Looking back at a tumultuous 2017

Stephan Ruoff, chief executive officer - Tokio Millennium Re:
Hurricanes Harvey, Irma and Maria, as well as other catastrophic events in the third and fourth quarters of this year, such as the California wildfires, have further tested the third-party capital business model globally, which has demonstrated well its co-existence with the traditional reinsurance model. Global market resilience has increased as compared to previous strong catastrophe-prone years, and a $100 billion impact has been handled seemingly well.

Brian Schneider, senior director, Fitch’s Insurance team:
Without a doubt the biggest story of 2017 for non-life insurance, particularly in reinsurance, was the return of significant catastrophe loss events after almost five years of more benign losses following Hurricane Sandy in October 2012. The devastation caused by Hurricanes Harvey, Irma and Maria, coupled with the significant losses from the earthquakes in Mexico and wildfires in California, generated potentially record insured catastrophe losses in 2017, with (re)insurance industry losses expected to surpass $100 billion.

The reinsurance industry holds significant excess capital and is well positioned to absorb the losses from recent catastrophe activity given the industry's very strong capital levels at the beginning of 2017. As a result, most rated entities remain well positioned to take advantage of any pricing improvement at the January renewals and beyond. However, for some re/insurance companies, the 2017 catastrophe losses constituted a capital event, and as such they may be less able to capitalize on improved market conditions.

The significant third quarter 2017 catastrophe losses will push the global reinsurance sector to an underwriting loss for the year, with a forecast 2017 aggregate reinsurance combined ratio of 110 percent for Fitch’s universe of monitored reinsurers. This is the weakest underwriting result since the 113 percent posted in 2011 when the re/insurance industry experienced record insured losses from multiple significant global catastrophe events, including the Tohoku earthquake and tsunami in Japan, New Zealand earthquake and Thailand floods. Earnings from investments and operations outside of non-life reinsurance will likely enable the group to produce positive earnings for the full year, with a net income return on equity projected at 2.1 percent in 2017, down from 8.5 percent in 2016.

Nigel Teasdale, head of motor, law firm DWF:
Change to the discount rate was the most important development affecting the industry in 2017 and has inevitably has led to increased levels of premiums even though insurers have been working to try to avoid passing on the full cost of the change in the hope of an early reform of the processes involved in setting the rate. The decision by the former Lord Chancellor Liz Truss to cut the rate from 2.5% to minus 0.75% in March was as surprising as it was illogical. The new rate seemed to have no correlation with claimant investment strategies and the returns being obtained from them.

The government's proposals for reform have been welcomed by insurers including the change from very low risk to low risk investments, with a specified process for reviewing the rate every 3 years. However the recent scrutiny of the proposed legislation by the House of Commons' Justice Committee has raised the suggestion of further evidence being needed which would if accepted by government add additional delay and in turn pressure on premiums.

Alongside that reform, the Queen's Speech in June confirmed that despite Brexit pressures it was still the government's intention to go ahead with its reforms on whiplash and small claims generally by introducing a tariff and raising the small claims track limit. We continue to await the Civil Liability Bill to bring the tariff into operation. In the meantime the MoJ have established Working Groups to take forward the process changes needed to accompany this change. I and my colleagues from FOIL are representing insurers' interests on those groups.

Beyond that, the effects of the Grenfell Tower disaster continue to be felt across the insurance industry as the Inquiry opens, while most the most important subject of all remains Brexit, as to which the triggering of Article 50 in March was fundamental. Some breathing space at least seems to have been bought by the agreement reached at the conclusion of the Phase 1 talks.

Kelly Lyles, chief executive client & country management, insurance, XL Catlin:
The cat events that took place in 2017 shone a bright light on the insurance industry and put claims front and centre. It was an opportunity to showcase the talent pool in claims and demonstrate our industry’s ultimate value. The feedback I’ve heard from clients and brokers has been consistently positive. I’m proud of how our own claims teams performed – professional, efficient and responsive. I’m also pleased with how the industry overall has stepped up. There have been many instances, for example, of assigning a single loss adjustor to work on behalf of multiple insurers to facilitate a fast and effective response.

These events also tested our ability to go above and beyond. When all communications were down in the Caribbean, for instance, our clients were nonetheless surprised when our exclusively retained crisis response consultants, S-RM, turned up on their doorsteps to check if they needed any assistance.

