Hard market v soft market
The insurance market is cyclical.

It experiences soft market conditions enabling low premiums and hard market conditions resulting in high premiums and difficulties in obtaining cover.

In the last 3-4 years you will have benefited from an extremely ‘soft’ market with very low premiums.

Prior to that around 2001 there were extremely hard market conditions and it was not unusual for firms carrying out surveys and valuations to be paying a significant proportion of their annual fee income for Professional indemnity insurance.

Hard market conditions can arise for a number of reasons.

The insurance industry accepts that massive losses resulting from 11 September and Enron (two seemingly unrelated events) acted as the catalyst for the dramatic increases in premiums around 2001.

Large scale economic, environmental and business losses have a significant impact on the reinsurance (the form of insurance that insurance companies hold) and insurers pass this onto their insureds across all classes of insurance. 

Rationalisation of the whole insurance sector during this time further contributed to the hardening of the market.

As the dust settled market conditions softened and so did availability and affordability of insurance premiums. However in recent months you may have heard talk of the insurance market “hardening” causing concern about increased premiums and higher self-insured excesses. 

Will the market harden and why?
There are two prime forces that drive the market. The first is the current level of competition between insurers for the business driven by increased capacity and the second is the favourable recent claims experience of the class.

RICS’ listed insurer scheme retains as much competition between insurers as possible and we have encouraged many new insurers to participate. 

It is, however, very unlikely that new insurers will enter the market in the short term.

Insurers are quietly nervous that there will soon become another epidemic of claims arising from an, as yet, unknown source.

The early 1990s saw the insurance market paralysed by claims for valuation losses.

It is widely anticipated that the incidence of potential global catastrophes (maybe even some of the UK environmental issues like recent floods will result in greater underwriting discretion).

Perhaps the unquantified effect of sub-prime lending issues on the banking system have the potential for significant impact on the insurance market.

Various influential voices in the market foresee that at some point in the medium term premiums are likely to harden, dramatically and quickly. 

An increase in valuation disputes is a real possibility, especially as the housing market is also beginning to deteriorate and, with the current ‘credit crunch’, repossessions looks likely to increase.

RICS Housing Market Survey

What to do to prepare for hard times

• Prepare your business for the coming premium increase – look at your projected cash flows and prepare for this increase.
• Your insurance is a significant cost to your business and you should pay more attention to ensuring risk management is appropriately addressed in your firm.

What to do to get the best terms from the market:

1. Get your proposal form in early. Brokers will have to work twice as hard this year to get you terms, so give them all the time and information needed to present your risk correctly.
   
2. Check the claims records your broker/insurer hold against your firm is correct and up to date.  Wrong information may adversely affect your premium.
   
3. Present a neat and tidy proposal form with supporting documents to show good practise. Answer all questions fully – do not say “see your records” or “as last year”.  These are distinctly unhelpful, to insurers and they will tend to treat your proposal form less favourably.
   
4. Agree with your insurance broker a strategy for renewal.
   
5. Highlight any risk management controls that you have put in force – in particular refer to those that will prevent re-occurrence of a previous claim problem.
   
6. Choose your broker carefully – do not be afraid to question their experience and knowledge – use specialist PI brokers wherever possible.  Some handy hints from the Association of Insurance and Risk Managers (AIRMIC) are available from the External Websites panel.
   
7. It is counter-productive to put in several brokers to the market at the same time – insurers will often only quote to the first broker they see.  Two brokers should be able to provide evidence of competitive quotations. 
   
8. Don’t buy the cheapest policy just because it is the cheapest.  In insurance, as with everything else in life, you get what you pay for.  Remember, one of the most important elements in all of this is what service and help your insurers will provide you with when a claim is made.  It may be worth paying a higher premium to ensure the quality of service you would expect from your insurer.

It is essential to look at the track record of the insurer in question within the class of business (as a general rule, often the last in are the first out, whereas the longer term participants will be there for the long haul) and check their security rating with the leading agencies Standards & Poors and A.M Best. 

Your brokers should be able to assist you with this. 

RICS has produced a guide called The Market and your options. 

What is RICS doing?
We have a close relationship with the insurance market.  We have asked for insurers feedback on their opinion of market conditions and what can be done to limit the inevitable increase in premium.   

We will continue to work with the market on your behalf and look out for further articles in the coming months.  We will provide you with as much advice and tips to help you during the predicted turbulent time. 

RICS operates a facility called the Assigned Risks Pool,

More information
RICS Insurance
T +44 (0)20 7334 3817.