Soft market, hard lessons? The hidden risks behind broader cover

A softening insurance market is usually good news for buyers, with insurers become increasingly willing to negotiate on price and terms to secure business.

However, with UK insurance rates dropping 8% in the second quarter and global rates recording their eighth consecutive quarter of reductions, increasingly competitive conditions are raising questions about what today’s softer terms could mean further down the line. 

Barry Reynolds, London market managing director at Verlingue, said there was currently “a lot of competition for business”, with significant reductions in pricing and insurers expanding the risks they were prepared to consider.

Reynolds also noted that brokers could increasingly negotiate better terms, including higher limits, more generous extensions, modifications to exclusions and lower deductibles. A supplier extension under a business interruption policy that might previously have been set at 10%, for example, could potentially increase to 15%.

That is a tangible benefit for insureds. But as insurers become increasingly willing to compete on the breadth of cover, the question becomes whether the consequences of the soft market could emerge further down the line.

Underwriting standards

The traditional concern surrounding a soft market is that insurers loosen underwriting standards as they compete to grow their books.

However, Reynolds does not believe that this is currently happening.

“I’m not necessarily seeing poor underwriting from a risk perspective,” he said. “I think that the underwriters are offering more coverage.”

Instead, he drew a distinction between accepting fundamentally unsuitable risks and suitable risks at prices that may not ultimately prove sustainable.

Reynolds said most markets remained careful about risk selection, but added that the pressure in the current environment was increasingly around pricing rather than the quality of the risks being accepted.

“Some of the pricing is definitely unsustainable,” he said. “It’s not going to make money at the levels of premium that the quotes are coming out at.”

That distinction is important. A policy can be carefully underwritten while still proving unprofitable if the premium fails to adequately reflect the exposure.

In the detail

Competitive pressure can also create another issue, even where underwriting discipline remains intact.

Ling Ong, a Weightmans partner specialising in insurance coverage disputes and reinsurance litigation, warned that broader policy wordings could increase uncertainty when claims arise.

“While insureds often seek wider protection and insurers compete on breadth of cover during softer market conditions, ambiguity can create disputes that neither party anticipated when the policy was placed,” she said.

The risk is not necessarily that insurers are offering too much cover. Instead, it may emerge in the detail of what is being offered – particularly as businesses move between insurers in search of a better deal.

During a soft market, companies may be attracted by lower premiums, broader wordings or bespoke enhancements. However, subtle differences in policy language, definitions, exclusions and notification provisions can create discontinuities in coverage.

An insured may believe they have moved to equivalent – or even enhanced – protection, only to discover when a claim arises that a particular exposure falls between the outgoing and incoming policies.

Ong believes the current market makes that risk more relevant because increased competition encourages businesses to explore alternatives.

“Continuity of cover is always important, but there is more propensity to ‘look around’ during a softening market,” she said.

Preparing for the turn

However, Reynolds said he was not currently seeing evidence that the soft market was storing up widespread coverage disputes.

Instead, his biggest concern is what happens when current conditions inevitably change.

“The biggest thing of all from the client’s perspective is managing expectations in the longer term,” he said.

For brokers, that means looking beyond the price available today and helping clients understand where the market may be heading.

The current soft market may therefore not be creating the widespread disputes that some fear. Underwriting discipline, Reynolds argued, remains largely intact, even as insurers become more competitive on price and cover.

But Ong’s warning shows that competition can still create less obvious vulnerabilities.

As businesses become more willing to shop around and insurers compete through broader and increasingly tailored cover, the precise wording of policies – and the continuity between them – matters more than ever.

The challenge for the market is not simply to offer cheaper premiums or broader protection. It is to ensure that, when a claim arises, the protection businesses believed they were buying is the protection they actually have.