What do you get when you mix one of the worst Australian catastrophe seasons on record with a global pandemic?

The answer, according to brokers surveyed by insuranceNEWS.com.au on recent renewals, is a seriously difficult market with no end in sight.

Rising claims, reduced capacity, increasing reinsurance costs and an “aggressive” tightening by insurers have resulted in soaring rates that have put clients – and by association brokers – under significant pressure.

“It is the most challenging market environment we have seen in 17 years,” Marsh Head of Placement Asia Pacific John Donnelly says.

Aon points to recent Australian Prudential Regulation Authority (APRA) figures showing an industry after-tax loss of $997 million for the March quarter. And it says insurers are experiencing “a dual shock” as underwriting performance deteriorates at the same time as investment returns drop.

As a result insurers have shifted their appetite for risk, says Gallagher, with more scrutiny on premiums at renewal, particularly for high risk occupations “where pricing can be particularly aggressive”.

Insurance Advisernet MD Shaun Standfield says an upwards trajectory in premiums continues “as claims frequency and values increase, combined with ongoing restriction of capacity supply both within local and offshore (Lloyd’s) markets”.

And Insurance House’s Victorian Broking Manager Rob Currenti says that “for the first time ever since I have been broking we actually have accounts that cannot be placed”.

While there is general hardening across the board, the survey shows that there is also great variation by sector.

Areas singled out as worst affected are directors’ & officers’ (D&O), professional indemnity (PI), energy, recycling plants, bushfire liability and cyclone-exposed locations.

Resilium Director of Sales and Distribution Ben Hastie reports average increases of 10-15% on commercial lines and 7.5%-12.5% on personal lines.

He says “the usual sectors” stand out, with North Queensland property, sandwich panel construction and metal recyclers “difficult to place” and with increases of 25% or more. Management liability and PI are also seeing average increases of 15-20%.

PSC Group CEO Rohan Stewart says D&O policies have risen 75-150%, and “upwards of 200% when Side C covers are in place”. [Side C cover protects listed companies from claims which often include shareholder class actions.]

AUB Group estimates premium hardening at 4-6%, but says liability for the leisure and tourism sector and risks involving expanded polystyrene (EPS) are the most challenging, as well as clients with links to the fossil fuel sector.

“As risk appetite has changed for some insurers, negotiation around increased pricing and increased deductibles was a constant,” AUB CEO Mike Emmett said.

MGA Broking and Technical Operations Coordinator Josh McDonald estimates domestic insurance has soared 20%, with insurers not just increasing premiums but also “really tightening up on risk criteria”.

Community Broker Network (CBN) CEO Richard Crawford singles out PI as a problematic area that is showing no signs of improvement.

“The estimation of the price movement is defined by class of risk and occupation as insurers are implementing sweeping changes across certain risks and occupations, rather than underwriting on the quality of the risk,” he said.

“This could see risks and insurance programs thrown out with the less desirable.”

So how are clients responding?

Many are cutting back on cover – although some brokers insist they won’t allow clients to knowingly underinsure. Higher deductibles are a recurring theme, with self-insurance an option for some.

“Several clients have sought alternative quotations with increased retentions with a view to softening the premium increases,” Marsh says.

“Some clients have also chosen to buy less cover to avoid increased costs. We have not seen clients electing to not insure.”

Aon says it has not seen “wholesale change” in the way buyers transfer risk, with “the volatility that self-insurance or underinsurance brings” remaining a key consideration for many.

“We are however seeing a far more prudent view on limit and coverage purchase using data-led insights ensuring over-purchase is reduced to a minimum,” it says.

Gallagher says some clients are seeking “alternate insurance solutions” and where clients seek to self-insure it is “generally to manage cost”.

Price increases are forcing some MGA clients “to not insure certain sections as it just unaffordable” but the brokerage says it works with clients and insurers on increasing excesses or improving risk management to achieve “a desirable outcome”.

Mr Standfield believes affordability issues are “contributing to underinsurance” and some specific sectors “are trending towards self-insured”. Ongoing and increasing NSW Emergency Services Levy rates are a concerning factor in that state, he says.

“We refuse to let our clients use underinsurance as a means of cost saving,” Resilium’s Mr Hastie says. But he adds that “many clients have agreed to take a higher deductible to help affordability”.

AUB’s Mr Emmett says there is a “discernible increase” in the level of discounting of broker fees and commissions.

And CBN’s Mr Crawford says “clients are looking to save every penny”.

“We’ve heard a lot of brokers suggesting clients are self-insuring as they are unable to afford the premiums the market is putting out,” he said.

Brokers agree the hard market has significant time left to run, but there’s a level of uncertainty over how long, in part due to the pandemic’s unknown disruptive potential.

Certainly conditions are expected to persist into next year. PSC says we’re set for continued hardening for “12-18 months at a minimum” and others predict longer.

“Before COVID I would have said that we still have 12 months of a hard market,” says Insurance House’s Mr Currenti. “I am now not sure.”

Mr Standfield says the frequency and severity of cat events locally and globally will be key, while Aon warns that the recent APRA statistics have left insurers with something to prove.

“With rating agencies casting a watchful eye on the industry and investors more willing to demonstrate a removal of capital, insurers must prove that they can return to profitability,” Aon says.

The one thing we can be sure of is that these are unprecedented times with change a constant, and the expertise of brokers will be needed to see clients through.

“We expect the market to continue to harden over the next two years,” CBN’s Mr Crawford says.

“With this we expect mergers and acquisitions will rise, new players may enter and some likely may leave. This is a market unlike many have seen or perhaps [are] unlikely to see again in our careers.”

• The August edition of Insurance News magazine will carry an extended report on broker renewals.