In the relatively staid world of business insurance, we have managed to battle it out over the past three or four years as the UK entered and exited it’s recession. Times have been tough for one and all, for us we have had to cope with the reduction, in our estimations, of around 15% in the number of active, trading businesses looking for insurance. A friend of mine who is a solicitor, specialising in land purchase, always says to me that we should be ok because people will always need insurance. Whilst this is undoubtedly true, you have to understand that there are still roughly the same number of insurers and underwriters operating in 2011 than there were in 2007 before the economy took it’s nose dive.
What this means is that they are all chasing an ever decreasing number of clients. Those insurers that have clients are also suffering because, contrary to what their actuaries are probably saying, they are not increasing their premiums to make up for their increased losses and reduced investment income. What they are doing is having to depress some of their prices just to keep customers, profitable ones, on their books.
So what does this bode for the industry as a whole? We have been here before, in the late 90’s and the start of the millennium which led to one of the bigger, growing, insurers (Independent) going bust. I worked for a large commercial insurance company at the time and one of the tasks I worked on in the “strategy” team, was to produce a report for senior management on exactly how the Independent was doing so well. The company was the stock market darling with it’s share price seemingly knowing no limits. The rest of us in the industry could only look on in wonder. They were picking up insurer of the year awards, picking up big clients and some of the best staff in our company went to work for them.
Then, as we all know now, the truth came out and the Independent crashed. There where rumours, trials and a lot of their staff ended up with worthless shares. The question we are asking is, who is going to be next? We have our ideas but of course we cannot go into print because without hard evidence we are going to be screwed into the ground for making libel. There are a few companies out there who, in the cold light of day, when you sit down and look at where they are now compared to where they were five or ten years ago have grown very fast. The ones we are thinking about have all been involved in either motor or liability insurance. Both of these classes of business are susceptible to what are called long tail claims. These are the claims that go on for years and years and cost an absolute fortune. If the insurers are not careful and do not reserve adequately for these claims, then they will turn around and bite them on the bum later on.
One analyst has gone into print about one large insurer saying that they think they are not adequately reserved. The insurer has categorically refuted these suggestions but, at the end of the day, the analyst must have thought long and hard about this before going to print. We need to sit down and see what the Financial Services Authority is going to do. They rightly got a very bad press about the problems with the banks, here’s hoping that they keep a closer eye on the insurers. As a business insurance broker we have to be careful about who we choose to recommend to our clients. We cannot rely solely on what we read in the press, it is about time the FSA categorised insurers along the same lines as the ratings agencies.