Like any market, the insurance market experiences different cycles that can affect pricing and availability of cover. Depending on the stage of the cycle, this may result in more risk and higher premiums for you.
Understanding Insurance Market Cycles
Insurance premiums are generally governed by the insurance cycle - which moves between a ‘hard’ and ‘soft’ market, based on frequency and severity of local and global claims, economic and other factors.
In a soft market, insurers chase market share - competing with lower premiums and wider underwriting terms -making it easier and cheaper to get the cover you require
Factors like a worsening economy, higher claims - perhaps due to a string of natural disasters and storms - and poor investments can lead the market to harden. In these times, premiums tend to be higher - and underwriters are less willing to take on additional risks.
Following on from a long period of falling rates, the last few years have ranked as some of the worst on record for natural catastrophes across the globe. The coronavirus pandemic will result in significant losses and will have an adverse impact on the insurance market for several years to come.
The cycle will turn again and we’ll begin to see more capacity driving competition in the market. When all is taken into account, the premium increases we are seeing are bringing the market back to the level that it should have been at for many years to ensure claims can be paid by sustainable insurers.
Expectations for the next 12 months
Covid 19 and global catastrophic losses have resulted in a significant shrinkage of available capacity in the international markets over the last 12 months creating higher reinsurance costs for local and international Insurers who continue to tighten their approach to high hazard industries, buildings containing EPS, panelling or inferior construction and/or properties located in regions exposed to higher natural catastrophe risk.
A number of recent articles in Insurance News and other publications indicate that the hard market is beginning to ease. It’s important to keep this in perspective. We are still a few years away from a truly stable market, let alone a softening one.
Insurers rely heavily on investment returns as a critical source of profitability. The latest statistics released by APRA show that financial market turmoil recently led to a 56% reduction of $2 BILLION in investment returns for Australian insurers between FY19 and FY21.In the same period, insurers’ net profit after tax (NPAT)fell by 69%, and returnon net assets fell sharply from 12.4% to 3.9%.
As the underlying need for premium increases is still present and premiums need to be sustainable, we are still expecting to see some increases from insures. However, we do expect the increases to taper off, especially on those properties with lower exposures.