Giving in to pressure for lower casualty premiums today will be potentially disastrous for the future, argues Ash Bathia. He wants a market reality check
IN THE current economic climate, it is almost inevitable that short-term thinking has become the order of the day for most UK businesses. Cash flow, rather than profit, is king, cost control has become the top priority and business retention is even more important than business development.
For those in survival mode, the overriding philosophy has now become: "Why worry about having the ingredients to make tomorrow's lunch when I am in danger of becoming today's supper?"
For the insurance and broking community, such dynamics are creating challenges that need to be tackled urgently and decisively if the sector is to avoid sleepwalking into a period of less than palatable profitability triggered by rising claims, inadequate pricing, lower investment income and a reduced ability to rely on previous years' releases.
A quick look at the ABI online media centre graphically underlines the issue. In March and April alone, key headlines included:
- "Rise in burglaries makes cutting back on insurance criminal"
- "Recession Britain – insurers detecting record amounts of fraudulent claims"
- "Record fire damage costs of £3.4m a day spark fears of surge in large-scale fires"
Such developments are only the tip of the iceberg. The casualty sector, for instance, is already seeing an increase in claims frequency, combined with some increase in severity, on both professional indemnity and employers' and public liability business.
Current pricing dynamics are further complicated by the fact that the increase in claims experience is occurring as typical underwriting measures of exposure are falling - for instance, numbers of employees or the level of turnover or fees - and the business contractions they reflect are also triggering insurance buyers to expect premium reductions.
In other words, despite claims trends clearly indicating that the only way premiums can and should be going is up, the overall mix of business dynamics is masking the trends and causing buyers to expect lower insurance premiums.
Against such a background, it hardly takes a crystal ball to forecast that unless pricing action is taken to deal with these trends, future industry results are likely to be disappointing for most and disastrous for a select few.
Nor should anyone take comfort from the argument that such developments only serve to "cull" the weaker players. As experience also shows, it only takes a few underwriters to be forced to withdraw from a sector for the credibility of the entire insurance community to come under fire.
It is critical that brokers and insurers alike act now to manage the pricing expectations of our mutual clients - to inject a reality check into the market. Otherwise, we are simply storing up problems for tomorrow, when the "cheap" prices of today will cost dear both in terms of future profits and the industry’s credibility.
In recent years, insurers have made much of their newly acquired cycle management skills. While few would have envisaged these skills would be promptly put to the test in such an extreme environment, managing the cycle through recession is a test we cannot afford to fail.
There is no question that casualty rates need to rise. The issues are simply when, how quickly and how hard.
Action taken, or not taken, now will have a significant impact on the eventual outcome. No policyholder ever wants rate rises, and particularly so in the current climate.
But given the choice between a gentle, more manageable increase in rates or a sudden, sharp and unplanned rise on the back of a capacity crunch, most would opt for the former route.
It is no coincidence that the commercial operations that can be assured of their future access to affordable employers' liability, personal injury or other casualty protections (barring disaster), are those that have built durable partnerships with financially secure insurers.
In addition, these partnerships are underpinned by long-term, mutually sustainable pricing.
Supporting clients through tough times is as much about preventing nasty surprises as it is about price.
For a long-tail business such as the casualty sector, "short-term/least price" equations are not just counter-productive, they are potentially disastrous for all.