The insurance industry’s changing post-pandemic assumptions

Throughout any normal year, the industry’s focus has tended to fall on the Monte Carlo Rendez-Vous de Septembre and, as renewals season gathers pace, turn towards Baden-Baden.

But while everything has changed since the end of 2019, the COVID-19 pandemic and the resulting restrictions imposed have not been too disruptive. That is what  Greg Dickerson, associate director of New York-based AM Best told Intelligent Insurer’s Re/Insurance Lounge, the on-demand platform for interviews and panel discussions with industry leaders.

This is the message, he said, that he has been hearing from companies for some time. “Maybe the most important driver of negotiations could be the actual results of reinsurance for the remainder of the year. If reinsurers post strong results for the full year, it’s going to be difficult for them to push through more rate increases or ask for more-favourable treaty terms,” he explained.

That is not to say that things have been easy or that the situation for conducting business is optimal.

“Despite the fact that the reinsurance industry has already successfully executed year end, and after a couple of rounds of mid-year renewals in a remote environment, we do get the sense that the market would still strongly prefer to conduct negotiations in person,” Dickerson said.

He added: “We think that’s what the market will go back to once conditions allow. That’s despite the savings they’ve realised from reductions in travel and entertainment expenses, along with the fact that in many cases, they’ve probably been able to connect with more people in less time through a virtual environment.”

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Fresh assumptions

While the industry has been forced to learn about how better to conduct its business on a personal level, Dickerson said that the impact of the pandemic has caused it to look more closely at some of its assumptions, particularly around the notion that insured losses were limited to life and health risks. The results since December 2019, he said, have been surprising.

“Losses were driven more by government intervention in the form of nationwide lockdowns, travel restrictions that triggered business interruption, and event cancellation claims. For the top four global reinsurers that had balanced portfolios of life and non-life risks, COVID-19-related life health losses accounted for only about 20 percent of their total losses in 2020, so roughly 80 percent of COVID-19 losses for these companies came from non-life plans. And that’s something that the traditional pandemic models failed to foresee,” he explained.

Looking to the future, he pointed to a handful of issues—pricing improvement, a globalised economy, and environmental, social and corporate governance (ESG) considerations—that he thinks are going to shape industry conversation.

With the first, he expects pricing to continue to improve, albeit at a slower pace; for the second, how the correlations between nations are making some risks more systemic; and, third, the external pressure on the industry to realign its values with regard to climate change.

On pricing, Dickerson is somewhat conservative, saying: “We would not expect a huge boost in pricing for most lines, given abundant capacity and the fact that reinsurers have achieved rate improvement for at least a couple of renewal cycles.

“That said, plenty of factors remain in place to at least keep a solid base on rates and probably drive overall improvement in most lines. There’s climate risk, social inflation, uncertainty around emerging risks, and the low interest rate environment that keeps the focus on maintaining underwriting margins.”

He is bullish about the US market compared to the European one in terms of pricing, saying that the latter is consistently disappointing. This is due, he said, to different competitive market conditions that are driven by the biggest players. Therefore, he expects the majority of rate improvement to be domestic for AM Best.

Globalisation is an issue that is no longer on the horizon but clear and present. “One issue that’s likely to be discussed is how to address the increasingly interconnected economy resulting from globalisation and technology, which causes correlations to shoot up dramatically in times of crisis and makes risks more systemic in nature,” he said.

“In the current form, some risks may not be considered insurable, given that the technical prices would be simply prohibitive.”

Almost inevitably, ESG investing is among the mix. The past year has seen a raised awareness of climate change and its effects on weather and the world’s population. Financial firms are looking increasingly at their investments and asking themselves whether their business interests align with their corporate ones. Dickerson named this as a concern for insurers.

“ESG considerations are adding to pressure for the industry to align its overall strategies with societal values,” he said. “If companies haven’t reacted quickly enough to ESG regulations, they could be in a position where they have to make quick adjustments due to regulatory or public pressures.”

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