ArgoGlobal MD seeks quality hires and a good flood model in 2018

Hiring more quality staff, better rates and a reliable US flood model—those are the three things that Dominic Kirby, managing director, ArgoGlobal, wants to see or achieve in 2018. But he also stresses that the year could be an interesting and challenging one for the market for many other reasons.

“More top-quality people is always at the top of my list,” he says. “In 2018 we are expanding our operations in Europe, Asia, and South America to create opportunities closer to our clients, which will also create new roles within Argo. In order to support these opportunities as they emerge in 2018, we will rely on engaging the very best people both regionally and here in London.”

He explains that on the back of this he also wants the business to use the data and expertise it possesses more effectively.

“We have bucket-loads of it, and need to find ways to bring it to bear more effectively in our underwriting decisions. We gained extra capabilities through the Ariel acquisition, particularly around catastrophe and modelling data, which will help us with that goal, but we also see opportunities to improve our use of data across our specialty insurance classes,” Kirby says.

He adds that he wants to exercise the company’s power to choose business more. “We have scale as an international business, and an opportunity now to improve our discipline and risk selection. We must resolve to choose only risks that we expect to meet or exceed our loss ratio expectations, rather than being concerned about volume,” he says.

Finally, he adds, the business needs to think outside the London box. “We will see numerous and better opportunities in some specialty lines, and the potential to implement smarter distribution strategies, when we move closer to the risk through the international platforms we are building.

“It is important that we ensure we pay enough attention to those opportunities,” he says.

In terms of rates, he stresses that the losses of the third quarter have ensured the industry will achieve better reinsurance rates than expected six months ago, and substantially better in certain areas.

“But we must not forget that we are in the process of paying a $100 billion catastrophe bill and moving towards sustained pricing adequacy. We are some way off it in most areas, and won’t be able to fix it all at January 1. Achieving sustainable profitability will require a series of measured rate increases,” he says.

“In our insurance business the rating environment had become essentially unsustainable in a number of areas before the major catastrophes. Now we need to build on momentum feeding from retro and reinsurance. To do so we must ensure things change on an organisational level, not just in property.

“I wish for an institutional memory to remind us that, across the classes, recent hurricanes or not, things must change if we are to begin making money again.”

Kirby stresses the “discovery of the length of collective market memory” will be important. “If it extends more than three months, we may achieve sustainable change that leads to a much better market, or at least to an environment where better businesses can make some money,” he says.

“As rates strengthen we will see some property business bleed back from London to the US, but the questions are how much, and who will be willing to write it, either as expiring or with lower rate increases than London requires. Property business was challenging before the storms, and underwriters now need a portfolio-wide rise to get back to acceptable loss ratios.

“The pressure is on every underwriter to achieve it. US underwriters have seen business leaking away to London for several years, and might be willing to write at lower rates to get it back home. That business has been a very powerful driver of profitability when rates are good, so we need to manage it carefully, rather than let the better quality risks decamp to the US.”

He adds that the debate over pricing may also emerge in some unexpected areas. “Cyber coverage is bound to be a big topic as more re/insurers face substantial bills for unexpected claims arising through lack of clarity of cover or exclusionary language,” he says.

“On a macro level, tax changes in the US could start to change the dynamics for Bermuda reinsurers. They face a double hit: lower corporate tax for US companies reducing the attraction of a low tax environment offshore, and the changing ability of US insurers to cede risk to Bermuda.

“If the tax reform takes hold, the amount of revenue generated on the Island may decline and with it presumably the depth of the market and the talent pool.”

In terms of wishing for a more reliable US flood model, Kirby asserts that no-one knows the real price of flood risk, because the historical event dataset is so thin, and that makes it very difficult to establish sustainable rates across all categories of exposure.

“We recently carried out a comparison of the major vendor models available, and shared the results publicly in collaboration with Lloyd’s. The estimates of loss were materially different even with an exactly identical dataset. I’d like to have a model that enables us to supply a considered product across all areas of the US—we are working on implementation as we speak,” he says.

Future concerns

Kirby notes that an overlooked issue that has the potential to be very important is the UK’s Financial Conduct Authority’s (FCA) decision to run a market study of wholesale broking.

“This could ultimately be one of the most important events of the year, but it will take the whole of 2018 to discover the outcome. If the FCA does find issue with the London wholesale market, a series of consequences including changes in regulation could result for brokers and carriers alike,” he explains.

Another issue he notes was the testing of collateralised retro and reinsurance by hurricanes Harvey, Irma, and Maria (HIM). The storms focused minds on the impact of burning or locking up a big chunk of collateralised capacity.

“It now seems that the available post-loss capital is sufficient to replace what was lost—as long as it is deployed at significantly higher rates. If we suffer a similar catastrophe year in 2018, it will be very interesting to see if the investment funds are able and willing to reload a second time,” he says.

“Compared to the alternative capital markets, the traditional Lloyd’s Names suffered more deeply from the impact of the major losses. Given the fact that many of them had weathered not only 9/11 and Katrina, but also asbestos and Andrew, it was surprising that HIM seemed to disrupt the available capital.

“Lloyd’s requirements to fund solvency deficits and expected deficits due to the storms in cash or equivalent assets appeared to restrict Names’ capital flow into the market and brought the stack of assets that had previously seemed unshakeable into question for the first time since September 1996 (when Lloyd’s implemented its Reconstruction and Renewal plan [R&R]).”

Finally, Kirby notes, a continuing theme for 2017 was the emergence of managing general agents (MGAs) across all classes of business, including reinsurance.

“They change the dynamics of the marketplace and lead to some interesting institutional challenges around control of the business. For instance, a new £50 million MGA shared by 10 syndicates could focus 100 percent on top line, tearing up pricing and conditions to get scale without any real regulatory oversight as their numbers get lost in the larger portfolios of the syndicates involved,” he says.

“By contrast, a new £50 million syndicate in Lloyd’s would be under constant regulatory scrutiny, with limited capacity to deploy at monitored pricing.

“Neither business might last for that long, but one would be a lot more disruptive. In the current environment renewing underwriters will likely look for sizeable rate increases.

“Newcomers need only to convince themselves that pricing is adequate. This difference could lead to some very intense competition in areas where rates need to materially improve,” he says.