Why insurers need to be more honest with risk and insurance managers

​The hardening market is a major concern for risk managers and insurance managers, who increasingly feel that insurers are using COVID-19 as an excuse to further drive rates up, according to Scott Feltham, group insurance manager for Compass Group—a multinational contract food service company headquartered in Chertsey, UK.

He believes the situation is being worsened by the reluctance of insurers to have constructive conversations with clients.

Compass Group has been significantly impacted by the COVID-19 pandemic and while it is in a stronger position than many, having completed a £2 billion capital raise in May, it remains keenly aware of the impact of the rising cost of insurance—and this means Feltham has to find cost-effective risk transfer solutions and be able to fully account for any rising insurance costs.

“The biggest challenge for me at the moment is the hardening market, which has been exacerbated as a consequence of COVID-19—but insurers are hanging their hat on COVID-19 a lot,” Feltham says.

“The financial lines market, for example, had been hardening for a while pre-COVID—but is the pandemic being used as a useful excuse for further rate increases?

“As this continues, senior stakeholders are going to start questioning the value of insurance,” he adds.

“At Compass we have started to utilise our captive to a greater extent owing to the hard market, not so much for the financial lines but, for example, for non-damage business interruption (BI).

“If you look at our risk profile, we clearly require coverage for non-damage BI. We’re now making use of our captive to effectively finance non-damage BI risk given the current lack of appetite for the same in the external market.”

​“The market is, I feel, using COVID-19 as an excuse to not respond to certain questions and not to reveal their true position.” Scott Feltham, Compass GroupGood alternative
Feltham says that increased use of captives is a trend he is seeing across the board, with many insurance managers looking to make more use of existing captives, or to set captives up, due to the fact that external risk transfer is becoming cost-prohibitive.

“They need to look at better, more alternative ways of financing risk and one way of doing that is to make use of a captive,” he says.

“Some who don’t have captives are assessing the feasibility of captives which could smooth the risk transfer cost over time. As the market continues to harden, bringing about further rate increases, more buyers will move towards processes that enable them to self-finance risk, whether through captives or through taking more risk on the balance sheet directly.

“That is going to reduce the premium income for the market, so it is unlikely to help the hard market in the long run.”

A contributory factor is a shrinking appetite within the re/insurance market for certain types of risk—particularly a lack of capacity for certain financial lines.

Notably, AXA XL has announced it is placing its London executive liability and financial institutions book into run-off.

“That’s going to send further shockwaves through the D&O market,” says Feltham.

“If other key markets adopt a similar stance over the next six to 12 months it’s going to make the D&O market tougher—and it’s brutal out there at present.”

​C​ommunications
This is a time of massive challenge for insurance buyers, with increased retentions and reduced coverage—and Feltham believes it has never been more important to have good lines of communication between the insurance industry and insurance buyers.

“As an insurance manager, I will be keeping a very close eye on the market and how it develops over the next 12 months—I won’t be waiting until the next renewal before, for instance, strategising our approach to how we finance certain key risks,” says Feltham.

“I’ve always believed that you should get through a major renewal and that the cycle should begin immediately—you should remain engaged and in dialogue with the insurer throughout. The current situation requires even closer engagement with insurers—which they can be reluctant to do.

“Communication, or a lack of it, is an issue, and the market is, I feel, using COVID-19 as an excuse to not respond to certain questions and not to reveal their true position.”

COVID-19 is having other effects too: Feltham believes the perception of a whole raft of risks is changing now that pandemic risk has gone from a seemingly fantastical prospect to a reality.

“Speaking more generally, pandemics have been on risk registers for a long time, but I think people tended to assume that it—a pandemic—probably wouldn’t happen in their lifetime,” he says.

“People are now contemplating what the next thing will be and are shifting attention to some of those peripheral risks which ought not be on the periphery any longer.

“Climate change, for example, will now be at the forefront of the C-suites’ minds; also political risks and civil unrest, and certainly cyber.”

Feltham believes COVID-19 has brought greater rigour to business continuity planning, crisis management and risk management, giving risk managers an opportunity to shine and to refocus the C-suite’s attention to risks that had previously sat on the margins.

Meanwhile, he sees an opportunity for insurance managers to engage with insurers about their organisations’ changing risk profiles in the light of COVID-19: with many people working from home while business premises are left unoccupied, there is a chance to make changes and savings by reassessing insurance contracts.

“Corporates have been hit very hard by COVID-19. If they can engage with insurers around reduced exposures, that may give rise to conversations around returned premiums,” he says.

He believes that insurance managers are generally becoming more vocal, and that this is important in order to ensure that the C-suite understands what is happening regarding the impact of the hardening market.

“When it’s a soft market, you are rather on the periphery, making savings year on year—but these days, we are getting ourselves in front of the C-suite, articulating the issues we are facing at this time,” he says.

“It’s important for us to manage the expectations of senior stakeholders. There will come a point when the C-suite start to ask questions of you so it’s best to give them clear and frequent updates.

“The issues you are facing are ultimately the issues the organisation is facing—you need to be managing expectations ensuring that the board is clear on the issues that lie ahead”.

“This presents an opportunity to get in front of the board, demonstrate that you are in full control and explain how you are going to position the company to achieve the best available outcome in the current climate.”