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India: Liability Insurance – Navigating through hardening market

Is the liability insurance really hardening as some people are talking? We do not see signs of it in our country yet. That said, let us understand that liability insurance has a global flavor. We cannot expect to enjoy the luxury of a soft market for ever, as the market has begun to harden in other parts of the world.

“Fitch Ratings defines a hard market as one in which “pricing and conditions are consistent with generating an adequate or better return on capital,” according to James Auden, managing director and North American head of Non-Life Insurance Ratings. “Soft market means that pricing is generating inadequate returns,—-”

He contrasted the rating agency perspective with insurance brokers, who define hard and soft markets according to whether insurance prices are going up or down. “We refer to that as hardening or softening markets.”

More on the above and other interesting inputs can be gathered from “Property/Casualty Insurance Outlooks: What Experts Say to Expect in 2020” which can be accessed here

Let us see how, following some events, things turned topsy-turvy earlier for a few lines of insurance business around the world.

  • Terrorism – Post 9/11 suddenly capacity has begun to shrink for terrorism insurance.
  • Thailand Floods – Withdrawal/ Reduction of capacity.
  • Technology Liability – Major Reinsurer with significant share in the Indian market becomes very selective in underwriting technology liability insurance policies following continuous losses.
  • Major player exits Asia Pacific following continuous losses in Med malpractice.
  • Australia – Perception that premium increases not enough in unprofitable D&O market.
  • Corona Virus – A black swan event with multi-dimensional impact on insurance business. Immediate concerns are lack of clarity about coverage and long processing time for underwriting because of lockdowns. At this moment, it is difficult to estimate the quantum of loss the insurance industry is likely to suffer on account of claims. Explicit and absolute exclusion may become common.

At present in the Indian context on liability insurance, while there is no general cause of concern, market seems to be hardening for a few sectors/ few lines.

  1. Technology companies/ Pharma companies with a huge USA exposure
  2. Crime insurance with wider coverage
  3. Financial Institutions Professional Indemnity( FIPI)
  4. Credit insurance
  5. D&O insurance for companies with high exposure and particularly US listed companies

What are the signs of the hardening market?

  1. Shrinking capacity with exit or reduction of capacity by some players.
  2. Primary players reduce limits. Some of them may like to move to excess layers.
  3. Underwriting gets more disciplined. Insurers examine submissions minutely.
  4. Premium rates begin to increase.
  5. Coverage restrictions with increased deductibles.

How can one prepare to tackle hardening market? Some of the following ideas may prove useful.

  1. Start the renewal exercise well in advance. Insurance is a serious business. Give the importance it deserves. If adequate time is budgeted, there are better chances for exploration of alternative markets as also for effective negotiations.
  2. Understand your exposures and insurance gaps.These gaps may relate to unisurance, underinsurance, absence of cover for certain exposures, under payments caused by factors  in the claim process and coverage gaps caused by limitations in the policy like sub limits.
  3. See if there is duplicate coverage. Duplicate coverage does not offer additional indemnification. But, there may be costs associated with it. One needs to exercise caution with silent coverage under any policy. While seeking covers, give primacy to the covers relevant to the organisation’s exposures.
  4. Share all the information with insurers to eliminate adverse inferences. When required information is not made available, it is only natural for insurers to draw adverse inferences.
  5. Have best practices in place and implement them. They are necessary to prevent losses and adversities. These are needed and helpful regardless of insurance.
  6. Discuss with insurer/ advisor why you deserve better rates. When insureds have best risk management practices and policies in place and a favourable claims experience, coverage/ rate negotiation gets smooth.
  7. Redesign policy structure, if necessary. Explore if redesigning policy structure is useful like reducing the primary layer. Some times, it  may help in reducing the premium. The remainder can go under excess or umbrella policies.
  8. Higher deductibles: It is not a bad idea to volunteer higher deductibles, as it can reduce premium as also avoid time loss to pursue small claims.
  9. Help Insurers in executing subrogation rights: If there is a  possibility for recovery , do help insurers to pursue the subrogation rights. Do not routinely seek waiver of subrogation rights in the policy
  10. Develop long time relationship.Long term relations always come to the rescue in times of need. Place your demands before insurers clearly. But, do not change the goal posts, as it will create trust deficit. After all insurance is a relationship business. It is necessary to look at the long term commitment of insurers/ reinsurers, besides their other capabilities. Here is a profound statement on why  long term relations matter from “Looking ahead 2020 Property & Casualty Considerations for the coming year from WOODRUFF-SAWYER & CO”

“It’s a Relationship Business.” A closing thought on our industry adage: It is truest in difficult losses and difficult markets. Some lost sight of this in the soft market, and it quickly went from cliché to karma catalyst. Insurer capacity is not the limiting commodity, but insurer attention is. With submission flows up 50%-plus, underwriters and management devote their efforts to respected, collaborative partners—brokers and clients alike. We wish you the hard-fought satisfaction of weathering this “hard” market in 2020.”

P. Umesh
Consultant – Liability Insurance

Disclaimer: The information contained and ideas expressed in this article represent only a general overview of subjects covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisors regarding specific coverage and/or legal issues.