A return to technical underwriting a necessity as COVID-19 accelerates change: VIG Re

As the industry is buffeted by so many different challenges, such as decreasing investment incomes or how to underwrite new risk classes for which no valid experience data are at hand, it might be easy for reinsurers to seek sweeping rate increases across the board.

This is the wrong approach, however; they should instead be returning to the practice of technical underwriting and treating each client based on merit.

That is the view of Johannes Martin Hartmann, the chief executive of VIG Re, who told Intelligent Insurer that, especially in Europe, clients expect to be treated on a case-by-case basis according to the health and profitability of their underlying portfolio—a marked difference from what he sees in the US market where blanket rate increases are being enforced.

“We must get back to underwriting based on technical terms,” Hartmann said.

“The profitability of reinsurers has been eroded by deceptive investment returns and their reserve releases have all been used. But not all business is the same and it should not be a question of treating everyone in the same way.

“Some contracts will warrant higher increases than others, but as long as that decision is based on technical terms and the underlying portfolio, clients will understand.”

He admitted that there remains huge uncertainty around the extent of COVID-19 claims globally, with many court cases and litigation still ongoing in every country around the world. Great uncertainty remains around how wordings and exclusions will be interpreted in the courts; on top of this, it is not clear how long the challenges of COVID-19 will last.

Standard clauses
A vast amount of ambiguity remains around wordings and exclusions in the market with different reinsurers in different countries having each devised their own for various lines of business. In instances where a large panel of reinsurers is in place, this makes things especially difficult, Hartmann said.

He stressed that it is important that the market quickly agrees upon standard clauses wording. For some markets a “follow the fortunes” approach is still favoured by the cedants, especially if it comes to proportion reinsurance.

“There is a push for insurers to do that so that the reinsurers sit in the same boat as them and follow their destiny,” he said.

“However there needs to be clarity over what is covered and what is not, and one of the lessons learned from COVID-19 is that there is a lot of work still to be done.”

He added that the lack of clarity could mean some reinsurers would be walking away from certain deals if clarity and standardised terms are not agreed.

“You could see panels being reshuffled because certain parties are not comfortable with the terms,” he said.

“We need contract certainty in a way that is fair to both parties and becomes a market standard.”

While it is clear the insurance industry has no appetite for uncontrolled pandemic risk, the industry has also an obligation to help society better understand and manage risk, he added.

“It is the ultimate purpose of insurers and reinsurers to make society more resilient. This includes new kind of risks connected with the globalisation and digitisation of our world. Our industry can contribute here through taking on a certain part of the risk, but this has to be limited.

“The likely best solution will be the establishment of a public-private partnership, similar to the established nuclear or terrorism pools.”

On the other hand, the biggest driver for COVID-19-related losses so far was political decisions, together with rulings on local shut-downs—and this risk is barely insurable, he said.

“We have an obligation to use our skills and expertise—even though we cannot cover all claims.”

Advancing tech
Another consequence of the COVID-19 pandemic is that it will accelerate many aspects of change in the industry, Hartmann believes.

One obvious example of this can be seen in the way it has finally led to the digitisation of the industry: videoconferencing and home office have become the new normal.

As to the most discussed topic of this renewal—the extent to which the reinsurance industry will catch up with the marked hardening of commercial insurance and the retrocession market—“The pandemic is not the ultimate cause of rate increases, it adds to it as it represents another risk which has not been priced in but materialised as a negative surprise,” he said.

While there were many other forces pushing rates upwards, the uncertainty around COVID-19 has accelerated that process. But it will also accelerate the speed with which the market adopts digitisation.

“Along with many other aspects of the economy and society, it will make the industry embrace change and technology but also make it more resilient as a result,” he said. “It will be a transformational event for the industry in that sense.”

Growth for cyber
As society and economies become more digital and reliant on technology this will lead to another significant change. There will be a big increase in the scope and severity of cyber risks including what the industry now calls silent cyber: losses emanating from cyber risk, which were previously unforeseen and, thus, not priced for by insurers.

“I believe cyber will become a bigger threat to the world than pandemics,” Hartmann said.

“The pandemic will have accelerated digitisation across the board and consequently cyber exposure will grow exponentially as a result. But whereas we will eventually find a vaccine for COVID-19, there will be no vaccine for cyber risk.

“This has the potential to be massively disruptive to the global economy. But, for the re/insurance industry, this should represent a business opportunity.

“When it comes to COVID-19, we have a moral obligation to help; with cyber risk this is a business decision. I think there is massive potential for the industry, we just need to develop the solutions,” he concluded.

Johannes Martin Hartmann is chairman of VIG Re’s managing board. He can be contacted at: jm.hartmann@vig-re.com