David Gittings, chief executive of the Lloyd’s Market Association:
During a year that had many moments of change, we believe that one of the most important is the adoption of new legislation to support the ILS industry in London. For centuries Lloyd’s has made its name by leading innovation in the global insurance market, not just by insuring risks that others shied away from but also by its flexibility in leading the development of new products and new ways to finance risk. The Risk Transformation Regulations 2017 and the Risk Transformation (Tax) Regulations 2017 are something the LMA and others worked hard to achieve, and we are heartened to see a Lloyd’s business was the first to take advantage. We have heard some suggest that ILS is cutting into our business, but the solution is to make it our business. In practice many Lloyd’s managing agencies have done just that over the past several years: some of the strongest and most promising alternative capital players are connected directly to existing Lloyd’s managing agencies, and many syndicates use some form of capital markets’ capacity in their retrocession programmes.

Benjamin Serra, vice president and senior credit officer, Moody’s:
In the P&C segment, the most important event was the succession of hurricanes Harvey, Irma and Maria. Although these events did not materially impact European primary insurers, they impacted reinsurers significantly and will likely affect 2018 reinsurance renewals, including those in Europe.

In the life segment, we would refer to three M&A operations: the acquisition of Delta Lloyd by NN Group, the envisaged acquisition of Generali by Intesa SanPaolo, and the merger between Standard Life and Aberdeen. The first one, agreed in December 2016 but concluded in 2017, reveals the significant challenges that some insurers face in a low interest rate environment. Delta Lloyd’s solvency ratio was weakened by low interest rates and decided it would be best to tie itself to a stronger insurer. The second one, which did not happen, shows that banks are increasingly willing to diversify in insurance and also reveals the blurring frontiers, not only between banks and insurers but also asset managers. The third one illustrates, what insurance companies are doing to adapt to the low interest rate environment and the increasing competition with other savings providers. Insurers increasingly diversify in asset management, and in an extreme version, Standard Life has turned into an asset manager.

Luzi Hitz, CEO, PERILS AG:
In my view, the two most important developments in 2017 were HIM and greater awareness of Cyber risk. After years of softening rates, HIM has triggered a potential turning point in the price cycle. While these events are probably not large enough to shake the entire industry, they provide an opportunity for many underwriters to correct markets, or at least the loss-affected lines, and return them to more sustainable pricing levels. However, we must recognise that such major events are relatively infrequent and the potential for market forces to drive irrational behaviour is likely to remain a constant.

In my view, 2017 might go down as the year in which cyber established itself as a major line of business. It is interesting to see how different companies approach this new risk. Some see it more as a threat because it is a risk which is hard to measure and managing potential accumulation issues is extremely challenging. Others see it as an opportunity to grow and innovate. Nobody knows who the eventual winners will be; but it could be that fortune will favour the brave - as long as the brave behave intelligently and are not guided by volume targets only.

Iain Bremner, managing director, Barbican Managing Agency:
There is no doubt that HIM was the stand-out series of events in 2017. While there is still a degree of uncertainty regarding the final insured loss total from these hurricanes, the combined figure will undoubtedly position it amongst the largest accumulated losses to hit the market. The most significant knock-on effect of HIM will be the impact on rate developments at 1/1 and the extent to which these can be converted into a longer-term positive pricing event. It also provides the first major test of the resilience of the ILS market.

Julian Tighe, CEO, Asta:
It has to be the hurricanes and other catastrophes, not because of their immediate impact, but because of what happened in their wake, and what will lie ahead.

The catastrophes of 2017 were not a market-turning event in the classic sense, not like the dramatic losses of 2005 or 2001. However, they have had a subtle and emerging impact on the behaviour of the market. One effect is on capital and liquidity. This is being driven by three phenomena:

1) existing capital providers reloading after the impact of the storms, earthquakes and fires;
2) all capital providers displaying caution over the entities and classes to which they choose to deploy capital, as they see the opportunities in a pricing uptick; and
3) changes in Tier 1 and 2 capital requirements for Lloyd’s operations. Backers must fund 10 percent of their capacity in cash for 2018, 20 percent for 2019 and 25 percent for 2020.

In short, capital is plentiful, but not readily available or deployable. Those with easy access to plentiful liquidity have a significant advantage over others in the market ahead. Trade and alternative capital alike are interested in investing in insurance, but they may be more enthusiastic about new opportunities, rather than refinancing existing businesses.

