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Risk gap widening - Aon

The risk gap is widening for insurers who are taking less premium for more risk, leading to significant concern about sustaining their profitability levels, according to Aon’s ‘2006 European Property, Liability and D&O Report’.

The report found that an overwhelming majority of insurers have reduced rates over the last 12 months and many now offer broader cover to fend off the competition. 

The report said it expects the situation will worsen for insurers as nearly half surveyed across property and liability business areas expected to give further rate reductions in 2007. As a consequence, insurers cited sustaining profitability as their number one business concern. 

Oliver Schofield, leader of Aon’s Global Property Practice, said: “This remains a buyers’ market.  Insurers are genuinely concerned about future profit sustainability in the context of climate change, continued fierce competition and the impact of the Eastern Europe effect. Barring a sequence of major catastrophes or a significant market failure, the downward pricing trend in the property market is set to continue throughout 2007.” 

The report noted that the emergence of Eastern Europe economies meant that companies are now keen to move to a low-cost working environment with state-of-the-art facilities located away from natural disaster zones. These companies enjoy a reduced labour cost and are further removed from an increasingly litigious Western European culture. 

According to the report climate change continues to be a key underwriting concern for insurers, with an expectation that it will trigger more natural catastrophes. 

Also highlighted is the spread of US litigation and governance issues that has created concern in the boardroom, as shown by the purchase of higher limits in D&O liability buying patterns.

Adam Codrington, executive director of Aon Professional Risks, commented: “Recent highly-publicised cases, such as the NatWest Three and Sportingbet, have increased already significant concern in the boardroom about the quality and appropriate levels of D&O insurance. Our clients are paying more attention to their cover, in some cases increasing limits by 50 percent or more.”

The report has identified a continuing trend towards greater risk quality - over half of insurers say that buyers are providing more and better quality risk information than two years ago. Some 90 percent of property insurers will consider further premium reductions to encourage this trend towards more qualitative and quantitative information.  

Aon said that while competition is driving 80 percent of property insurers to offer policy enhancements for the same premium as last year, buyers are generally happy with the cover provided, although there are some gripes in the liability arena over inadequate capacity for product recall, pharmaceutical/chemical and environmental risks. 

Simon Thompson, leader of Aon’s Global Liability Practice added: “Following four years of profits, insurers are competing strongly for market share and there is no evidence yet of the indicators necessary to bring the soft market to a halt. EU legislation in product recall and now environmental matters are creating greater responsibility for buyers. Both offer the prospect of increased income for insurers provided they make good their promises to provide more cover.”

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