Like a volcano that usually erupts once every 80 years but has lain dormant for the past 100, the insurance market is, many believe, ripe for a shift. A so-called soft market involving comparatively low premiums is, many believe, likely to give way to a hard market in which insurance companies struggle to make sufficient profit and respond by restricting cover and hiking up premiums. Wendy Cotton, social welfare manager at the specialist insurance provider Markel UK, says: "Historically, the market has gone in eight-yearly cycles. The interesting thing with this soft cycle is that we are 10 years into the eight-year cycle; it's been a bit later in coming round than it normally would."
The reason for the "coming round" is thought to lie in expectations about how much money can be made through insurance. In a soft market, companies compete to offer low prices; as it hardens, some bow out or don't quote competitive rates. The market is influenced by factors such as the health of insurance companies' investments, made up of all those premiums, and whether they have been compelled to make large payouts in the recent past - as a result, say, of widespread flooding.
But there is no consensus as to whether the market is hardening now. Cotton says some insurers are still targeting the charity market aggressively, a sign of a soft market, though this is happening less. "What we are seeing at the moment is that the market is hardening but only in certain areas of risk," she says. "Insurers are choosing which risks to apply those higher rates to." Care-oriented charities, such those responsible for elderly people, children or the rehabilitation of offenders, are seeing their premiums rise. By contrast, "lighter exposure" charities such as support organisations, or those primarily concerned with fundraising, are still benefiting from a competitive market, says Cotton.
However, David Willingham, head of risk financing at Save the Children, says he does not believe the market is in imminent danger of hardening. "The cycle has stopped turning and the market has just flattened and I don't know why," he says. "We've been saying for at least four years that it's got to harden soon - it hasn't, and I don't see any signs of it happening." He points out that rising motor insurance premiums are normally one of the first signs of a hardening market, but rates are still falling.
Other charity sector insurance specialists do see harder times on the horizon. Gary McCulloch, insurance and risk manager at the British Heart Foundation, says long-term agreements with insurers and profit-sharing schemes, whereby a charity receives back a percentage of a premium if its claims record is good, are both becoming rarer, which is usually a precursor to the premiums and rates going up. He says: "Quite often, if the agreements being offered start to dry up, it's an indication the market is hardening - and that has already happened." But McCulloch doesn't think the hardening is universal. For example, property and casualty insurance is hardening, he says, but indemnity insurance for directors and trustees is flat.
The question facing charities is whether they can do anything to compensate if a general hardening of the insurance market happens next year or the year after. The temptation will be to shop around more for the best deal, but that is difficult in the charity market because there are fewer than 15 insurers in this area and they invariably offer similar prices. Insurance experts recommend that charities develop long-term relationships with their brokers, so they become aware of their approach to risk management and health and safety. The broker will then be able to look for the best price with that evidence to hand. "A strong relationship with your broker means they should be able to insulate you, to some degree, from short-term changes," says McCulloch.
But there are adjustments charities can make. McCulloch recommends a flexible approach to excess limits. This is where, in common with personal insurance, a claimant pays a proportion of a claim - for example, £100 out of £500. McCulloch says charities could consider retaining more risk themselves. "Where the excess is hundreds of pounds at the moment, perhaps it ought to be low thousands of pounds," he says. "And where it is low thousands of pounds, perhaps it ought to be several thousand pounds."
The result would be lower premiums and, if claims were kept low, the charity would benefit. But there could be dangers. If a charity had to make multiple claims at one time because, for example, a whole fleet of cars was damaged by flooding, then a higher excess would mean the charity suffering a substantial hit. McCulloch recommends agreeing a cap on a charity's exposure: "You can say to your insurer that you are happy to take £1,000 excess on your fleet insurance for your 50 cars, but you don't want to pay more than five of those excesses at any one time."
For larger charities, self-insurance becomes a more attractive option at a time of sharply rising premiums. Self-insurance is where a charity pays routine claims from its own funds and seeks outside insurance only for exceptional events. Save the Children, for example, self-insures its international workforce. Willingham says self-insurance is in principle right at all times for large charities with a sizeable volume of claims; when the market is hard, he adds, "the savings are more obvious".
Case study - Jamie's Farm
The Wiltshire-based farming education charity Jamie's Farm fears that a sharp rise in the cost of insurance premiums will prevent it from offering its existing range of activities. Each year, Jamie's Farm provides residential breaks to 500 vulnerable children from urban areas; it has public liability, vehicle and domestic health insurance. Jake Curtis, programme manager of the charity, says: "If the insurance goes up significantly, we'd be very quick to look elsewhere to see if we could get a better deal." He thinks the charity would approach the National Farmers Union, which provides specialist insurance.
But he adds: "If the whole market goes up and we can't do anything better, then it would be very worrying because it could prevent us from doing things." Activities such as horse riding and log-cutting might have to be suspended because the charity could not afford the insurance for them. "But the more we stop offering certain activities, the less unique our provision becomes," says Curtis. "Our charity is all about giving young people real jobs with real outcomes, and if you stop any young person from being able to do any of that because of excessive insurance rates, it takes away the magic from the experience."
Jamie's Farm has eight employees, and Curtis says the time to search for the best insurance deal is not readily available. "To be honest, I'm working 35 hours with young people, on top of all the communication I have to do with schools and fundraising. Spending hours sorting out insurance is at the bottom of my list. I know it's very important, but the situation means we're unlikely to get as good a deal as we might. And if insurance rates go up exceptionally, then we are going to be punished."