Climate Change, Covid-19, Solvency II reform, delivering fair value to customers, building financial resilience and how insurers’ use health data are all major challenges facing the wider insurance and long term savings industry. For general insurance, however, hardening markets across many product lines and the upcoming implementation of the FCA’s GI Pricing reforms are the challenges taking up significant attention across the industry.
Hardening markets are a natural part of the insurance cycle. Many GI business lines and markets, notably professional indemnity, Directors’ & Officers’ liability and contingency markets have experienced a significant challenges over recent years. These changes in market conditions have been driven by both factors within the insurance industry as well as in those in the wider economy such as the pandemic, economic downturn and significant events, such as the tragedy at Grenfell Tower. As a consequence, the symptoms that might typically be associated with hardening markets have, in certain sectors, become more apparent to customers including increased rates, reduced capacity and a greater emphasis on risk selection.
These symptoms can create significant public policy and reputational challenges for the industry. The most visible of these challenges are reduced availability, and an increase in the cost of, insurance. Businesses and consumers may find it harder to access the insurance cover they need to manage their risks and that provide them with peace of mind. Less engaged customers are less informed customers which presents a real risk to the industry as it can lead to a widening expectation gap between what a customer thinks a product provides cover for relative to what the insurer intends to cover. We witnessed the effects of that last year in the context of business interruption with the consequent reputational damage to the industry.
These symptoms can create significant public policy and reputational challenges for the industry. The most visible of these challenges are reduced availability, and an increase in the cost of, insurance. We must, therefore, continue our efforts to engage in solutions to help tackle the hardest elements of risk to insure. Customers understand that not every risk can be covered, but they expect the industry to confront challenges head on and work to develop solutions. We need to work together with the Government and other market participants to develop creative and innovative interventions to overcome the challenges associated with a hard market and allow the wider economy to function effectively.
As the last 18 months have shown, we can do this very successfully. For example, the industry worked with the Government to secure the establishment of a £10 billion reinsurance scheme which shared the trade credit insurance risks between the public and private sectors, and which enabled trade between businesses to continue. We worked with the Government to put in place a time-limited indemnity arrangement to provide state-backed insurance for care homes designated as being appropriate to accommodate Covid+ patients being discharged from hospital. We have also been involved in the work of the Chartered Insurance Institute’s Transparency Forum, alongside representatives from the broking community and consumers, which has made a number of recommendations to the industry about how to better meet customer expectations.
There is, however, more work to be done. The market needs to continue to adapt and look forward to ensure it continues to respond to customer demands in both personal and commercial lines, help customers navigate the current hard market and be prepared for the future challenges that are coming.
One such challenge that is on the horizon are the FCA’s new rules on GI Pricing Practices that come into force in January 2022. This change represents a once-in-a-generation opportunity to fundamentally change for the better the way insurance products are priced, bought and sold. That is why we have supported - and will continue to support - the FCA’s work to deliver a system where customers focus on product appropriateness and quality. Price comparison websites have long done a useful job at helping consumers. But this has come at a cost, especially to those customers who do not want to change insurer every year and who have ended up paying for the discounts demanded by those who do shop around. As we have consistently argued, we need a market where consumer loyalty is not punished and where a focus only on price is not unduly rewarded; the quality of the product and whether it meets the consumer’s needs is just as important as the headline premium.
In a highly competitive market where there are no excessive profits, any revision is likely to lead to a re-balancing between new and renewing customers. There are many who rely on switching every year to keep their insurance costs low. From January, their inability to receive reduced new customer prices - and therefore pay more for their insurance - may mean they become less engaged in the insurance purchasing journey. No-one wants to see an insurance apathy trap where customers become even less engaged with the products they are purchasing. So, it is incumbent on the industry, Government, regulators and consumer groups to effectively and honestly communicate the effects of the new pricing landscape.
Hardening markets and GI Pricing changes are just some of the challenges facing the general insurance market. Others, such as the tough re-insurance market and the threats in the cyber world as well as what routes there are to a more stable market and whether we should expect this period of instability to continue will all be discussed at the ABI Annual Conference 2022.