APCIA 2021 roundup

As the 2021 conference season has rolled around, it has been an encouraging sight to witness the re/insurance industry meeting face to face once more after such a long absence.

Videoconferences are undoubtedly useful and will clearly remain a fundamental part of the market in years to come, but as the American Property and Casualty Insurance Association (APCIA) gathered for its annual event in Denver at the beginning of November, few in the room would have preferred the virtual alternative.

With travel restrictions to the US from the COVID-19 pandemic still in place, overall attendance was down from the last time the event met in person, in 2019, but the return to face-to-face meetings and discussions could not have come at a better time.

While the pandemic has been one of the dominant themes in the interim period, the industry is also staring at a pivotal 1.1 renewals season in the coming months as losses have mounted and climate change and secondary perils have rapidly risen to the top of the agenda.

How to address and accurately price this risk was one of the key talking points of APCIA 2021, as the market seeks to get a handle on possibly the most challenging changes to its fundamental assumptions ever seen.

Wildfires in the US, flooding in Germany and unseasonable storm patterns over the last year have dealt the industry a timely reminder of the looming threats, and attendees were keen to discuss how to move forward with a shifting and seemingly rising risk profile.

The running theme underlying these concerns is pricing, and how the market will respond at 1.1 to a significant loss burden from the past year as it begins to reassess the risks it is taking and pressure grows to move prices towards a more sustainable level.

While the short-term pricing debate rolled on, the longer-term focus on environmental, social and corporate governance (ESG) factors of the industry and its clients came to the fore, with attendees looking for more ways for the re/insurance market to develop this new paradigm in corporate life.

With the doors now shut on APCIA 2021, here is a look at the key themes which dominated this year’s discussions.

A shifting climate

Climate change has leapt to the forefront of the global consciousness as the trend has become unignorable over the past few years, and the re/insurance industry finds itself at the coalface of the business world’s response to the issue.

That dynamic played out clearly at APCIA, with a panel dedicated to discussing the industry’s response to climate risks and how it will have to examine some of its fundamental assumptions to secure a sustainable future for both themselves and clients.

After a record year of losses, the urgency of the industry debate on the problem has heightened considerably, and Dan Dick, executive managing director at Aon, told Intelligent Insurer that the market had to rethink its approach to climate perils.

“We should be thinking about climate perils and considering how a number of things from wildfires and hurricanes to winter storms and convective storms are being impacted in terms of their frequency and severity,” he said.

“We need to think on an aggregate basis and examine how these events play out over the course of a year,” he said.

The executive added that over the past decade there had been a notable change in weather patterns globally which had altered previous assumptions around the potential losses these risks pose, with the term “secondary” perils potentially no longer fit for purpose.

“We have seen a lot more in the last 10 years, which has been exacerbated by climate change. The warmer conditions in the western half of the US is a catalyst of these events,” he said.

“We have also seen wildfires in other parts of the country, and people are becoming much more knowledgeable about the potential impact of what have always been referred to as secondary perils. Maybe we should be calling them climate perils,” he said.

Swiss Re president of US P&C Keith Wolfe agreed that climate change was fundamentally changing the industry, saying that the divergence of catastrophe frequency and severity from historical patterns was absorbing a significant chunk of the company’s efforts.

“We’ve been spending a lot of time on this for the last several years. It’s been a bit of an outlier in the marketplace, to be honest. We’ve been talking about the secondary perils issues we’ve had here in the US market,” he said.

“Whether it’s tornadoes or hail, wildfires, winter storms, you name it, almost any part of this country is exposed to something that wasn’t a severe problem in the weather environment five or 10 years ago. The frequency and severity of those types of events has been astronomically higher than we’ve seen historically.

“This has changed the risk landscape and has increased what real loss costs are. You see that certainly in flood environments—when events happen that’s been a particularly bad area, and the wildfires are another example,” Wolfe said.

