Monday, May 30, 2022

Return to listings

Control the ‘controllables’ this insurance renewal season

The state of the hard insurance market has been well publicised over the past five years, during which time we’ve seen significant premium increases with reductions in cover, especially for areas impacted by natural catastrophes.

The state of the hard insurance market has been well publicised over the past five years, during which time we’ve seen significant premium increases with reductions in cover, especially for areas impacted by natural catastrophes.



Status update on property insurance


Right now, inflationary pressures are contributing to a spike in the cost of insurance claims.  Factors such as the pandemic, supply chain disruptions, the increased cost of raw materials and labour, the recent flood events in Queensland and New South Wales, and the war in Ukraine have all contributed to these inflationary pressures.  Although these events impact earnings and not capital, their contribution to the increased cost of claims is factored into insurers’ pricing models.

In general, the cost of an insurance claim has risen by around5% and when considering the increased price of raw materials, labour, and freight, this can be as high as 10%.  As such we are seeing these costs passed on – either partly or in full to policyholders.  At Honan, we had already observed a slowdown in pricing increases as insurers cautiously exited a mindset of remediation into one of growth. We do not expect inflationary pressure to lead to another hard market, but it will prolong rate increases for the remainder of2022 and potentially into 2023.



Concerns about widespread underinsurance


The present state of the market has raised serious concerns about underinsurance among insurers, which in the event of a claim, could mean clients have inadequate cover - leaving them exposed.

At Honan, we have seen recent examples where the cost of a claim has exceeded the sum insured of the building declared, which has triggered ‘co-insurance’.  Co-insurance is a condition found in the policy where the policyholder effectively co-insures or contributes a portion of the settlement amount should the claim amount be greater than the value declared to the insurer.  The larger the difference between the amounts, the higher the contribution needed from the client.  These are unknown costs that are rarely budgeted for, and they can be considerable.

Insurers are making underwriting assumptions on the true replacement value of buildings, plants, equipment, and contents, especially where there is little or no recent increase in the declared values (over the past 3 years).  These underwriting assumptions can lead to inflated increases in premium rates.  



What can you do?


To help avoid underinsurance and co-insurance in the event of a claim, it is essential that insureds undertake formal valuations of their buildings every 3 years.  A valuation incorporates both economic and social inflationary factors when determining the true replacement cost of a building, plant, equipment, and contents.


An updated valuation is likely to mean an increase of the declared value of the property, which may attract a higher premium.  Depending on the time between valuations, the level of increase can vary.  No increase in premium is ideal for clients, however, a valuation offsets this in two ways:


Coupled with a valuation of the physical assets insured, a detailed Business Interruption (BI) review should also be completed.  This involves the analysis of the business’ financials to determine the right level of cover and how the business interruption should be insured.  A BI review also uncovers unknown and/or contingent risk exposures the business may have from dealing with major suppliers or key customers.



Looking ahead


We do not see these events impacting insurers’ overall capacity to underwrite risks in Australia. Insurers will continue to focus on natural catastrophes and the price and amount of insurance they offer for ‘high risk’ businesses.


In our view, the market will continue to operate in a multi-speed fashion for the remainder of FY22.  Clients deemed as ‘low risk’ will benefit from greater market competition and will experience lower rate increases (if at all). For the right client, insurers are open to offering long-term agreements as a means to secure profitable business. Clients that are categorised as ‘medium risk’ can expect rate increases of up to 10%. For clients who have lodged claims or where there is little evidence of risk management, insurers will be less willing to underwrite risk, leading to higher rate increases. In extreme cases, some clients have elected to self-insure portions of their program to preserve cash flow.


We expect current conditions to continue for the remainder of 2022 and perhaps the first half of 2023, depending on insurers’ full-year financial results.






To find out more, feel free to reach out at any time.


Travis Wendt

Head of Placement


Return to listings