured

Insurance should only ever be one part of a company’s risk management strategy. But in a soft market, insurance can become the only thing that clients do to manage their risks. They know that they can get a renewal easily enough – it becomes a merely transactional thing that happens every year. They pay the premium or switch providers based on price, and carry on with business as usual.

In a hard market, it becomes much harder to insure a company that doesn’t have a healthy approach to risk management. So companies need to rethink their whole approach and in some cases, change their mindset: use insurance to cover the business for the unforeseen, and control all the other risks as much as possible.

Right now, you can encourage your clients to re-asses their risks: what lies within their control, how can they improve processes and culture to better manage those risks? This is the perfect time to eliminate the easily preventable things, and focus on improving everything else. 

And while your clients might have had a hard time getting buy-in on a risk management programme, now is exactly the right time to be getting the ear of top execs. The bigger premiums tend to bring into sharp focus the gains to be had from better risk management.

Three: focus on the narrative

A broker’s market presentation is absolutely key in a hard market. Once you’ve built relationships and controlled your risks, you need to use both of those to your advantage in your market presentation.

And where you might have relied on face-to-face site visits to win the confidence of your insurers before, Covid-19 restrictions now make that impossible. All the underwriters have are the documents you present them – so make sure they tell a rich and detailed story.

For instance, when an underwriter asks you for the client’s five-year claims history, don’t just present a list of claims. Go further: pick out any significant ones and tell the story of them. What happened, why did it happen and what has the client done since to make sure it won’t happen again? Telling a simple narrative of event, analysis and improvement helps your underwriter get a sense of how the client operates. It also shows them how you think and gives them the confidence that together, as a client-broker-insurer relationship, you can make the right improvements to mitigate risks. 

Finally, hard markets aren’t forever. But the lessons you learn now will help you trade better through all market conditions. At RSA, our focus has always been on nurturing long-term relationships with our brokers and clients. These relationships have helped us weather many market cycles – and, no doubt, have helped us continue trading for more than 300 years.

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