The current correction in the London Insurance Market pre-dated COVID and was in essence as a result of squeezed capital markets. The London Insurance Market is intrinsically linked to capital markets in a direct way and ultimately the market only really hardened in earnest once we saw an exodus of capacity. Before then, despite it being obvious for years that a correction was needed, the surplus of capacity and the focus on growth from Insurers meant that this never really materialised.
The shift in focus from growth to profitability has had an impact on the Insurance market in a variety of ways and one of the most important has been the reduction in Insurer line sizes. Previously it had been possible to purchase programmes for complex Financial Institutions with several different legal entities each holding their own policy and their own separate limits of liability. Some insurers would have aggregate exposures of tens of millions on one Insured and were happy to do so because the capacity was available and it enabled growth. This is no longer the case, however, and there is certainly a drive from Insurers to rationalise these programmes.
The real issue here is one of reserving capital. Where separate policies are issued Insurers have to reserve capital for each individual policy. There is obviously a cost to reserving this capital both in terms of an actual cost immediately to bear and also the loss of any investment gains that could have been made were the capital not reserved. That is why it is more cost effective and generally more appealing to Insurers to write one policy with separate aggregate limits which they regard as 'sideways exposure' and more importantly means that they do not have to bear the cost of reserving excessive amounts of capital.
For as long as the current market conditions exist and there is a paucity of capacity in the London Market it is important that your Broker interrogates why policies have been structured in certain ways historically. Moving from separate policies for individual entities to a blended policy does not have to equate to any denigration in cover but it could save huge expense on premium while retaining important lead markets; as well as the fact that it alleviates some of the administration burden for Insureds. This is one of the things that Brokers should be interrogating and communicating to their clients in advance of their renewal to ensure that they are not trying to find soft market solutions in the hard market which will always be expensive, inefficient and certainly not in the best interests of clients.
Should you wish to discuss the structuring of your Insurance programme please contact us.