How to adapt and succeed in a hard insurance market

Hard-market

Authored by RSA

What can one company’s experience from 20 years ago tell us about how to adapt in a hard market?

The last hard market the insurance industry saw was nearly 20 years ago, in 2002. We’ve seen ups and downs in the market since then – but nothing on the scale of what we now face. That means many brokers, underwriters, and clients might not have experienced the conditions of a true hard market before.

Andy Jones, Head of Operations and Proposition at RSA Risk Consulting, was working at one of the largest food manufacturers in the UK when the 2002 hard market hit. The group’s brands included many household names like Hovis, Saxa Salt and Mr Kipling – and it employed 15,000 people and owned 60 sites across the UK, France and Ireland. Read on to see how he helped to transform the company’s risk management culture and embedded lasting change that helped the company thrive.

The hard market of 2002: a series of natural catastrophes, then 9/11

The hard market of 2002 was a direct result of the events of 2001. The collapse of Independent Insurance, natural catastrophes and 9/11 put a lot of pressure on the global insurance market – transforming it almost overnight. It sent shockwaves through the whole industry, exposing just how interconnected everything was.

How a hard market affects company thinking

What does a hard market mean for companies? Bluntly: higher premiums and choices between having adequate cover or not. As insurers limit their exposure to risk, it becomes harder for companies to find insurers willing to provide cover. The crunch first comes at renewals – and the increase in premium can transform a company’s approach to insurance from a yearly transaction into a monthly discussion point for top executives.

The shock of insurance renewals in a hard market

As a risk manager for a food manufacturer, Andy witnessed the effects of a hard market on a large company. “Our property premium increased by 63% overnight, for a 3% increase in physical assets. The premium hit £10 million, and the deductible went from £500,000 to £5 million bringing property risk management sharply into focus for the Executive Board.”

The company was not alone: the whole food sector faced the same problems. “Everyone was having an awful time trying to get insurance. For many, it just wasn’t possible to get full coverage.”

When self-insurance is not an option

There were not a lot of options for such a large company. There was only one insurer on the table – so the soft market tactic of simply going elsewhere for insurance wasn’t an option.

The company could have self-insured, as some companies chose to, but the risks associated with the food industry at that time were too great. There had been a series of large fires at sites around the UK as a result of combustible composite panels. If the Mr Kipling factory burnt down, for instance, it had a maximum loss potential of £275 million. Not insuring it was just not an option either.

So the board decided to pay the premium, and put Andy in charge of property risk management for the whole group. Over the next three years, he transformed the group’s approach to risk, embedding property risk management into the company culture.

Risk management tops the agenda

Risk management was suddenly part of board-level discussions. Andy reported to the board every month on which sites had been audited, issues discovered, measures implemented, and so on. In some ways a hard market makes it smoother to get buy-in on a risk management programme. “It’s much easier to get the ear of executives,” says Andy, “when there’s a huge bill attached to it.”

Building relationships becomes key priority

One of Andy’s key responsibilities was to develop the company’s relationship with its insurer and broker. “I took the time to really understand their drivers, to accept their challenges to us – and to push back too,” says Andy. With a stronger relationship, he was able to communicate much more openly with the insurer. “With a robust, tripartite relationship, we were able to have really pro-active engagement with the insurer, talking to the underwriters to understand their concerns and demonstrating to them the progress that we were making across the group.”

Building a good relationship between company, broker and insurer was at the very heart of the success of the risk management programme. “It’s really important, in a hard market, to build a relationship where people on all sides can talk openly and honestly. It meant we could keep the focus on the right areas of  risk management across the business.”

Carry on doing the right thing

The programme of improvements was so successful that the CEO saw it as an opportunity to make lasting change to the risk culture in the group. Even when the market began to soften, the CEO chose not to reduce the deductible. Instead, says Andy, the CEO maintained the downward pressure on companies in the group to carry on doing the right thing. It had made the business more resilient – and more efficient, too.

Key strategies: perspective, risk control, relationships

One of the most important lessons, says Andy, is to change the company’s view of insurance. In a soft market, it can be easy to think of insurance as the thing you get to cover you for everything. You might be able to get away with that in a soft market – because the ease of getting insurance covers the problems this strategy creates. But in a hard market, there’s nowhere to hide. “Insurance is only ever one part of a much bigger mechanism of risk management,” says Andy. “Don’t think of it as a yearly transaction that covers you for everything. Use it for what it’s designed for: covering you for an unforeseen or catastrophic event.”

Every company and broker can use the current hard market as an opportunity for lasting change. Now is the time to focus on controlling risks, building relationships, and making businesses more resilient. And when the market eventually softens, you might find you’ve made real positive change to the company’s culture. 

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