Financial Services 02/2020 Insurance Market Update

The UK insurance market for financial services firms is hardening with premium rate increases now becoming commonplace. Bucking this market trend requires a well thought out insurer engagement strategy and an understanding of underwriting appetites to create competition for your business.

For more than a decade UK financial services firms have benefited from a competitive insurance market. Most firms have enjoyed stable or decreasing premium rates alongside policy enhancements that have broadened the insurance protection as insurers have fought to differentiate their proposition.

The reasons behind this soft market environment can be attributed to three key factors: 1) additional sources of capital entering the market creating overcapacity; 2) new market entrants broadening client choice; and, 3) insurers were generally turning a profit.

The tide has certainly turned over the past few months, but before looking at ways to mitigate the impact of the hardening market let's briefly consider the market realities that are causing a readjustment of underwriting attitude and a reduction in market capacity.

Regulatory and legal pressure

The Financial Conduct Authority (FCA) regulates UK financial services and has undoubtedly been more active recently. There has been continued new and updated regulations, with some broad changes affecting the whole market. For example, the Senior Managers and Certification Regime which is aimed at increasing individual accountability is showing signs of becoming a cornerstone of any FCA investigation.  Perhaps more worryingly, there has been a higher number of thematic reviews and enforcement actions. According to the FCA’s 2018/19 Enforcement Annual Performance Report there was a 31% increase in the number of open enforcement cases between 1st April 2018 and 31st March 2019.

These often create immediate insurance claims and can be a signal of potential claims in the future. Recent results show that insurers have experienced an uplift in claims activity – both in severity and frequency – and this has contributed to worsening loss ratios. For example, the FCA’s report on Skilled Person reviews gave an industry cost of GBP6.6m for these in 2015-16 but the 2018-19 figure was nearly eight times higher at GBP51.2m.

Claims and profitability

Recent insurance sector results have shown that most insurers are struggling to make underwriting profits, in part due to the number of large catastrophe losses from natural disasters around the world in recent years. A review of the Lloyd’s of London market results for 2018 provides a perfect example, with claims costs amounting to GBP2.9bn.

Whilst property and business interruption losses from natural catastrophes may seem far-removed from financial services insurance where protection is largely liability based, but as we’ve already mentioned there has been a rise in claims in this sector too. Interestingly, reports at the end of 2018 ranked non-US Professional Indemnity Insurance as the second worst performing class of insurance in Lloyd’s of London.

Harder market

Perhaps unsurprisingly all insurers are closely scrutinising their portfolios.  This is leading to changes in underwriting appetite and, in some cases, insurers are pulling out or limiting their exposure in specific market sectors. Just within Lloyd’s of London, four syndicates that wrote financial services business have recently stopped underwriting new business and have been placed into ‘run off’ (Acappella Syndicate 2014, Neon Syndicate 2468, Vibe Syndicate 5678 and Pioneer Syndicate 1980).

The number of insurers in the financial institutions’ insurance market has reduced and those which remain are being more selective. They are looking closely at the amount of cover they offer, often reviewing deductible levels, scrutinising cover enhancements and seeking premium rate increases. We expect this to be a continued feature of the market throughout 2020 and to combat this financial services firms need to be better prepared.

Tips for financial services firms

1. Be pro-active with your upcoming renewal and engage your broker early, we’d recommend at least three months before renewal.

2. Get an early indication of your current insurers’ underwriting appetite and how that is potentially going to affect their renewal terms. How has their underwriting criteria changed and what sort of terms are being imposed on businesses like yours?

3. Help your broker to understand your business, especially changes in the past 12 months and any planned changes in the forthcoming period and how these might affect the risk you present.

4. Understand the re-marketing exercise being employed by your broker. Are they approaching select insurers or carrying out a more complete market exercise? And how are they approaching alternative insurers as different methods can produce very different results.  If you’re unsure or would like to speak about the different styles and how these can make a difference then do get in touch with Protean Risk.

5. Make sure you’re using a specialist insurance broker as they will be more likely to have the broad market relationships and knowledge required to get you the best possible renewal terms.

How we can help you

Protean Risk is a Lloyd's Broker that specialises in insurance solutions for firms in the investment industry, financial services, fintech and technology sectors.

Our relationships with a broad range of insurers facilitate access to products which are best suited to the specific needs of our clients. As these client needs and the market change over time our depth of market access ensures we continue to match client requirements with market leading solutions.

Being pro-active in our market approach and working extensively for our clients means we have time and again bucked the market trend and challenged underwriting rate increases:

• Taking the time to understand your business and risk exposures. Where possible we like to meet our clients face-to-face or have a pre-renewal conference call to assess any changes to your business or insurance needs. This puts us in the strongest position when presenting your firm to insurers and negotiating quotations.
• Agreeing a robust insurer engagement strategy and presenting your business in the most compelling way. By keeping abreast of market developments and changing insurer risk appetites we are able to adapt our strategies and deliver more successful results for our clients.
• Ensuring our insurance discussions are focused on industry risks and exposures specific to individual clients, rather than generic solutions. Our long-term relationships and specialist reputation often enables us to create competitive tension between sector specialist insurers, providing our clients with choice and helping us outperform our competitors.
• Properly assessing and presenting different policy structures and options, for example deductible levels or coverage restrictions/enhancements so that you are able to make a more informed decision.

We know we have to spend more time in a harder market as insurers are more selective so rushed or incomplete submissions stand out and are more likely to be deprioritised or overlooked.

Please speak to your Protean Account Manager for more information or call us on 020 3763 5340 to find out more about our approach and how it can help you.