Category: News

In insurance broking, managing uncertainty is our bread and butter. It’s our job to take a measured look, and to help our clients respond to eventualities as they emerge. Of course, we can’t offer a helping hand when things go wrong if our own footing isn’t firm. That means having a good idea of what might be coming down the pipe for ourselves … as well as for you.

It’s hard to say that the past year has been great for insurance. Profitability took a dive in 2019, and we’re still waiting for a recovery. APRA’s most recent report shows some growth in profitability, but not much. It’s not all bad news, however: I believe we’re at a point in the insurance cycle where the tide starts coming in again. That is, when there is a more equitable relationship between the degree of risk and costs to transfer it in a policy.

How bad is it, Doc?

On the surface, the picture isn’t pretty. The pattern we’re seeing in insurance is one of rates increasing, capacity receding and profitability staying level. Let’s take a look at what’s behind those trends.

Generally, what causes premiums to go up is big losses like we’ve had over the past few years, with economic upsets and natural disasters. These are situations where insurers are suffering the losses, reducing market capacities and moving out of unprofitable markets that they had previously stayed in. It means premiums go up, and it gets harder to access insurance in certain industries and regions.

There was a good report from Fitch Ratings recently that showed how the insurance industry has been affected over the past couple of years. One result of COVID has actually been a decrease in global risk. For example, there are fewer people on the road, less road freight and logistics and fewer people travelling. So, the risks and payouts around motor insurance have gone down and insurers in that sector have been running more profitably.

In other words, COVID has reduced some operating risks and insurers are rebuilding their coffers and doing what they have to do to remain stable and continue offering coverage.

Things are looking up, actuary 

Part of the problem with the pandemic, business-wise, has been uncertainty. This has been a particular problem for insurance, because making good predictions is what makes the industry work.

From looking at “Global reinsurance sector position improving” (an article in Insurance Business Australia that quoted the Fitch report), the uncertainty is going down for three main reasons:

1. Pandemic-related losses have stayed within projections so far
2. Insurers are responding with COVID-specific language in policies, helping to minimise future payouts and thus protect their ability to offer fairer pricing
3. Increasing vaccination rates are cutting health and mortality payouts.

It’s good to look at the situation for reinsurers; after all, they assess the risk represented by insurance companies themselves. Good projections for reinsurers reflect a healthy insurance industry. That said, it can take some time for increased profitability and stability to flow downstream to you, the client. For example, Fitch doesn’t expect reinsurance prices to go down in the coming year, which means consumer-facing insurers are not going to see that benefit.

So, when will my premium go down?

You might be asking “if uncertainty is going down, then what?”. I like to think of the insurance cycle as a clock – when you have a major disaster, that moves the hour hand to 4 o’clock. The market then follows a predictable cycle, where you see insurer losses, rising rates and receding capacity. Eventually, insurer profitability returns, leading to an increase in market capacity, stronger profits, price competition and easing of consumer prices.

Anyway, I think we’ve now spun around to about 10 or 11 o’clock. That means we’re seeing continued strongly rising rates, which will be followed by a period of strong profits. For reinsurers, Fitch expects up to a 2 percent rise in combined ratio in the coming year, and again the year after that. 

As we’re entering this hard-market part of the cycle, you can expect to see the following:

• Premiums will probably continue to rise over the coming 12 months
• Getting insurance coverage could become more difficult for many
• Negotiating terms will become harder and take considerably longer to facilitate 
• Until higher profit levels return, insurers will reduce capacity
• Higher excesses in general
• A greater focus on risk management and mitigation processes
• More time and additional information will be required from you before insurers offer coverage.

The coming year or two

The cyclical nature of the insurance market means that costs will eventually stabilise and potentially reduce. However, in the immediate future, coverage costs are likely to go up, or plateau. If you haven’t started to focus on your insurance costs as a major business expense, you need to ask what you can do internally to mitigate these exposures.

First of all, if your insurance broker is doing their job well, it should make things easier for everyone: for you and your insurance company! You should get the right – that is, the most accurate – cover for your operations. As always, seek advice from a suitably qualified risk-management professional on controlling and mitigating your risks.

A recent article titled “Global cyber insurance pricing rises 32%” has led to some interesting conversations at Alleviate Risk among my team, and with the odd client. Why? Because cybercriminals are opportunistic and we’re in a new world of business. The recent haphazard rush to working from home means all manner of cyber vulnerabilities have been created or revealed in businesses across the economy – small, medium and large.

