BIBA hot topic: The challenge of the softening market in financial lines

The hard market has been a tough period for the financial lines sector. Insurers restricted capacity across the board, with some Directors & Officers’ (D&O) markets pulling out completely. There were some very significant premium increases experienced in most classes.

Coming off the back of a long period of soft market conditions meant the shock to the system was felt even harder. Companies were spoilt for years and could access all the limits they needed and at fairly reasonable prices. But all of a sudden, they were scrambling to find coverage at any cost.

The hard market was a difficult time

While forming Spring in 2020, I was CEO at Protean Risk, where we’d just started working with a publicly traded biotech company, to assist them with their D&O coverage.

Back in softer times, their previous broker had no trouble sourcing the coverage they needed at a very low price for a substantial limit. It was up for renewal in August of that year, but they couldn’t find the capacity anywhere.

The only solution the broker could suggest was to wait until the following January when things ‘might get better.’ You could say it was a case of desperate times called for unusual measures. Luckily, we managed to find them the coverage they needed – all be it at a much higher price.

But it didn’t stay for long

However, it does look as though the tide has shifted. And it means the hard market was a relatively short one to endure – the last “properly” hard market cycle to hit before this one was during the mid to late 80s, possibly into the early 90’s.

There was a period after 9/11 where a sustained hard market looked imminent but it wasn’t long before normal service resumed. Then at the time of the global financial crisis we saw some hardening in financial lines, particularly in FI classes. Again this was short-lived.

With the soft cycle lasting for as long as it did, one might’ve expected hard conditions to last a little longer. But it looks as though capacity is coming back into the market, and it’s driving up competition in the sector. As market trends shift the other way, it naturally impacts the tactics carriers use to set themselves apart.

Prices are reducing, limits are increasing

With more capacity available, insurers can reduce price or increase limits, or sometimes drive up both – it’s just a case of how aggressive they’re willing to go in either direction.

It’s likely to create a number of cases where a primary insurer wields their power. With higher limits on the table, brokers don’t have to rely on other carriers to fill the void anymore. In a hard market where a client needed a £10m limit and carriers were restricted to only offering £5m, or even less, brokers would have to find multiple insurers to support the placement. However, as the market softens and the primary is now able to offer, for example, £10m alone, others may see themselves getting bumped from the programme at renewal.

This is where we believe we have an advantage at Spring. Having the support of a number of respected insurers and Lloyd’s syndicates behind us – Beazley, Atrium, Aspen, Ascot, Argenta, to name a few – means we can offer those higher limits across multiple binders, for target business.

Coverages are widening

Price and limits aside, it’ll be interesting to see how breadth of coverage shifts too. With plenty of capacity in the market, insurers and brokers usually look for innovative ways to differentiate in the coverage they offer. In the past, some have been gimmicks, but others have caused significant losses.

An example of this was when businesses started including Employment Practices Liability Corporate cover as part of their D&O offering. This was part of a moved to make a D&O policy behave more like a corporate legal liability policy. Some say they should never have been part of the same policy, proving to be riddled with risk and subsequent claims.

When the hard market hit, most insurers started to rethink these inclusions – either retaining them on a restricted basis or removing them completely. As the cycle circles back around, we could be heading for a scenario where scope of cover starts to widen again.

Spring stays the same 

But while price, limits and coverage fluctuate depending on the state of the market, there’s always one crucial element we keep the same at Spring. And that’s service.

It’s why our insurers trust us with their capacity and have the expertise to deliver what they need. Take Beazley, for instance. They know we’re specialists at underwriting small to mid-sized FI business, so they back us to develop that area of the business while they can focus more on larger ones.

We also never waste the capacity we’re given, finding ways to write business that’s in our appetite and delivers profitable results, year after year.

That drive to write our core business keeps our relationships with brokers healthy too. In the hard market, many insurers weren’t open to having a new business remit and just concentrated on the books they had. However, they’d often sit on quotes for weeks only to tell brokers they weren’t interested. This is something that I have heard from many brokers in the last couple of years.

We were still open to new business risks, even in those tougher times. And would make sure we turned around a quote, or at least an answer, without keeping brokers waiting.

Take note of those who came through in tougher times

As competition rises in the market, it’s a good time for businesses to pause and take stock of their partners who stuck with them when times were at their toughest. Those who value their long-term relationship, and keep coming through for them, time and time again.

When the market inevitably changes around them, those are the businesses worth investing in and keeping consistent.

Written by Nathan Sewell, CEO of Spring Insure