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Tougher times put the ball in insureds’ court

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With premiums rising and terms and conditions tightening, pressure is increasing on businesses to reduce their potential risks and put themselves at the head of the queue in securing cover.

Affordability and mitigation are discussions running in parallel as the coronavirus outbreak and last summer’s devastating natural catastrophes exacerbate a harder market that is well established and has some way to run.

FM Global Operations Manager Lynette Schultheis says industry profitability figures, low interest rates and lagging reinsurance increases are among factors that suggest insurers are likely to continue a disciplined approach.

Australian Prudential Regulation Authority statistics show the combined operating ratio for fire and industrial special risks stood at 115% for the year ended September 30, deteriorating from 110% a year earlier.

The recent Finity annual state of the industry Optima report also shows insurer return on equity collapsed to just 4% in the last financial year – down from 13% during the previous corresponding period. The figure, the lowest ROE in 20 years, reflected a slump in investment returns.

Looking forward, the COVID-19 outbreak is having the effect of both contributing to the extended period of lower interest rates, which also hits insurers’ revenues, while adding to uncertainty and increasing claims in some areas.

Ms Schultheis says looming reinsurance market increases are particularly likely to be felt for business exposed to natural catastrophe risks such as flood, cyclone or bushfire and insureds should be proactive in mitigating against potential losses.

“As this disciplined market progresses, natural catastrophe is one of the areas where you will see a lot of tightening-up regarding deductibles and limits,” she told

Insureds should respond to any recommendations suggested to reduce their risk and should aim to present themselves as a relatively favourable proposition for underwriters through the approach they are taking, she suggests.

“There is capacity out there,” she says “It is just that the insurers are using their capacity smartly and using a more disciplined approach.”

The pandemic and an accelerated shift to the digital world and working from home has also seen an uptick in cyber claims, and that is also likely to lead to changes in coverage limits as insurers seek to curb potential exposure amid uncertainty.

“A cyber event could hit multiple locations of a single insured and on top of that hit multiple insureds at the same time, so it is very hard to aggregate how big that exposure will be,” Ms Schultheis says.

“Because of the uncertainty I think you are going to see a lot of insurers, and reinsurers restricting the coverage, more so as far as limits and perhaps putting in a waiting period.”

For insureds the message again comes back to prevention and making sure as much as possible is done to mitigate the risks.

“The reality is, the cyber insurance you’re going to be able to find and obtain and price out will be a fraction of what your actual exposure is, so again I would just reinforce that clients or insureds need to think, ‘How do I beef up my resilience’.”

The current hard market follows an extended period of soft conditions, while terms and conditions during that time also moved in favour of the client.

As businesses face increasing insurance affordability pressures, there has had to be a change in mindset, and mitigation is becoming more of an issue from governments through to small businesses.

Ms Schultheis says insureds should review their situation soon after renewals are completed and, particularly if they are not satisfied, think ahead and make sure boards are across the need for funds to be budgeted for any beneficial mitigation or resilience measures.

“Have a debrief to determine what the triggers were that perhaps negatively impacted your placement and start right away on ‘how can we improve our risk profile to improve our terms and conditions and put ourselves in the best light for the next renewal’.”