Hard Market Factors

Solvency II– launched in 2016, Solvency II which applies across the whole of the EU, has meant that insurers spare capital requirements have more than doubled. This has caused a number of insurers to leave the market whilst others have significantly reduced their capacity. Solvency II has also created a significant barrier to entry meaning that lost capacity in most cases is not being replaced.

The negative Ogden table rates – In 2017, the Minister of Justice changed the Ogden table rate from 2.5% to minus 0.75%.  This meant that insurers had to pay out far more on larger personal injury claims. Whilst it was hoped that the rate would return to a positive in 2019, the government are fixed on a rate of minus 0.25% in England and Wales and minus 0.75% for Scotland, further impacting settlements and rates now have to be set accordingly.

UK Property Rates 2020 – Most insurers were experiencing losses on their property risks.  Even prior to the devastating storms early in 2020, rates needed to increase considerably in 2020 to return to break-even, let alone profitability.

Storms Dennis and Ciara –The floods caused by these storms are predicted to cost well over £400m. Climate change is causing insurers to struggle with correctly predicting floods, and they need to build up reserves to take care of the next set of bad floods which will inevitably be on their way.

Reinsurance rate will rise significantly, and capacity will reduce – Reinsurance is a key component of an insurers pricing model and rates will rise significantly at the renewal of the treaties.  Insurers will have no option other than to reflect these increases in their rates.

Interest rates are at an all-time low – when interest rates are high insurers are able to offset a certain amount of underwriting losses against their investment income.  At the moment, the current interest rates are the lowest in the Bank of England near 300-year history.  Insurers will therefore have to write for profit and put up rates.

“COVID-19 will be the most expensive event ever to hit the insurance world”  –  A quote from John Neal, CEO of Lloyd’s of London. It is estimated that the combination of insurance claims and investment losses will cost the worldwide industry in excess of £200 billion, making it the most expensive insurance event ever.