The madness in the insurance world started in December 2022 with a crazy renewal season for the London Market and Lloyd’s. It has continued throughout 2023 with premium increases globally that are mind-boggling and raising eyebrows, while at the same time, enormous losses were being reported –and then more recently, enormous profits were reported too.
In a bizarre turn of events, many incumbent insurers were pulling out of the insurance markets in the first half of the year, while in the second half, new insurers have been jumping into the gold rush-like opportunity the departing insurers left behind.
You couldn’t make this stuff up!
Insurance is experiencing some of the biggest changes it has seen in decades. This article tries to explain this crazy picture, focusing on the US home insurance market and the UK motor insurance market which have been making headlines for all the wrong reasons in 2023.
In the US, global warming has resulted in warmer seas and hotter, drier temperatures globally. These, in turn, are making disasters far more expensive for insurers, resulting in vast areas of the globe becoming almost uninsurable (for example in 2022, Florida experienced massive damages from hurricane Ian and California experienced uncontrollable wildfires), while claims fraud and litigation in these areas added further cost. Meanwhile, in the UK, the impact of severe motor claims inflation caused huge losses for UK retail insurers with premium growth not keeping up.
To make matters worse, a number of reinsurers pulled out of some markets at the start of the year, creating a gap in coverage especially for protection against natural catastrophes. This reduction in reinsurance capacity has increased insurers’ cost of buying protection for extreme events for shareholders and increasing the insurer capital required by regulators.
Insurers are leaving the market
According to an analysis by Milliman, UK retail insurer, profit margins fell by 75% in 2022. Despite high premium increases, insurers continue to make risk losses,and many are pulling back from the UK insurance market or switching to higher margin / lower risk business lines like commercial insurance. The result is steep escalation in premiums experienced by insurance consumers in 2023, in many cases, premiums increased by over 40%.
London Market insurers, who write much of their business in the USA, had very high claims in 2020 (due to the pandemic), and 2021/2022 (catastrophes) as well as suffering ongoing fraud and claims inflation in the US market. In addition, reinsurance has been harder to obtain to protect against catastrophes.
So insurance shareholders took fright, and made a strategic decision to step back. In 2023, many insurers have been pulling out of major UK and US insurance markets (e.g. RSA and Zurich pulled out of the UK motor insurance market, while most major US insurers stopped writing new property business in Florida and California).
Reinsurers took on too much natural catastrophe risk prior to 2022, resulting in large losses, and are also pulling out of reinsuring key markets like Florida and California because of the higher risks that this entails.
Meanwhile, insurers are making excess profits in 2023 …
Bizarrely, at the same time as insurers head for the exit, significant insurance profits are being made. Lloyd’s has just reported a second year of bumper risk profits and growing premiums, with Brit recently reporting H1 profits of $547m in 2023 (1788% up from 2022!). Almost any insurer in commercial insurance is raking it in.
This is because commercial insurers across the world bumped up their premiums at the start of the year, and are making these hugely increased profits on the back of that. External parties are diving into the insurance world to capitalise on a hardening insurance market.
Are we talking about the same insurance market? Yes! What is going on?
And now the future is looking brighter for insurers everywhere
Even midway through 2023, the picture for commercial insurers has changed. Premiums are up significantly in 2023 (c30%-40% for London Market insurers, c40% to 50surance regulator% for UK retail insurers, c50% for reinsurers) with the level of competitiveness reduced as insurers pull out of key markets. Premiums started increasing in huge disruptions have continued to rise throughout the year. The resulting profits are likely to be widespread across the London Market in 2023.
For UK retail insurers, however, this boost to profitability is yet to be recognised in their financials as premium increases take longer to implement, and profits are likely to emerge only 6 to 12 months after commercial insurers. Expect a huge profit lift in the second half of 2023, and throughout 2024.
New entrants will replace lost insurance capacity
This huge disruption has resulted in a revolving door, with capital providers spotting an opportunity and new insurers jumping into the market. In Florida, the in is already approving a number of new insurers that are entering the.
Already a number of acquisitions have been announced as new capital enters the market,e.g. the CVC purchase of a majority stake in Dale, and the merger of Atlanta Group (a subsidiary of Ardonagh) and Marker study to enter the UK personal lines market. Expect many more announcements in the next few months.
How long will the good times last?
The impact of this new capital will be increased competition in the market. This will take time to emerge, but within 2 to 3 years, the capacity that was withdrawn at the end of 2022 will be replaced. As has happened in the past, the insurance cycle will swing from a hard to a soft market.
There remain warning signs for insurers
This may not be the end of the story though. While the inflationary spike is likely to be a one-off, the trend of a warming planet is likely to cause more se catastrophes, resulting in significant losses from hurricanes, wildfires, floods, etc.
Insurers need to protect themselves from these extreme events by understanding risk better, diversifying their portfolio and managing their exposure within risk appetite. Underwriting technology can help insurers do this – it has never been more important to protect against risk.