Insurance markets all over the world are subject to price cycles. During soft market phases, there is an oversupply of insurance covers and prices are relatively low. Dur­ing hard market phases, the exact opposite happens. Key drivers are the individual insurers’ competitive growth and profitability strategies, the development of claims pay­ments as well as costs and capital gains which have a direct bearing on the insurer’s profit.

From soft to hard market

The past 15 years in the business insurance sector were characterised by a soft market phase: a drop in premiums, broad coverage, and some tough competitors vying for big insurance business. Industrial companies, their board members and those responsible for insurance received the red-carpet treatment in form of many different individual solutions and enough capacity. Booming sector products such as D&O or cyber insurance undermined growth. The fact that the volatile business insurance sector made a loss every now and then and was cross subsidised by the private client and retail business was accepted by all insurers. Numbers always added up in the end. The additional revenue generated via capital gains ensured that the underwriting results, which yielded hardly or no profit at all, were widely accepted as well.
Given the enduring low-interest phase and an increasing number of claim compensations, insurance exec- utives changed their mindsets over the last couple of years. Business insurance became their problem child: unprofitable, too volatile, too customised, difficult to manage internationally, too exposed. Not surprisingly, the price cycle started to turn around in 2017/2018, followed by a hardening market. At the time, it was a moderate market limited to a few risky and costly insurance sectors. The beginning of the pandemic accelerated the turnaround. All of the sudden, businesses with a favourable claims history faced drastic price increases. Besides that, capacities were reduced across all sectors. The bigger and more global the company, the stronger the effects. All that happened during the worst economic crisis since World War II.
How was that possible and what can be learned for the future? Which risks will businesses and the market behaviour of insurers be able to control? Which countermeasures can businesses take?
Two issues must be kept in mind when answering these questions: the mindset and operating principles of insurers as well as the current and future risk landscape.

The mindset and operating principles of insurers

Insurance balances risks, collectively and over time. The task of the corporate insurer and his underwriters is to assess the individual risks of a business and price them accordingly in order to safely take over these risks. The better the risk assessment, the better the price, and respectively the capacities that will be provided. Some of these risks may later result in claims and damages. Insurers put the spotlight on possible risks and claims every day, which is why they always consider a glass to be half empty (negative), rather than half full (positive).

With the onset of the pandemic – which was hardly considered a risk itself earlier on – the entire risk landscape changed. In addition to typical insurance claims following works and firm closures or even event cancellations, the pandemic had a huge impact on other areas as well: disruptions in global supply chains, the threat of increasing insolvencies as well as cyber-attacks.

Insurers were also concerned about an increasing number of management mistakes because nobody had to previously navigate a pandemic. With the ensuing downturn in capital markets insurers lost a major source of revenue. The entire insurance industry was in a doomsday mood. It was this mood that caused the above-mentioned changes in business insurance.
Today, we know better. The world still exists, and the pandemic even yielded some positive results for the insurers’ business. Automotive insurance serves as an example. Given less mobility during lockdowns there were significantly fewer claims. At the end of the day, the glass was half full and insurers still achieved positive results. These could even be stepped up during the first half of 2021. So, is all well that ends well?

The future risk landscape

If one believes the insurers, the answer is “No”. The glass in the industrial insurance sector is still half empty. Positive results again derive from the private client and retail business, and changes affecting the risk landscape are long-term. As you will read more about these aspects in this magazine, here is an overview of the most significant changes and their impact on the industrial insurance market:

  • Digitisation: risk of cyber-attacks, more cyber claims
  • Climate change: risk of natural hazards, more natural disaster claims
  • ESG criteria: risk loss of reputation, e.g. if climate-damaging industries such as coal are insured
  • Globalisation: risk of pandemics, more claims due to a pandemic
  • Capital market: low interests and volatile capital gains, therefore more focus on insurers’ underwriting results
  • Regulatory changes: risk of management mistakes, more D&O claims

Given these changes, industrial insurers will continue their chosen path. Hence, the hard market phase is not over yet and will continue to be a real challenge for property, D&O and cyber insurance.

How should companies respond?

Recent months have shown that insurers tend to increasingly focus on corporate risk management. Whereas in the past mere statements of intent to effect risk-minimising measures sufficed companies nowadays are practically obligated by the insurance sector to implement them. This trend, which used to be typical in the fire protection sector in the past, now extends to natural hazards (caused by climate change) and other areas, such as cyber security or preventive measures against liability claims. Reports of individual risk assessments, improvement measures that have been implemented and future development steps have become must-haves for companies to receive any insurance quotation and to secure the required capacities.
Risk management has become the magic word. Companies that devote special attention to their risk issues will be able to leave the hard market phase much earlier.
However, this focused attention on one’s own risk management comes with a positive side effect: Some of the risks will only have a limited insurability (e.g. natural hazards, pandemics, cyber, D&O) or none at all (e.g. blackouts) in the future. Therefore, boosting a company’s internal risk management will not only become a game changer in industrial insurance, it will also change the game in the market environment of industrial companies.

Andreas Schmitt

Vorstand Risiko- und Versicherungstechnik

T +43 664 962 40 11

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