Insurers in New Zealand, the Pacific region, and across the rest of the globe have increased premium rates in the past year due to a perfect storm of Covid-19, reduced investment returns, and natural catastrophe events. As rates rise and the market hardens, the burden falls on brokers to pass on the bad news to their clients.
Brokers are highly-skilled in dealing with the complex issues behind rate increases and capacity changes as they source insurance solutions for their commercial and individual clients. But what is the best way for advisers to handle the current market? How should brokers approach the discussion with key clients?
Risk managers, commercial insurance buyers, individuals and families are grappling with rising costs in New Zealand and overseas. Leading brokers say it’s important to communicate the reasons behind the market changes and how they have affected local capacity and coverage.
Megan Warner, commercial leader for Marsh in New Zealand, says brokers need to focus on their traditional role and be a clear communicator.
“The rising cost of insurance is a significant issue for commercial buyers, Warner says. “Explaining the dynamics of our local market, in context with the global market, helps aid customers’ understanding of cost levers. More than ever, successful insurance brokers are the ones who can deliver a balanced outcome, whilst embracing our customers’ needs and motivators.”
Warner adds brokers should look for creative solutions when capacity is tight: “I believe it comes down to good old fashioned communication and forewarning. Innovative insurance solutions, such as utilisation of captive or self retention programmes, go a long way to demonstrating the value brokers deliver to customers.”
Dave Penfold, a director at PSC Connect Insurance Broker Services, says “it should always be part of the role of insurance brokers to keep their clients informed on how insurers and reinsurers’ capacity, climate change, local and international catastrophe losses, and local claims frequencies affect insurance pricing”.
He adds: “Clients never like hearing that their insurance premiums are increasing. However if they are well informed as to how insurance pricing is affected and how the Insurers manage these influencing factors to ensure they maintain a strong balance sheet it makes the rise in their insurance premiums a little more palatable.”
Penfold notes that some clients can get angry about profitable insurers increasing rates. He says brokers should stress the importance of a financially sound insurance sector.
“The ill-informed clients sometimes see their insurers making too much profit, but we always stress the value of being protected by a financially strong insurer and security. This was very evident following the Christchurch earthquakes.”
Lee Garvey, head of financial solutions at Willis Towers Watson, also says “communication” is key, regardless of the line of business or size of client a broker has. He says a clear dialogue with clients is “ even more important in this market”.
Sam Kerr, a broker at SHARE NZ, says it can be difficult to explain rising costs when there has been no major natural disaster event.
He says customers have experienced larger increases in the past: “Post Kaikoura, Wellington we saw a massive jump in premiums and it wasn’t uncommon to see 15-20% increases in a single year. There were horror stories of direct insurers pushing through increases and making it unaffordable to have insurance.”
“When we explain rising premiums to clients, we’re currently not talking about the impact of large quantum events, like Kaikoura or Christchurch, but a series of smaller events like the Timaru hailstorms. We’re starting to see those effects come through,” Kerr says.
He says the small size of the NZ insurance market, and underlying reinsurance support, mean the market is vulnerable to increases in premiums when market players adapt to changing market forces.
At the end of the day we’re a relatively small market and you may not have much to choose from. You’re talking four or five main “local” general insurers, and some of those share common reinsurers. So really a small impact in the reinsurance layer that can drive significant change in how premiums are rated.”
What is best practice for brokers in 2021? Kerr says advisers need to be clear with their clients when markets are repricing and adapting.
“The biggest thing in explaining price changes is transparency. Insurance is a risk transfer, and the insurer is saying, ‘we will take this risk, for this consideration’. So they have to calculate what that risk looks like. When you recalculate risks, you are going to get changes. Prices are not meant to stay flat.”
“Pricing is not one dimensional, but that’s where the value of the broker comes into play. If a broker is transparent and shows how premium increases have come about, whether it’s because of a change in the region or particular market, that’s a core skill. Brokers need to be able to explain something complex in a way their client understands.”
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