Why the hard market may be here to stay

Despite 17 quarters of rate increases, insurers return on equity (ROE) is still below target, and these hard market conditions may not be going anywhere for awhile, a Gallagher executive said during an industry webinar. 

Broker’s clients may be able to mitigate further increases by preparing for their renewals “like never before,” said Ilan Serman, regional president of Ontario at Gallagher during the Gallagher Talks webinar session, Anatomy of the Canadian Insurance Market. 

“For those of us who have been around for a long time, or are students of this industry, we know and expect the market cycle to be 10 to 15 years of a soft market — where pricing comes down, terms increase, capacity is abundant — followed typically by a hardening market lasting 15 to 24 months, where pricing sharpens very quickly, capacity dries up, terms or conditions tighten, and then another 10 to 15 years of soft market again,” said Serman. “To have 17 quarters, as we have had right now, [of having] increasingly tighter prices is unprecedented.” 

Serman warns the industry to get used to these hard market conditions. “It may well be that this is the market,” he said.  

“It may not be that this is a spike and that we can expect 10 or 15 years of soft market pricing reductions, abundant capacity and broadening of terms,” he added. “This may be the market, so while I appreciate that it’s painful, I appreciate that you may not be able to pass the increased pricing on to your clients, unfortunately, this is the industry. This is the market. And I don’t anticipate that it’s going to change anytime in the next 12 to 18 months.” 

Average global insured losses have consistently been increasing for the last decade, Serman explained. 

Global insured losses between 2011 to 2015 averaged around $85 billion, but between 2012 to present have jumped to $107 billion — an increase of about 26%.  

And while the calendar year has not yet ended, global insured losses sit at about $100 billion for the first three quarters of 2022. “I fully anticipate that 2022 will be in excess of that $107 billion,” said Serman.  

These loss trends are no different in Canada, and have been trending upward since the 1980s.  

“The 1998 spike [in insured losses is due to the] Quebec hailstorms, the 2013 spike is the Calgary floods, and the 2016 spike is largely due to the fire damage in Fort McMurray,” explained Serman.  

Canada’s insured losses have been surpassing $2 billion for the last several years, he added. 

“Given that Canada is about 1.2% of global GDP, and yet we’re having 2% of the claims — we’re having about $2 billion out of $107 billion (global average) — certainly our losses are of greater proportionately than what our GDP is as a percentage of the world.” 

Clients feeling the strain of hard market pricing can mitigate these increases by starting their renewal process early, said Serman. 

“Start early. Push your broker. Stay on top of it. Ask to meet your market. Have the discussions, [and] make the case for why you don’t think that you should be treated as harshly as everybody else there,” he said. “That’s probably the best advice.” 

 

Feature image by iStock.com/Khanchit Khirisutchalual