Renewals looming

While the future impact of climate change was a major theme at this year’s APCIA conference, the more immediate issue of the 1.1 renewals remained a dominant topic of discussion throughout the event.

Across the industry there is a growing sense that rates have to rise this year to account for the spate of catastrophe losses suffered by primary and reinsurance carriers over the last 18 months, as well as to address concerns over inadequate pricing with climate change risks rising.

That said, there remains little consensus about exactly where pricing will go at this year’s renewals, particularly on the reinsurance side as capital remains abundant, and Mohit Pande, head of property underwriting for the US & Canada, Swiss Re said that the current market remained up in the air.

“I would describe the market as being volatile and uncertain right now,” Pande said.

“Within this challenging environment, the industry has played its role of being a shock absorber quite well, by providing solutions and improving overall resilience.”

He said from the pricing perspective the momentum appeared broadly positive, but warned that the market would need to be mindful of the challenges that lie ahead.

“If you look at it from the rate side the environment is a positive one. However, it’s important that this environment continues to improve as we look ahead, so that it can keep pace with the loss costs we are seeing for property business,” he said.

The main risk which is driving carriers to up their prices come January is those climate perils which were at the top of everyone’s minds at this year’s conference.

In its commentary around the renewal season published ahead of ACPIA, ratings agency Fitch said that the outlook for the sector was actually improving, given that the expected price increases helped build its resilience to climate-linked risks.

This came as it said that 2021 was likely to be one of the five costliest years the reinsurance industry has ever faced.

“This is largely due to increasing natural catastrophe claims linked to climate change,” it said.

“Prospects of a strong economic recovery and lower COVID-19 pandemic-related losses were also key,” Fitch added. “We expect double-digit percentage premium rate rises for property catastrophe cover in 2022 due to the excess losses in 2021 and the prospect of higher natural catastrophe claims frequency and severity in future.

“This would make 2022 the fifth successive year of price rises. The price increases should help to bolster the sector’s underwriting profitability as they gradually feed into reinsurers’ underwriting margins,” Fitch said.

Outside of traditional carriers, the agency noted the growing demand for catastrophe bonds and other alternative securities which could help share the burden of climate exposure with the mainstream market.

“The growth of catastrophe bonds to pass risk directly to investors could become an important factor to mitigate the sector’s exposure to climate change risk in the coming years,” it said.

ESG

As in other industries, ESG concerns have become a major theme in the re/insurance world in recent years, for the industry itself and how the changing regulatory and cultural landscape impacts coverage for clients.

With ESG coming to play a larger part in corporate thinking across the board, AM Best noted that more carriers are experiencing demand from investors and other stakeholders to place ESG at the forefront of their strategic thinking.

It said that six in 10 US insurance companies agree that demand from stakeholders to explicitly consider ESG factors in their decision-making is growing.

However, Best’s Special Report, “US Insurers’ Perceptions of ESG,” published on November 1, found that, compared with Europe, the US insurance industry is still in the nascent stages of ESG integration.

“Survey results show that insurers believe there are risks to ignoring stakeholder pressures related to ESG factors, and particularly with regard to diversity and inclusion, carriers generally view corporate governance as key to managing and mitigating reputational risk,” said Rosemarie Mirabella, director at AM Best.

Some in the industry have gone further from making their own commitments around ESG to offering specific coverage tailored for clients which protects their reputations and balance sheets from related risks.

Nir Kossovsky, chief executive officer of Steel City Re, told Intelligent Insurer that the growing importance placed on ESG created new expectations from stakeholders, and that the firm had launched a new ESG insurance product in mid-September, designed to provide boards of directors with much-needed protection.

“ESG is an aspiration, a goal of environmental sensitivity or awareness, social justice and excellence in governance. That aspirational notion creates in the minds of various stakeholders an expectation of certain levels of performance,” he said.

“For those that do not meet expectations, the charge of greenwashing poses a tremendous risk to companies and specifically the members of the board of directors.”