From: Commercial Risk
A hard insurance market has traditionally been a bellwether for captive growth. Previous hard markets have seen existing captive owners make more use of their risk retention vehicles while also driving the formation of new captive solutions. This hard market is likely to be no different.
The challenge for insurance buyers and captive owners is how to best manage increased deductibles/greater risk retentions, while also softening the blow of increased re/insurance premiums.
A perfect storm
There is presently much talk of a ‘perfect storm’ in the commercial insurance market. After a prolonged soft market, prices have been rising in the past two years. This is a result of increased losses, reduction in capacity (particularly in distressed classes), market performance reviews, adverse loss reserve development and lastly, uncertainty surrounding the global pandemic and its impact on claims.
According to Marsh, global commercial insurance premiums increased by 19% in the second quarter of 2020, with significant price hikes in US public D&O (up 59% on average) and UK D&O (up 100%) driving rates up by 37% globally across financial and professional lines. Geographically, composite pricing increased in all geographic regions for the seventh consecutive quarter, led by the UK (30.5%) and the Pacific (31%).
Meanwhile, the long-lasting low interest rate environment has meant that insurance companies have, for a long time, been unable to prop up a disappointing underwriting result with investment returns. This is exerting yet more pressure on underwriters to charge more and increase deductibles – the point at which insurance attaches – a situation that is unlikely to change as we enter another global economic downturn.