Retailers are currently in the midst of a key trading period amongst fairly gloomy predictions for the economy and a lack of consumer confidence is driving a more cautious approach to spending on discretionary items.
This Update reflects the insurance market trends outlined in our recently issued half year market update (opens a new window) and provides a more focused view for the retail sector: Where there may be opportunities to take advantage of the more settled insurance market conditions and the headwinds that exist that may still provide a break to further price easing.
Property
The hardening of the market anticipated due to increased reinsurance rates at the beginning of 2023 has not been as severe as anticipated. New entrants and a healthy appetite for new business over the past twelve months have meant that any impact was restricted to those risks that are particularly exposed to natural catastrophes.
The pace of rate increases has continued to slow. For well managed risks, unchanged rates or modest reductions may be achievable. The past twelve months have seen most insurers extending their available capacity and there is now an increased appetite to quote for primary risks.
The recent reduction in inflation in the UK and elsewhere in Europe is welcome news for retailers. However, those with a large bricks and mortar estate will still need to adjust their values insured to reflect increases in values for buildings, plant, and machinery. This is likely to result in an increase in insurance costs.
To take advantage of greater market competition, retailers should make sure that property survey information has been recently refreshed and that it accurately reflects the exposure and risk management controls at key locations. Underwriters remain cautious and the most favourable terms will be available to those businesses that are able to demonstrate a proactive approach to risk management. A particular focus for underwriters is outstanding risk improvements, particularly those involving process change or training where capital expenditure (capex) is not required. The risk engineering measures suggested by potential lead insurers need to be carefully considered: A raft of unexpected risk recommendations or an unrealistic expectation of availability of capex to complete major projects can quickly offset potential insurance cost savings.
Insurers are looking carefully at the way in which they underwrite flood risk in the UK. Some markets are adopting new models to attempt to predict where catastrophic floods could occur. This is providing some challenges as businesses may face higher deductibles or restricted cover for locations that have not historically been a challenge to insure.
The increase of political unrest has also led insurers to review cover for riot, strikes and civil commotion, and some markets are seeking to sublimit or exclude such risks particularly in city centre locations.
Casualty
Appetite for retail risks continues to be plentiful with most insurers keen to increase their market share in this area. The competitive environment is tempering insurers’ desire for rate increases with low single- digit increases fairly typical. Retailers with sizeable deductibles for statutory classes may also benefit from the increasing flexibility that some insurers can offer in the form of collateral that supports these programme structures. Some markets will continue to require a letter of credit, but more insurers will now consider alternative surety-backed solutions which are frequently lower cost and less operationally restrictive.
The inclusion of Martyn’s Law, the new Terrorism Draft Bill, in the latest King’s Speech provides a strong indication that this will become law in the next twelve months. It will create additional roles and responsibilities for publicly accessible premises. The focus will be on “enhanced duty premises”, but “standard duty premises” will still need to specifically cover terrorism within their risk assessments and ensure that relevant workers undertake terrorism protection training. Insurers may be reluctant to remove existing terrorism exclusions and we can expect the market to take a cautionary approach. Underwriters will be keen to understand the risk mitigation measures in place or impose restrictions to reduce their potential exposure.
The increased focus on adequacy of excess of loss premiums may adversely impact retailers as the sector typically purchases higher limits to reflect exposures. The stagnate pricing over many years has not reflected the increased likelihood of catastrophe claims breaching excess layers and the market is now looking for corrections. Insurance buyers have become accustomed to renewals with very little change in pricing year on year and factoring in potential increases to budget processes may be prudent, particularly for those with US exposures.
Directors’ & Officers’ Liability
New market entrants and increased competition are providing favourable conditions for most insurance buyers. The sensitivity of the sector to customer sentiment and economic downturns means that underwriters tend to approach retail risks with a degree of caution. However, for those with strong financials that can demonstrate resilience, savings should be available particularly for excess layers. Underwriters are also rolling back some of the restrictions imposed in the hard market with “any one claim” coverage available for some risks. Engagement with markets is key to getting the best results. Providing insurers with the opportunity to scrutinise the financials and raise questions directly with the senior management can help to allay concerns and drive a better outcome.
The increasing focus on the ESG agenda is evident across all insurer negotiations. For retailers there is a particular focus on worker relations and supply chain risk. High profile brands are still hitting the press for both the treatment of suppliers and the way suppliers manage their workforce. Being able to demonstrate a robust approach is crucial to the availability of capacity.
Cyber
With its vast online presence and extensive customer data repositories, there is no denying that the retail sector is particularly vulnerable to cyber threats. Incidents such as data breaches can potentially lead to significant financial losses, damage to reputation, and legal ramifications. Understanding cyber risk therefore remains crucial.
The market has undergone three years of market corrections, driven by an increase in both the frequency and severity of claims, as well as the changing nature of claims profiles. We are now seeing a shift to more competitive market conditions. Aggressive new entrants are challenging more established players. They are offering a broader range of services and added value propositions for clients at competitive premiums.
For those that already purchase cyber insurance, the increased competition, together with improvements in cyber security posture should provide a period of premium relief. For businesses that opted not to purchase cover in the past or were unable to meet the rigid approach to minimum security requirements imposed over the last few years this is opening new opportunities. Insurers are reconsidering risks where progress is being made towards hitting insurers’ key requirements. This has led to an increase in new placements into the market in the last few months.
Although the market shift has manifested quicker and more dramatically than most predicted, it is important to note that insurers are once again reporting a rise in costly ransomware attacks, data breaches and business interruption claims. Whilst forecasting losses accurately continues to be a challenging task, there remains the risk that the loss environment could see insurers begin to pull back if the performance of their books deteriorates in the coming months.
For further information, please visit the Lockton Retail Practice Group (opens a new window) page , or contact:
Michael Kay: Head of Retail Practice Group
Phone:+44 161 828 3304 (opens a new window) Email: michael.kay@lockton.com (opens a new window)
Jane Baron: Head of Office Birmingham
Phone:+44 121 232 4512 (opens a new window) Email: jane.baron@lockton.com (opens a new window)
Matt Davies: Head of Lockton North, Manchester
Phone:+44 161 828 3302 (opens a new window) Email: matt.davies@lockton.com (opens a new window)
Kelvin Chadwick: Head of Production North & Client Advocate
Phone: +44 161 828 3334 Email: kelvin.chadwick@lockton.com