Many underwriters are keen to protect their underwriting position while the full impact of events is played out and absorbed. We have seen a notable uplift in the rating of loss-affected contracts, and as time has passed, the hurricanes and other cat events have hardened sentiment. The market is displaying a strong desire to halt reductions across the board, and we see evidence of a small uptick in rates, 5% or so, in non-cat-exposed lines.

A very positive story to emerge from 2017’s catastrophe losses has to be Lloyd’s payment of claims. The response has been excellent, and will prove a great advertisement for the market. We have very few proof points for the value of the insurance product except in the prompt payment of valid claims. They convert our promise to pay into action. The market effort to ensure that claims are paid promptly has been significant and successful. It will serve us well.

Ståle Hansen, president and CEO, Skuld:
It is hard not to mention the various weather-related catastrophes and casualties in the Caribbean and the North Sea, though their impact on rates remains unclear. Additionally, we witnessed positive developments in the hull & machinery market. More broadly, it is likely that we saw the trough of the cycle in 2017. Many insurers realise investments remained volatile in 2017, which makes it difficult to assess the macro environment, and crucial to focus on maintaining a positive technical result.

Johannes Martin Hartmann, chairman of the board of directors, VIG Re:

Obviously the Nat Cat events we have seen in 2017, not only “HIM” but also the Californian wildfire, Debbie and others have not only made a dent in the earnings of all global players. Whether this is a turning point in the reinsurance market cycle – if there is still a cycle in this economic at all - remains to be seen. As the industry is likely to experience negative cash flows and revised earnings projection in 2018, we will see how much new capital will actually flow into the market.

Dennis Sugrue, director of insurance ratings, Standard & Poor's:

In the non-life space, 2017 will definitely be characterized by the catastrophe losses.  We estimate that global insured cat losses will fall in the $130-150 billion range for 2017, making it a record year.  The US primary market and global reinsurance industry will bear the brunt of these losses, largely due to the estimated $100 billion of losses in the Caribbean, Southern US and Mexico during Q3 and at least $12 billion in Q4 from the California wildfires.  But we think that both sectors have proven resilient to these record losses.  For US primary P/C, the Q3 catastrophes should be an earnings event for the sector, and for the reinsurers we expect that these losses will blow through the sector’s earnings and eat up some capital, but will be manageable.  As a result we have taken very few rating actions on reinsurers as a result of the losses.  We also estimate that the alternative capital market will bear some of the losses from these events, more so in the collateralized reinsurance class rather than catastrophe bonds or sidecars.  This could be the first major test for the alternative capital market, so it will be interesting to see how investors and sponsors respond in 2018.

The EU-US covered agreement is a major step forward in increasing trans-Atlantic regulatory harmonization and levelling the regulatory playing field.  This is a welcome development for European re/insurers, particularly as they have been vocal in the past about the amount of collateral that non-US reinsurers have had to post to operate in the US, which they deem to be anti-competitive; however we don’t envisage any significant economic benefit for European re/insurers in the near term.  Most importantly though, the signing of the covered agreement has sown the seeds for the development of a group capital framework for US insurers.   While there is much to be ironed out between the NAIC, the Federal Insurance Office and the Federal Reserve on what form this framework will take, starting on this journey is a milestone in itself.

The decision in September to rescind AIG’s SIFI designation by the US Financial Stability Oversight Council (FSOC), which followed MetLife’s successful appeal of the SIFI tag in 2016, raises questions in the US and globally about the systemic importance of insurers to the economy.  In fact the US Treasury issued a report in November with a number of recommended changes to FSOC’s evaluation and designation process for SIFIs, namely suggesting that the council focus on an activities-based approach to measuring the industry’s systemic risk, rather than an entity-based evaluation.  Later in November, the Financial Stability Board (FSB) decided not to refresh it’s list of global systemically important insurers (G-SIIs) for 2017 and the IAIS published a consultation paper in December on an activities-based approach to systemic risk.  So it will be interesting to see how the G-SII designation and international capital standard (ICS) framework develop in 2018, if at all.

The capital controls around overseas M&A put in place in China in 2017 is likely to dampen cross-border insurance acquisitions in 2018, which may help to further cool the M&A hot streak we observed in the insurance industry dating back to 2015.

The publication of the IFRS 17 standard for reporting insurance contracts in May was a major milestone for the IASB.  We believe this standard will help to improve the transparency and comparability of insurers’ reported accounts, but may also increase the volatility in their results.  However, we do not envisage any rating implications as a result of the implementation of this standard in 2021 as the fundamental risks underlying the insurance business will not change.