This quote from the article sums it up nicely: 

“COVID-19 and all of its attendant effects on technology adoption and cybersecurity, combined with independent or connected changes to the loss environment, has added a big dose of complexity into an already complicated risk landscape.”

That’s from Shay Simkin, head of cyber at international insurance broker Howden. Yes, she is speaking in a US context, but the same trends are happening here.

Think about it. All of a sudden, we’re being forced out of our workplaces, where IT is professionally managed, controlled and monitored, into using our own devices and home internet connections. The risks are clear. 

In this context, the degree of difficulty for being a cybercriminal has come way down. Many cybercriminals these days aren’t “genius hackers”, they’re just conmen who’ve downloaded automated security -probing software. That’s all they need to launch the two main kinds of attacks we’re seeing: spoofing and ransomware.

• Spoofing: cybercriminals intercept emails and then use social engineering (digital grifting, essentially) to fiddle with invoices to divert money into their accounts.
• Ransomware: one day you go to work, switch on the computer and find that your entire business system is encrypted and crippled. All you have is an ultimatum: pay some sort of cryptocurrency amount to a mystery destination or your data will be deleted.

The point is, you and all the other businesses you do business with have been thrust into an era of slapdash cybersecurity. I’ve been working around this a lot, so here are my key insights… 

My top 4 points about cybersecurity risks

1. If you think you won’t get hacked, you’re mistaken. Actually, if you think you are immune, your risk increases. Chances are your site has already today been cased by cybercriminals looking for soft targets. It’s like that story with the two people about to get chased by a tiger and one of them stops to put on running shoes. You don’t have to outrun the tiger, you have to outrun the other guy. The cybercriminals are always coming, so, at a very basic level, your online presence just needs to be too tough to bother with.
2. Insurance does not bring back data that has been encrypted or lost. Two factors here: highly sophisticated encryption tools are cheap, and decryption or recovery is rarely successful and is always very costly.
3. You probably won’t get your data back, even if you pay a Bitcoin ransom. Research from Kaspersky has found that only about 25 percent of ransomware attack victims get everything back. After all, the cybercriminals have little incentive to keep their side of the bargain.
4. Being a cybercrime victim casts your business in a bad light. Regardless of the data loss or outcome, there are major reputation risks associated if you have a data breach. Imagine sending a letter to all your clients saying “we were hacked and your personal data was stolen”. At the very least, this will cost you business. At worst, you could end up in court. 

The big effect of raising your cybersecurity bar a little

To handle this emergent situation you must mitigate your cyber risk exposures. The key to doing so rests in how most cybercriminals operate: they cast a wide net and try to scoop up easy pickings. Generally, their automated software scans thousands of sites a day looking for specific weaknesses. If your site doesn’t have them, the scanner moves on. Trust me, your site has been scanned for weaknesses thousands of times already. This means the best cybersecurity mitigation tactic is often simply to be a slightly tougher nut to crack than the next guy.

Yes, you can have cybersecurity as part of your business insurance, but the standard cover is pretty skinny. It’s better than nothing, but you’re far better off with a standalone specific cyber policy that is responsive to your cyber-risk management practices.

Being proactive on cybersecurity goes a long way

My point is that prevention will always be better value for money than paying a Bitcoin ransom. And the tigers are already stalking your online presence, but they usually seek to attack the weaker targets. So, instead of outrunning the tiger, outrun the pack mentality of “cybercrime happens to other people”. 

To learn more about “putting on your running shoes”, reach out to someone in your network who can connect you with a cybersecurity expert and/or seek a suitably qualified risk expert to assist you in mitigation strategies. At the very least, have the conversation so you understand where your exposures lay.

If you weren’t watching the insurance news, there was an interesting article recently. And when your insurance broker says “interesting”, you know they mean “concerning”.

The article is on insurancenews.com.au. It is about a presentation that the Insurance Council of Australia (ICA) CEO Andrew Hall gave to the House of Representatives Standing Committee on Economics. The headline: General insurers facing ‘greatest challenge in two decades’.

If that sounds like the hot air that peak bodies often offer up to government committees, you’d be right: it does sound like that. But this is not hot air. This quote from Hall shows why:

“Insurer profitability over the 24 months ending March 2021 was down 64 percent on the preceding two years, and according to APRA the entire general insurance sector only made a profit of $19 million in the most recent March quarter.”

That $19 million is shockingly low. For a multi-billion-dollar sector to be running at a fraction of a percent profit margin is not sustainable. It will not continue. Something will change. Here’s what I think will happen.

