Why is my premium going up?

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.

Cybercrime risks rise in the world-from-home world

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.

What to do about the greatest insurance challenge in decades

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.

Get to know Morgan Appleby, Director of Alleviate Risk

Alleviate Risk is a Brisbane-based business insurance broker that does things a little differently. Where other companies in the insurance industry focus on what happens after a claim, Alleviate Risk lives up to its name – advising its clients on how to alleviate risk in the first place. Find out more about Morgan Appleby, the man behind the business that aims to prevent its clients from ever actually making a claim.

Morgan Appleby Director
Morgan Appleby

Q: Most people equate the word “insurance” with “boring”, but that doesn’t seem to fit with your philosophy at Alleviate Risk. Why not?

Morgan: It’s true the insurance industry can seem boring to a lot of people, but it isn’t. Most businesses see insurance as a necessary evil to use to avoid taking risks or making a loss. At Alleviate Risk, we believe insurance should actually be the last line of defence for a business – part of a much broader strategy to manage risk.

Any entrepreneur will tell you that growing a successful business always includes some measure of risk. Alleviate Risk is about understanding the risks that are unique to each of their clients and working with them so that it does not impede progress, growth or ambition.

The thing you have to remember is every business, and every entrepreneur, needs insurance, but not every insurer is willing to work with every business. Most insurers avoid working with people who are really pushing the envelope, because it is too hard or too much work to understand and insure against unfamiliar risks, but these are the businesses I love working with.

I really enjoy getting to know my clients and their businesses on a personal level and the best part of what I do is watching a client achieve remarkable things, and knowing that I have contributed, in some small way, to their success.

Q: So, what makes Alleviate Risk different to the rest?

Morgan: Most insurance brokers think of their role in terms of protecting a client’s bottom line and insurance policies are how they defend it. They focus on having the best reaction to risk. It’s a mainstream way of understanding how business works and it suits mainstream businesses – there’s nothing wrong with that. However, for my clients, I like to use insurance as a last resort – which it is! Nobody wants things to go wrong. Nobody wants to make a claim.

People often think that when something goes wrong and triggers an insurance claim, it can be traced back to a single cause. That’s not actually the case. Each ‘cause’ is essentially all of their ‘ducks lining up’ in a way that they didn’t want (or plan) them to. When that happens, things go pear-shaped. For me to be the best insurance broker I can be, it means:

  1. Understanding the risks faced by clients on a day-to-day basis, which includes economic, financial, legislative, environmental, professional and even online risks
  2. Advising my clients on how to prevent the ‘ducks’ from lining up in a detrimental way
  3. Ensuring they get the best outcome if this happens.

Understanding risk and probability is often counter-intuitive. Business intuition is great, but it often means an entrepreneur can focus too heavily on the things they already know and can control and not pay enough attention to possible sources of risk. The cognitive reasons for this bias are really interesting and something we can talk about later.

Q: What does it mean for clients who have difficulty transacting with mainstream insurers, when you can get them the right insurance cover?

Morgan: Well as an example, for some of my clients who work in adventure sports or in conflict zones, not being able to get insurance not only puts a cap on their ambitions and growth potential, but it can even prevent them from doing business at all.

When I can get them the cover they need for what they want to do, they’re free to seize more of the opportunities that will allow them to succeed. Their insurance cover stops being a limiting factor and instead becomes an enabling factor: a soft place to land that doesn’t hinder their passion, drive or creativity.

Q: And what about Alleviate Risk – how did it all start? And have you applied this ethos in your own business?

Morgan: I worked as a financial adviser with Suncorp for several years and things were going really well. However, our entire division was downsized when there was a change in CEO in 2003. So, in 2004, a colleague and I founded our own commercial insurance brokerage.

We worked together and had a lot of success over the next 11 years, but eventually we each wanted to achieve different things in business. We parted ways about 3 years ago, after which I founded Alleviate Risk and things have been going from strength to strength ever since.

Was there a risk in starting my own business? Sure. But, as I said earlier, you can’t grow without taking any risks. When I first started Alleviate Risk, I took a lot of financial risks, investing in capable staff, corporate branding, a new premises and a range of professional development activities. But these were all measured risks which provided many opportunities for growth, both in business and personally, over the years.

Since then, we have been through some tough times and some not so tough times, but on balance, every risk has paid off. Some people see risk as something to avoid, but I see risk as opportunity – provided it is managed properly.

Q: You mentioned that you have participated in a range of professional development activities. Has your constant study and self-development been a part of your success?

Morgan: I definitely feel like I have learnt and grown an incredible amount over the past 10 years. After studying a Graduate Certificate in Business Administration at QUT, I went on to complete a Master of Business Administration in 2012, majoring in Strategy and Entrepreneurship and Innovation. This study gave me with both the knowledge and skills to develop innovative strategies, in order to help businesses survive and thrive in an increasingly complex environment.

Also, I am currently undertaking a Postgraduate Certificate in the Psychology of Risk and Decision Making through ACU, and so far, I am loving it. Yes, it has taken a lot of effort and some people (including my wife) have asked why I would want to do all of that extra work while running a business.

I guess it’s just in my nature: never standing still, always learning new skills and looking for a better way to do things. I’m not the type of person to get into a routine and then be happy just plodding along. Solving the same problem in the same way over and over – that’s boring. That’s why I love the challenge of finding cover for hard-to-place risks and discovering ways to keep those pesky ‘ducks’ apart!

Q: What is it that you love so much about the study you are doing now?

Morgan: Something I have been thinking a lot about recently is cognitive ease, which we touched on earlier a little. It’s the idea that when you ask someone to think about things they are familiar with or things that are easy to understand, then they’ll perceive those things as more true.

However, when you ask them to engage with things that take a lot of thought, or are new and/or obscure, they are predisposed to see those things as less relevant or true. You can see how this relates to insurance, which is all about working with elements that are hard to predict or hard to detect.

The reason this interests me so much is that I always knew ‘cognitive ease’ existed, but I never knew the name for it or the science behind it. I came across it while reading the famous book Thinking, Fast And Slow, which you might also have read.

The most amazing part is that the section of a person’s brain that makes decisions is excessively lazy. It will usually just navigate towards the path of most familiarity and least resistance. It’s the same way that a lot of businesses bring risk into their systems by always choosing a familiar process.

They don’t actually stop to consider what better options there may be. The human function for processing risk is quite fascinating and I firmly believe that if you stay in the same place for too long, the world will simply overtake you and leave you behind.

So my role in helping clients avoid making claims is literally challenging their existing thought processes, biases, assumptions and attitudes, to come up with a better way. That’s what Alleviate Risk stands for, and when you think about insurance this way, it’s not boring at all.

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