Peter Allen, partner, Moore Stephens:
The 29th March 2017 was clearly an important day for our London clients. Although our view is that Brexit is by no means an insuperable challenge for the London re/insurance market – indeed, operationally rather less complex than recent EU regulatory initiatives such as Solvency II and GDPR – the cultural impact of Brexit will reverberate for many years. I expect the tone of the London market to become more “offshore” as the regulatory, fiscal and entrepreneurial supertankers start their slow divergence.

2017 saw the continuation of a long-running trend which is the sale into foreign ownership of the bulk of London underwriting capacity. By one of our competitor’s calculations over 80% of London re/insurance capacity is owned and ultimately controlled outside the UK. Although that makes limited difference in the short run, in the event that there is market-changing event, decisions crucial to the future of the industry will be made outside London by those with perhaps limited emotional investment in the place, just as happened after Big Bang in the banking market of the 1980s. In that case it resulted from many fewer major players but ultimately a vigorous increase in the global competitiveness of the industry.

David Edwards, founder and CEO of ChainThat:
Blockchain, or more appropriately termed, distributed ledger technologies (DLT), are still very new. 2016 saw the industry beginning to become aware of this enabling technology and start to consider if it could work on a technical level when you applied considerations like security, privacy of information, or performance, in a commercial environment. If 2016 was about awareness and a heathy mix of excitement - possibly hype and a healthy dose of scepticism - 2017 has been about the emergence of this technology as having the potential of being a real game changer for the sector. Leaders have realised that DLTs offer the commercial specialty (re)insurance sector both opportunities - in terms of substantially reducing the ever-growing operational and administration cost burden that characterise the sector and which clients pay for - but also a threat: that of potential disintermediation of parts of the distribution chain.

Without doubt, application of DLT will have both these effects, but it has the potential to be very beneficial to any party which embraces it and uses it to make their businesses more effective, delivering benefits not just to themselves, but to their end client, the consumer of insurance services.

Consequently, 2017 began as the year of ‘What is Blockchain and will it work?’ and ended as ‘What is our path to using DLT in our business, and how do we learn quickly?’. At least, that’s the story for the many leaders in the sector - and it’s a big step in one year.

Adam Safwat, vice president, underwriting & business development of IGI:
The obvious answer to this is the major spate of catastrophe losses in the third quarter. While this activity is not unprecedented, it should not come as a surprise following years of benign loss activity.

Recent events will have a material impact on balance sheets, and as this is potentially a capital event for many exposed markets, it will surely act as a turning point. Insurance and reinsurance has been inadequately priced for years, with pricing heavily influenced by brokers. Now the market is faced with circa $100 billion of accumulated aggregate losses, with some companies in the market seeing operating earnings and reserves completely wiped out by the third quarter losses. This will undoubtedly have a huge impact. While rate rises are predicted, the question is will this be seen across the board?

After any major loss, there is always a debate around how connected the global insurance and reinsurance markets are – however, believing in one huge interconnected pool of global capital does not work in practice, but sensible underwriting across the board does. IGI has long been endorsing and encouraging a return to disciplined underwriting and it has stuck to its strategy of prudent underwriting during a challenging period in the market. How the markets react to the current dynamics will be telling and I hope, a wakeup call for the industry.

Samit Shah, insurance solutions manager, BitSight:
The topic of risk aggregation and accumulation achieved much higher visibility in 2017. Recent events like Dyn and MongoDB (in 2016), as well as major attacks like Wannacry and Petya/NotPetya have made the insurance community recognize that cyber security (and cyber insurance underwriting) is a topic that must not be ignored. At nearly every major industry conference, including Advisen, NetDil, and PLUS, multiple panel discussions or keynote speakers discussed such incidents and the future of cyber insurance underwriting. Not only that, reputable industry publications are increasing their coverage of the economic and insurable losses associated with cyber risk.

Erik Abrahamsson, CEO, Digital Fineprint:
In 2017, although not specifically insurance, the results of the Competition and Markets Authority’s (CMA) Retail Banking market investigation and the subsequent Open Banking Remedy is a really exciting development. Their security-first approach and putting trust of the customer at the heart of its proposition creates a really exciting framework which we think the insurance community will not only benefit from, but also learn from. This 'trusted partnership' approach has also come to the fore in 2017 as the insurtech community's core focus seems to have been less on disruption and more on enablement, working alongside the incumbents to make their processes better and more appropriate for the current generation on insurance customers.