The Hard Insurance Market Has Begun
Risk Managers Need To Watch For Restrictive Policy Terms And Claim Problems
Insurers are starting to be tough on their customers. The cyclical insurance market ebbs and flows in terms of the fairness of the deal you can obtain from insurers, and the cycle is turning for the worse. Risk managers, CFOs and others responsible for dealing with risk need to be particularly diligent in these times.
The insurance market is at times “hard” and at other times “soft.” Each leg of the cycle can last from 5 to 10 years. The market has been soft now for 6-7 years. The market is now hardening, but not in a way that most insurance customers (“insureds”) will be able to notice. Price increases, the one thing insureds are always aware of, are not yet happening. The changes that are happening are worse in the sense that they are hidden from view.
When candy makers cannot achieve the price increases they want because of market forces, they do the only other thing they can do, cut the size of the candy bar. Insurers are now cutting the size of the bar by doing two things:
- Being tougher on claim settlements. This takes the form of both coverage denials (full or partial) and delaying payments for cash flow purposes.
- Restricting policy terms they will offer to new and renewal customers.
The cyclical nature of this problem was laid out in a beautiful article co-authored by Richard Stewart, former insurance commissioner of New York and former president of the National Association of Insurance Commissioners. The article entitled “The Loss of the Certainty Effect” asks the following question: What is the value to you of a deal with someone whose handshake is 100% solid and dependable? Now, what is the value of the same handshake from someone who performs most of the time, but not always? The claim problems described are the same ones we are experiencing now. (We’d be happy to send you the article).
Restricting Policy Terms
Underwriting is a legitimate profession. The underwriter works for the insurance company crafting the contract that the insurer will sell to its customer. The underwriter does not work for the insured – so we should not expect the terms to be to the insured’s benefit. The problem is that most insureds do not have a clue what’s in their policy. You can rest assured that whatever your policy said prior to your most recent renewal, it is different (worse) now. Exclusions we have not seen in 10 years are reappearing, and we are also seeing many brand new, more creative ones than the last time around. This happens every time the cycle begins to turn. How can they get away with it? Well, to borrow a line, “what’s in your policy?” (You don’t know, do you?).
Besides restricting terms, there is also a move to offer less in terms of limits. On property portfolios the trend is going from pure dedicated limits to limits that are shared with other properties owned by unknown unrelated entities. This involves review of computer models to evaluate whether the limits will be sufficient in the event of a major catastrophe. This is a serious problem that will become apparent upon the next major event that exceeds worst case predictions, and there always is one.
Insurers do get away with both of these behaviors because policyholders on their own have no way of being aware of them until it’s hit them. You do need to pay attention to the deal more now than in the past.
Sep 15, 2009