As explained in our article, The danger for insurance brokers with the UK Professional Indemnity market, the UK market has been hardening since 2018, which could generate risks for insurance brokers. This situation can be explained by a series of parameters, as natural disaster losses, low prices, low interest rates, and the COVID-19 pandemic.
This is a challenge for all players involved : underwriters are restricting their appetite and increasing premiums ; SMEs are facing higher premiums than they budgeted for, and brokers are caught in the crossfire, trying to meet the demands and needs of their clients in a market where insurance capacity is in decline.
CASH-STRAPPED SMEs CUT BACK ON INSURANCE
According to an article from the Insurance Times, 51% of UK SMEs cut back on business insurance policies, as Employers’ liability insurance, business property cover, professional indemnity or cyber insurance.
Indeed, the Insurance Index research from Premium Credit highlights the fact that 19% SMEs have stopped paying for business interruption (BI) insurance ; 42% of them said they had suffered damage or losses in the past five years, but they could not make a claim because of not being insured or being underinsured ; and around 24% said they were underinsured, while 18% did not have the appropriate insurance. The Insurance Times Premium Credit’s chief sales and marketing officer Owen Thomas explained to the Insurance Times that : “SMEs have had to battle to stay afloat during the pandemic, which makes it understandable that they have cut back on insurance and taken out more credit.
Necessary, often legal cover such as employers’ liability is likely [to be] cut as firms reduce numbers of staff and wage rolls as a result of Covid-19. Cutting back on critical insurance can, however, be a mistake as not having the appropriate cover or being underinsured can be a serious risk for SMEs. We would advise SME owners to speak to their insurance brokers for advice on how best to fund the appropriate level of cover for their business”.
THE FCA CALLS ON INSURANCE BROKERS TO EXPLAIN AND EDUCATE CLIENTS ON THE IMPACTS OF A HARDENING MARKET ENVIRONMENT
This situation could generate risks for customers, and for insurance brokers. That’s why the UK’s Financial Conduct Authority (FCA) has recently published a ‘Dear CEO’ letter addressed to Lloyd’s and London Market intermediaries and MGAs, highlighting the key risks of a hardening market environment for customers. This letter outlines the importance of the role that insurance intermediaries must play in this hard market environment : “Where this is the case, the intermediated market will need to (re)acquire the skills to explain and educate clients about why their premium is rising, while cover may reduce.
“This includes requirements on assessing customer demands and needs, product oversight and governance, acting honestly, fairly and professionally in the customer’s best interest and providing appropriate product information to address the risk of customer harm that may arise from a hardening market.”
WHAT DOES IT MEAN FOR INSURANCE BROKERS ?
Therefore, as explains Richard Webb, Director at Manchester Underwriting Management (MUM), exclusive partner of CGPA Europe in the United-Kingdom, Brokers will need to take certain steps to reduce the risk of being confronted with dissatisfied clients : “Managing clients’ expectations is the first step and that involves managing time and communication. Steps such as identifying the risks that will be problematic to place. If high limits of indemnity are required or if the expiring market is withdrawing, then access to capacity is key. That may require access to the wholesale market in London. So the renewal process needs to start earlier and the retail broker needs to form a good working relationship with their wholesale broker. Leaving it late simply means the current policy will expire and then it becomes a much harder position for the broker and positively dangerous for the client.
Being open and realistic with a client about the cover available in the market is the best protection for a broker. Clients who receive bad news late in the day will never react well. The client may not be keen to hear that their premium is going up or limits are coming down but it is better to be open with a client about the reality rather than pretend that the market hasn’t changed”.