Over the last 12 months, it is likely you have experienced a significant increase in your insurance renewal, whether it’s a personal or commercial insurance policy. In this blog we dive into the reasons why this is happening.
Soft and Hard Markets – The Insurance Market Cycle
The insurance industry is cyclical, going through periods of ‘soft’ & ‘hard’ markets.
Characteristics of a soft market are higher insurer profits which in turn allow lower premiums, higher limits of policy cover, increased insurer competition & appetite, flexible underwriting – in a nutshell, insurers are willing to underwrite a wider range of risks with higher cover at lower premiums.
Characteristics of a hard market are lower insurer profits which in turn cause higher premiums, lower levels of cover or sometimes no cover, less insurer competition & even some insurers withdrawing from the market completely therefore much less choice for clients, stricter underwriting – in a nutshell, insurers are very selective, often inflexible, will often apply more restrictive cover and charge higher premiums.
Some insurers will even refuse to write business that they previously accepted. If your business is unusual or deemed high risk, you could find it extremely hard to obtain insurance cover at all.
After being in a ‘soft market’ for many years, it will come as no surprise that last year, the UK insurance market entered a ‘hard market’ and is a trend that we will see continue throughout 2021. As a result, coverage available is narrowing and premium rates are increasing.
What causes an Insurance Hard Market?
Ultimately, low insurer profits trigger a hard market, they are a business after all and must make a profit to pay out claims. The market had already begun to harden prior to the Pandemic, the virus just accelerated the ‘hardening’. The other factors driving the hard market are;
- A sustained soft market and fierce insurer competition pushed rates down for many years to a point where they often became inadequate to cover losses and therefore unsustainable long term.
- Solvency II, an EU directive introduced in 2016 but with the final phasing in 2021 which determines the amount of capital an insurer must hold in order to reduce the risk of insolvency – this has significantly reduced the amount of spare capital insurers have.
- The Ogden Rate ,which is a calculation used to determine the payment due in personal injury claims, has more than doubled meaning insurers are paying out significantly higher amounts.
- Increasing severity of weather events – Extreme weather globally causes significant losses for insurers. Storms Dennis and Ciara alone were estimated to have cost the industry more than 500M.
- Low investment returns – Interest rates hit an all-time low meaning investment income cannot be relied upon by insurers.
- Property Insurance market – was already running at a loss prior to 2020 due to significant losses.
- Covid-19 – The insurance market has experienced a negative impact across many lines of business from an increase in criminal and fraudulent activities to rising numbers of vacant properties. It is predicted that Covid-19 will cost insurers upwards of £1.8bn in related claims.
Do insurance premiums increase every year?
This very much depends on the type of market the Insurance industry is in. As mentioned above during a ‘soft market’ there is much more competition and therefore more choice to customers. Insurers appetite is higher and they will offer lower premiums to win new business.
In a hard market this is the opposite. Insurers need to increase their profits and so premiums will increase, and insurers will be prepared to lose the business if a client isn’t prepared to pay higher insurance premiums.
The UK insurance market is currently in a hard market so you should be prepared to receive an increase in your insurance premium.
Regardless of the soft or hard market, your personal circumstances also affect whether a premium will increase such as any claims you have had, adverse changes to your financial circumstances, changes to the risk itself i.e., increased turnover or stock, vacant properties etc.
How can I reduce my insurance premium?
Unfortunately, we don’t have a magic hack or a discount code that will reduce your insurance premiums but it’s not all bad news. There are some things you can do to minimise an increase.
- Start the insurance policy renewal process early, speak to your insurance broker a good 2-3 months before renewal so they can start to prepare a positive case to present to insurers.
- Make sure you are open and honest about ANY changes to your business, particularly any that have happened within the last 12 months. Good or bad changes are equally as important to declare even if you don’t think it’s relevant to your insurance. The more information they have, they better that can negotiate for you.
- Do declare ANY adverse changes to your financial circumstance such as CCJs, bankruptcy, insolvency, IVA’s or other arrangements with creditors. See our previous blog about the consequences of not declaring these How CCJ’s, Bankruptcy, Liquidations & Insolvency Can Affect Your Insurance. Its important to note that these don’t only apply to you personally but also to any business you have previously or currently been involved with.
- Ask you broker to obtain alternative quotes this year so even if there is an increase, they can offer you the lowest amount of increase. However, it is imperative that you should still have the level of cover required for your needs. It could be a futile exercise to have a lower insurance premium, but the cover is compromised.
- Tell your insurance broker about any risk improvements you might’ve made to the business such as Health & Safety, staff training, new policies/procedures etc. Insurers will look more favourably on a well-managed risk. If you’re unsure how you can mitigate your risk and future claims then speak to your broker, they should be able to assist you.
- If you have a claim, it could be worth considering whether you can afford to cover this yourself, particularly for smaller claims, otherwise the increase in future premiums could outweigh the claim payment.
- You could consider higher excesses and self-insuring some risks, but you should discuss this with your insurance broker first to fully understand the risk.
- If you are struggling to pay your insurance premium in one go then discuss this with your broker. Most insurers or broker can offer a monthly direct debit facility with some insurers offering this interest free.
Renewal tips to minimise premium increases and ensure correct cover
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How Glowsure Can Help With Your Insurance
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