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Wobbly lines: the market’s key trouble spots

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Capacity constraints continue to bedevil a number of business classes as insurers try to improve their bottom lines and back out of difficult markets.

That’s the assessment of major broker Gallagher, whose latest quarterly market report offers a sobering assessment of the issues still plaguing various areas of the industry and wider economy.

Persistent concerns around flammable insulation are causing premiums to rise in the food production industry, while a skills shortage in the transport industry is getting worse and the construction insurance sector faces capacity challenges due to major losses and insurers withdrawing. None of these issues show signs of abating and the result is a hardening market across multiple lines.

Worryingly, the spread of cyber incidents is starting to affect other insurance policies. This rapidly evolving threat may yet leave companies underinsured or totally exposed.

Industry trouble spots include:

Aviation: Gallagher says the aviation insurance market is facing tough times. Reduced competition and a sustained reduction in revenue are pushing up premiums. Only two major international insurers remain in the market after two withdrew in 2017 after incurring sustained losses. The remaining insurers are writing for profit, not premium income, Gallagher says.

Claims costs are climbing and insurers are trying to reduce their exposure by tightening risk-selection criteria. Airline operators with loss histories are now more heavily scrutinised, and insurers are demanding proof from brokers that their clients are striving to reduce loss exposures.

Transport: The Australian trucking industry faced a severe shortage of skilled drivers in the past year and insurers are hesitant to cover inexperienced drivers. Only certain routes and vehicles are being covered. Vacancies have grown 60% in the past three years, and 87% of transport employers report shortages.

The problem can only get worse, with truck traffic predicted to increase by 50% in the next 11 years and Asian demand for Australian products growing. Gallagher says licensing must be reformed to help younger drivers, and insurers can set up exclusions for younger drivers to give them the experience they need.

Food production: Combustible insulation panels – usually expanded polysterene – on industry properties is a serious problem. Insurers are increasing their scrutiny of producers and demanding strategic plans to mitigate risks.

Producers have been complacent around risk mitigation strategies because cover was previously widely available for reasonable premiums. But insurers are now quitting the market or reducing exposure because of cladding risks. Food producers face higher premiums, or may not get full cover for their business, Gallagher says.

The broker says insurance is becoming increasingly complex, and some clients have needed to double the number of insurers on their property policies.

Cyber: The risk of cyber attacks is increasingly tied to liability risk for top executives, because companies may face reputational and brand damage from data breaches.

This is causing a growing tie-in between cyber insurance and directors’ and officers’ insurance (D&O), and clients are increasingly worried about the connection.

Exposure of network security, procedures or controls will have a serious impact on a company’s ability to maintain shareholder confidence, and business confidence may also be damaged, Gallagher says.

The trading suspension of listed real estate company LandMark White due to a data breach caused shares to drop to a four-year low, leaving it facing regulatory and shareholder risk.

“With data vulnerability an omnipresent threat and accountability shifting to board level, awareness of how cyber and D&O insurance can intersect is critically important.”

Construction: The construction insurance market is hardening quickly as yearly losses force insurers to re-examine risk appetite, Gallagher says.

A number of London insurers have left the market or reduced their exposure, and the remainder are trying to avoid losses. Today’s losses come from projects or policies dating back several years, and insurers are working to return to profitability.

An imbalance between years of increasing volatility from mechanical failures, fires and natural catastrophes and declining prices and broad coverage has finally corrected, Gallagher says.

Insurers are even differentiating between contractors working on the same project with different risk management, and refusing cover for contractors with poor claims records.