Is the insurance industry geared towards attracting new investment?

The insurance industry has a habit of attracting lifers: people who enter, forge for themselves a career in this sector, and stay. Meredith Williams, vice president of Ceded Re at  AmericanAg, is one of them, with over three decades of experience, five of them with his current employer.

Based near Chicago, Williams dropped in to the Re/Insurance Lounge, Intelligent Insurer’s on-demand platform for interviews and panel discussions with industry leaders, to talk about how he sees the market in 2021 and, looking forward, to 2022.

“It’s challenging, particularly when you look at the loss ratio that’s been going on. The reinsurance market, over the last five years, has been looking at combined ratios in excess of 100 percent. At the same time, the return on equity for a lot of the publicly traded companies hasn’t been much above 5 percent on average. That’s not really meeting the targets of investors,” he said.

“That’s an interesting dynamic because there’s a plethora of supply when it comes to funding but not for this market. At the same time, we’re trying to get the margins and the revenue that’s needed to handle all the volatility of the last half decade.”

Investment capital has been tricky, with those with the money looking for short-term gains in an industry that values longevity. A mismatch, he said.

“It makes sense for capital investment to come in as a diversifier for investments. But the reinsurance industry, over 300 years, is looked at more as a long-term play. Up to 20 years ago, a lot of reinsurers didn’t buy retrocession coverage, let alone use the alternative capital markets in the ways that they do today,” he explained.

Climate challenges

Capitalisation is, in many ways, an internal problem for the market. Outside of the market, climate change continues to be a challenge, one that is especially prescient to AmericanAg, which for decades has specialised in providing insurance solutions to a largely farmer-based clientele.

“In the US we’re in the middle of the hurricane season and there’s been tremendous losses with Ida very recently. The question is what is going to happen on the loss side as much as anything else, especially if it’s non-typical,” said Williams.

There have been changes in weather patterns, he added, saying: “If you look at the frequency and severity of losses over the last 20 years, we’re in times that are very different and difficult to predict. We now have these unique storms such as Derecho, Uri and Sandy, that are catastrophes.

“All this has led to the question of how we can get this right. What is the right expectation of loss, and what margin do we need?”

Even as the industry grapples with this conundrum, the subject of financing has not gone away. “There needs to be more money in the system because there are more losses in the system,” said Williams. “The return on capital needed for reinsurers and other investors needs to be met, or that capital won’t be there in the longer term, especially if there’s somewhere else it can go to.

“That said I think there’s a differentiation as to how you look at rate. In the last season, the market didn’t seem to get as much as it wanted. It felt that those who were loss impacted were pretty severely impacted. You were looking at cost increases of 25, 30, and 40 percent. That’s not easy for a company to sustain as a cedant.”

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Williams believes the market next year will probably be similar to 2020, with a lot of losses, adding that it would be similar to 2017 and 2018. “There’s adequate or surplus supply,” he said. “The capital markets are driving this to make sure expected margins are more adequate than they were going to be a couple of years ago. That will put pressure on rates.”

As to where AmericanAg was itself going this year and next, Williams began to talk about the reinsurance side of the business.

“With regard to our broker assumed book, it’s a portfolio that we acquired about 20 years ago. We’re continuing to look to grow and diversify away from some of the exposures we have on the direct side. It’s continually growing, and there’s a domestic and an international element to that,” he said.

“For 2021 it’s going to be about channelling where the market is heading, versus traditional or non-traditional. We play in the non-traditional paces. We’re looking at both elements of capital because accessing more than one bucket of capital makes sense,” he concluded.

To view the full Re/insurance Lounge session click here