First, reinsurance costs will continue to go up as they have been over the past 18 months. This will affect the pricing models that insurance companies work from. In turn, this will have three outcomes: one, it’ll get passed on to customers for certain lines of insurance; two, insurers will simply pack up their bags and stop offering that line of insurance (which we are also seeing in certain product lines); or, three, insurers pricing certain products at a level where it makes the expense borderline unviable for clients (which we are also already seeing). 

None of this should be a surprise 

As an insurance broker, I’m already seeing all of these effects. When we get enquiries from certain kinds of businesses, it is difficult to find anyone willing to offer insurance at any price. If you read between the lines, you can see Hall saying the same things here:

“We are aware that the availability and affordability of some commercial lines of insurance for small and medium-sized businesses has become challenging.” 

If you know business-speak, you know that “challenging” often means “unviable”. What Hall is trying to do is to highlight that these rising insurance premiums are not price gouging: it’s the insurers trying to survive in an increasingly complicated world. A world in which offering insurance against many categories of risk has become increasingly difficult. However, the ability for businesses to manage risk is a necessity in a functional capitalist economy. There are two ways to do it:

1. Transfer the risk through buying insurance policies
2. Mitigating the risk through adapting your operations.

Given the continual shocks to the global and domestic sense of “business as usual”, it is becoming clearer and clearer that it makes sense to find a balance between the two.

Transferring and mitigating risk

A common way to start introducing more of Option B into your business is to find a risk-management expert who not only also understands your transactional environment but also understands your business model. They will be able to analyse your exposures and advise on what to do about them. When you implement those actions, you’ll still have some risks left over, of course. And it is these risks – the ones it is uneconomical to mitigate internally – that you then seek to transfer out via more appropriately priced insurance policies.

For most SME businesses – even those at the larger end – risk management and insurance is typically delegated to the Chief Operations Officer or Chief Financial Officer. But do they actually have dedicated risk-management skills? Probably not.

Of course, most businesses don’t have the financial capacity to employ someone specifically to deal with risk, but they can call on someone suitably qualified. Someone who has studied risk management and has the academic credentials to back it up.

I’m not saying this just because I am an insurance broker who has the appropriate academic credentials, I’m saying it as someone who is already seeing the fallout of the situation that Hall was talking about. 

I mean it too when I say that you must choose your risk adviser carefully. The insurance industry, unfortunately, has gone down a path of cost-based business models. The profits that keep the industry functional are derived from how customers transfer risks, rather than from advice on how to mitigate risks. In this situation, when the cost base rises, the insurer margins get squeezed and we end up with an entire sector on a knife-edge. This is what is currently happening.

If you’re adapting, so must your insurance company

I would like to think that the insurance industry is shifting from that cost-based model to a service-based model built around well-informed risk advisers working with business managers to engage with risk. Yet, if this broad change is happening, it’s happening too slowly.

To be honest, most insurance brokers don’t possess any business acumen beyond what they’re required to have as part of their license to be an insurance broker. So, there is a degree of ignorance about risk management on both the customer’s side – you don’t know what to ask for – and on the supply side – your insurance providers don’t know what questions to ask.

Our philosophy: the answer can only be as good as the question you ask.

For insurance brokers like myself who have academic credentials in risk mitigation, our role is not to force business owners or managers to decide on how they choose to engage with risk. Our role is to provide data on what their exposures are and advise on the pathways towards mitigating these – whether the be operational changes or changes to a contract of insurance.

Good risk management is good business practice

To me, these issues all boil down to ‘what is the most cost-effective way to deal with this risk?’ Is it cheaper to transfer it to a contract of insurance? If so, fine. Is it cheaper to modify your business in some manner to reduce the risk long-term? If so, great! Ultimately, the latter should be your goal (within reason). 

We are not here to use scare tactics, telling people everything that could go wrong in order to try to sell more insurance. When insurance brokers like us have ongoing relationships with our clients, we’re working with them to build a better, more stable and more resilient business overall.

Really, I am talking about giving risk resilience equal footing to profit margin in your business strategy. If your business is not risk-resilient, if it is brittle, then the profit margin doesn’t matter: you don’t have a stable operating base.

The business world of 2021 is in uncharted territory. The world is more connected, more dynamic and more surprising than ever. You can’t establish resilience in the new world by going for the cheapest quote generated under old-world assumptions. You have to be smarter than that.