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This past year sent shock waves through the insurance marketplace. Claims are up, investment income is down. The COVID-19 pandemic dealt a financial blow to virtually every industry, climate change is altering risk models, economic and racial tensions led to widespread civil unrest, and insurers’ profitability has suffered.
The bottom line is that the hard market we are now in is here to stay, at least for a while.
For insureds, the hard market means that it will become increasingly more challenging and costly to secure coverage. Underwriters are repricing and reassessing the amount of risk they’re willing to absorb. In this new normal, brokers need to demonstrate that their clients are a compelling risk with a strong risk management strategy, and practices, in place. At the same time, brokers must be capable of offering their clients innovative alternatives to traditional risk sharing models.
At Risk Strategies, we believe that our founding vision to be a national leading specialty brokerage has risen to meet the incredible challenges of the hard market our clients face today and in the foreseeable future.
What’s Behind the Hard Market?
An adjustment was overdue after a prolonged soft market. The financial impact of climate change has spurred an increase in catastrophic claims and runaway jury awards have led to social inflation, all of which have outpaced the industry’s premium pricing models. Rates have simply been too low to pay claims. Attachment points that were appropriate decades ago don’t reflect the value of today’s dollar. As a whole, the industry has been pricing and designing insurance programs based on 30- or 40-year-old pricing data.
Historically low interest rates are also a big driver of the hard market. The prime rate hasn’t budged for 10 or 11 years and that has had an impact on profitability and investment income for insurers.
The pandemic, of course, has touched every industry, including sectors like entertainment, higher education, real estate, construction and hospitality that have been hit especially hard. Claims and lawsuits are on the rise as a direct result of COVID-19. Climate change is also having a huge impact on pricing as well as capacity. Carriers are rethinking the amount of risk they’re willing to absorb as more businesses and properties are put in harm’s way from climate-related flooding, hurricanes and wildfires.
As a result, there has been a snap-back in terms of pricing models, as well as shrinking capacity and more restrictive terms on policies. Similar to previous hard markets, a reduction in capacity driven by material changes in reinsurer appetites is adversely impacting our larger clients’ ability to place Property, D&O, Umbrella and Auto Liability programs.
Today, insurance companies are paying very close attention to the quality of the risk they write. In addition to having a keen eye on aggregation of risk, they’re scrutinizing such things as quality of maintenance and care, construction type and quality, replacement cost, occupancy, human resources protocols and communicable disease exposure.
Why Specialization Matters
This renewed focus on underwriting discipline brought on by the hard market means that our clients should aspire to be in the top quartile in terms of protection and proactive management of risk to get the best coverage and pricing, and they need a risk professional to help get them there. This is where specialization matters. Brokers who focus on the particular needs of businesses within a specific industry are better able to understand the unique risks and the various potential solutions. They can anticipate problems and help clients deploy their limited premium dollars more effectively. Specialists also benefit from having deep relationships with insurance underwriters who are also specialists in their fields. When industry experts on the brokerage side and on the insurer side work together on solutions, the result is better outcomes for clients.
Our vision at Risk Strategies has always been to be a top five player in each of the industry sectors that we choose to participate in. We’re not trying to be all things to all people. We want to be all things to those who need our expertise.
Specialization also brings the ability to offer clients long-term, alternative risk hedging models like captives. Captives are more insulated from the ups and downs of the market cycles. We’ve seen a lot of interest in them as more insureds look to reduce some of the frictional costs of trading dollars with insurance companies and, instead, manage the risk themselves, particularly in the form of deductibles. Risk Strategies is a market leader in the alternative risk space with over 800 captives under management.
In our rapidly changing world, it’s not just about managing generic risk anymore. In addition to the current hard market, our focus is on helping our clients manage uncertainty and its long-term consequences.
The vision for a brokerage based on specialization that Risk Strategies was founded on has held up to the moment we now find ourselves in. And we look forward to growing that expertise and helping our clients navigate the year ahead.