Where are we headed when it comes to Commercial insurance? It isn’t just about buildings and lost business after a flood or fire. There are a range of cyber risks, then there are political campaigns, reputational damage, third party supplier or finance problems and much more. Here are some thoughts from Mactavish.
Mactavish, the leading independent expert on commercial insurance placement and dispute resolution, which advises a range of FTSE 100 and FTSE 250 companies on their insurance needs and contracts, has issued a call for urgent and radical reform of the industry. The company believes a long-term focus on price over value of cover has led to considerable erosion of insurance contract quality, growing opacity around broker fee structures and an increasing one-size-fits-all approach to complex risks.
Today, in the context of a rapidly changing technological and geo-political environment, Mactavish launches a year-long programme of investigation and discussion with the aim of encouraging debate from across the UK commercial insurance industry on how to address this decline, and ultimately make recommendations for transforming the sector over the course of the decade ahead.
Mactavish believes the long soft market conditions that have now come to an end have seen many traditional underwriting and broking skills sidelined. During this period, the insurance community has focused largely on the cost of insurance rather than its value-added skills. As a result, clients have come to see insurance as a commodity purchase rather than a complex financial instrument capable of preserving or breaking a company’s balance sheet. Too often, clients only understand this distinction when they have a claim denied.
A market that provides a standardised product and merely serves to pass on macro price dynamics without mitigation will become less attractive to policyholders with more sophisticated insurance needs. Bearing in mind the relatively high cost of doing business in the UK (and particularly London), Mactavish believes the UK insurance market is on an unsustainable trajectory. Indeed, the company points out that the UK has gone from being the third largest non-life market to the fifth in a decade.
Bruce Hepburn, CEO of Mactavish, said: “Insurance buyers are facing a growing number of risks – many of which are relatively new, such as cyber – at the same time, the industry has de-skilled throughout the last decade-and-a-half of soft market conditions. While this is already a problem it will be massively exacerbated as insurance rates are now rising as the market hardens. Not only are buyers being served with unsuitable products, they will now have to pay much higher rates for the privilege.
“The question now is whether the return to higher premiums will see insurers and brokers increase their investment in the technical skills that underpin the sector or whether they will simply enjoy the increased margins. Ultimately, if brokers only pass on insurers’ products at market price, clients are quite right to question the value they provide.”
David Hertzell, Chairman of Mactavish’s dispute resolution team, and a former law commissioner, said: “The UK insurance industry employs over 300,000 people and provides a greater net contribution to the UK economy than any other sector. However, emerging markets are now taking a lead – and showing higher levels of profitability than the UK and other established hubs. While the underwriting excellence that sits at the heart of unique institutions such as Lloyd’s remains, other institutions – in alternative global centres – can now credibly claim to match them. This then, is a picture of managed decline in the UK’s position as an international market.”
Bruce Hepburn said “We don’t want to adopt a critical attitude towards the great market professionals we work with day-in-day-out. But we do believe the UK insurance market is at a defining juncture. The decisions we make now will have very real long-term consequences. It’s vital that we now take an honest, open and constructive approach to our future. Our overall aim is for London to be seen as the gold-standard for sophisticated risk transfer.”
As part of its campaign to encourage a broad cross-section of sector participants to share their views, Mactavish believes there are two clear questions that need to be answered:
- How can we ensure that the UK insurance market retains and enhances its competitive edge in an increasingly globalised world?
- Is the market delivering for policyholders, and discharging its wider duty of care to align with and support long term economic growth in the UK by providing high quality financial risk transfer protection to the real economy?