As we approach the new year, the City seems poised at something of a turning-point in its fortunes. There are signs that the stock market is nearing the end of its bull run, with the current weakness in shares only the most well-publicised indication that the tide may be turning against investors. As yet, however, it is too soon to predict whether or not we will see a soft or a hard landing for equities.
In contrast to the situation facing the equity markets, there are signs that factors may be operating to bring the soft market in insurance, which has prevailed for the past few years, to a close. A great deal will depend on how the reinsurance renewal negotiations are concluded over the next few weeks, and on the resolve of the direct writers to push their own rates up. The insurance market in Australia has already hardened significantly after the withdrawal of a number of leading insurers and reinsurers, and if this pattern is repeated in the UK it will do much to determine how the cycle progresses in 2001. My first article of the new year will include a review of the reinsurance season, to assess whether rates did in fact harden enough and to consider what the likely impact will be.
Apart from reinsurance costs, a number of factors have come to the fore this year which are operating to push primary non-marine rates upwards. One of the most influential has been the firm stance taken by corporate investors, who have suffered substantial losses from the insurance sector over the last few years and are no longer willing to subsidise a soft market. The tendency for increasingly late payment of premiums has also put pressure on insurers' investment income.
Meanwhile, the legal environment has also changed to the detriment of insurers. For example, there has been a proliferation of “no-win, no-fee” arrangements since the implementation of the Access to Justice Act 1999 in April this year removed legal aid funding for most personal injury claims. Like other insurers, we have experienced an increase in claims as plaintiffs have taken advantage of the new conditional fee agreements to bring actions with minimal financial risk. Insurance to cover those exposed to personal injury actions has never been a more essential part of a sensible risk management programme in an increasingly litigious society.
Meanwhile, the post-Wells vs Wells changes to the Ogden Tables have continued to add to the woes of those insurers handling personal injury claims. The imposition of a 3% interest rate has had a major impact on the cost of such claims, particularly as it applies retrospectively. Rate increases are having to be imposed to ensure that reserves are adequate to meet the heavier than anticipated cost of previous years' claims as well as the heavier burden of those incurred in the future.
In my last article I discussed the Human Rights Act 1998 which came into force in October this year. Its effects on the cost of claims and consequently of insurance will not be known for at least a year, but this is only the most high-profile of a series of new pieces of legislation which have the potential to impact on claims costs and ultimately to promote the hardening of insurance rates.
Most commentators are predicting an increase in claims in the months immediately after the act's implementation as it is interpreted in the courts. Employment related legislation also continues to expand, emphasising the value of employment practices liability or employment legal expenses insurance to companies of all sizes.
Need to focus
With influences such as these operating to push up claims costs, it is clearly more vital than ever that insurers focus on achieving an underwriting profit by selective underwriting and sound pricing, instead of chasing volume. Equally, all of us in the London Market – both the composites, and Lloyd's syndicates such as my own – must continue to strive to achieve optimum efficiency and to cut back on the frictional costs of transacting our business. We have already made considerable strides in this respect, and if progress towards increased rates and reduced administration costs is maintained we might hope that we can look forward to a bullish new year.