Warning: Hard Insurance Market
Just as economists are warning of a possible slowdown or even recession, insurance observers are warning that the market is hardening. In the August 2019 Best’s Review Stephen Caitlin, founder of the Convex and Caitlin Groups and former executive deputy chairman of XL Caitlin, describes the current situation and probable future developments.
- “Loss creep” – deterioration in reinsurers’ reserves – is at significant levels from recent catastrophes.
- Loss creep will affect insurance-linked securities. Traditional reinsurers will raise rates when losses increase, but alternative markets will look for better investments. Caitlin sees this happening in the next two or three years.
- Casualty insurance has been underpriced, and reserves may be inadequate. Since casualty losses take longer to develop, the true cost of underpricing may not be known for five years.
- The cyber insurance market has expanded, with insurers offering broad coverage at low rates. This has been a good thing for insureds, but due to the systemic nature of cyber risk it will, in Caitlin’s words “end in tears”.
- Climate change is increasing the frequency and severity of catastrophic loss.
In Caitlin’s view, major insurers and reinsurers “… are now showing genuine resolve to adequately price their products…”. In layman’s terms, expect premiums to increase while policy terms may become more restrictive.
Advice to insureds:
- Budget for higher insurance costs, or increase deductibles to offset higher premiums.
- Check renewal policies for changes in terms and conditions.
- Allow enough time before renewals to review proposed changes, negotiate terms and if necessary remarket coverage.
As your insurance adviser, Beacon will work with you to navigate changes in the insurance market.