Striking a hard bargain: re/insurers react to COVID-19

“We still think that loss costs, while increasing, won’t be increasing as fast as the premium rates going into next year.” Brian Schneider, senior director at Fitch Ratings.

· Higher rates ahead of January renewals "speaks well" for future profitability
· Prices need to rise a lot further to offset potentially volatile results
· Reinsurers choose to focus on existing clients rather than new business
·  Excitement as new capital, particularly in new vehicles, enters market

The global pandemic has sparked major change across many industries. Reinsurers are embracing this as the market continues to harden.

For years, re/insurance professionals have hardly dared to whisper the words “hardening market”, but with a fairly big push from the global pandemic, this is exactly what we now have.

Precisely how it will affect re/insurance in the longer term is up for debate as there remains much uncertainty. COVID-19 is an ongoing event and there is expectation of major natural catastrophes yet to come in 2020.

With market changes a major talking point at virtual Monte Carlo this year, Intelligent Insurer asked industry professionals for their take on what we might see next.

The pandemic has helped push rates higher going into January 2021 renewals, says Brian Schneider, senior director at Fitch Ratings.

“That speaks well for the potential for profitability to improve going into next year, although that’s dependent on how these losses, and various loss cost indicators, end up for the year.”

Reported reinsurance losses from the pandemic are at least $6.3 billion, so far, which Fitch says translates into an industry combined ratio close to 106 percent for the full year 2020, representing an 11 point loss from 2019.

Underwriting results

However, Fitch’s senior director says, as well as helping underlying profitability, the hardening market has prompted the rating agency to forecast an improvement in the underwriting results.

“We forecast an improvement in the underlying combined ratio. We still think that loss costs, while increasing, won’t be increasing as fast as the premium rates going into next year.

“The big wildcard—as it is every year, and even more so now—is the level of catastrophe and pandemic-related losses that we’ll see coming through for companies.”

The industry has experienced a period of heightened cat losses over the last several years, with some respite in 2019, and Schneider says it looks as though the second half of 2020 could bring a return of the sizable catastrophes of earlier years, even though losses in the first half of 2020 “haven’t been that much”.

“There are different theories as to whether there’s more potential for losses out there from climate change, or whether more perils are hitting insurance at this time. In any event reinsurers have been pushing stronger for rate increases.

“It feels that it has only been more recently, within the last year or so, that they’ve been able to get the rate increases they’ve been pushing for.

“This is the best reinsurers have felt in a while being able to get price increases. So that’s certainly going to push its way through into 2021 and likely beyond.”

Rates need to rise further

Higher rates are a good sign, says credit rating agency Moody’s, but its analysts think prices need to rise further to offset potentially volatile results.

But how much do they need to rise to offset volatile results?

“It’s hard to say, it could be line-specific,” says James Eck, vice president–senior credit officer at Moody’s Investors Service.

“If we look at some of the major lines, such as property catastrophe, we’re still quite a bit below where we were back in 2012. And a lot lower than we were back in 2006 after hurricanes Katrina, Rita and Wilma when pricing was really in a hard market.

“Low interest rates have a big impact, so the lack of reserve releases or lower reserve releases going forward is our expectation.”

Eck says there are a lot of challenges for industry profitability.

“You have to make it up on the underwriting side. Now things are moving in the right direction, if you’re writing pro rata, primary insurance is getting a good rate, so that’ll flow through on the quota shares.

“Ceding commissions are going down a bit so that’ll help profitability but certainly, we would expect for a sector that has this type of volatility that you need to make excess returns in the good years when nothing happens.

“Then you need to be able to make up the years when you’re not making any money or losing any. Our sense is that it’s got to the point where the event frequency is taking away a lot in the bad years, then we haven’t seen too many good years, although 2019 was OK.”

Reinsurers recognise the opportunities despite being cautious while COVID-19 lingers on, says Max Carter, director and CEO of London-based specialty reinsurance broker New Dawn Risk. Part of this prudence is showing itself in the focus on existing clients, he says.

“Most reinsurers we work with are not particularly looking to write new business; they are focusing on existing clients, and we are not seeing business move around as much. We are yet to see anything meaningful in terms of new entrants to the casualty treaty space, but we hope there will be,” he says.

Carter agrees that underlying insurance rates are going up, and in some classes—especially specialty classes such as professional indemnity and directors and officers liability—the underlying rates have risen dramatically, not just in the US and Europe but around the globe.

“That should have a positive knock-on effect for reinsurers and our cedants because there should be more margin in our business as a result of it,” he explains.

There are significant opportunities for reinsurers created by the present situation.

“We are seeing them getting improved terms, they’re squeezing on commission, they’re tightening up on coverage even on loss-free accounts.

“I suppose it gives them the chance to make back some of the money they lost in the challenging years of the mid-teens. How sustainable these rates will be in the long term and how much they will go up is anybody’s guess at this point.”

Carter highlights interest in the new capital coming into the industry, and particularly in new vehicles, saying: “This is very exciting, clearly there’s a lot going on that we know about and I’m sure there’s plenty that we don’t yet know about—no doubt the landscape is going to change dramatically in terms of reinsurers.

“Some of the established, stronger players are reloading, which is great. Conversely we are seeing some of the weaker players suffering from a negative financial strength rating direction.”

Retrocession challenges

The retrocession market is also feeling the impact of the current economic circumstances.

Industry loss warranties (ILWs) are becoming more desirable for buyers and sellers as the retro market is characterised by limited capacity and rate increases expected at renewals. That’s the view of Luzi Hitz, CEO of PERILS.

“Current market dynamics are creating a challenging environment for both buyers and sellers of retro capacity. The challenge comes down to the basics of supply and demand—the fundamental drivers of any economic situation.

“Successive recent years of large-scale loss impacts on the retro market have meant that suppliers are much more cautious and as a result we have seen a decline in available capacity and a significant increase in price.”

This cautiousness has been further exacerbated by the increase in uncertainty created by COVID-19, he adds.

On the buyer side of the equation, Hitz says, this heightened uncertainty is creating an uptick in demand for retro cover as companies seek to minimise the impact and potential volatility created by any surprise losses—whether those stem from pandemic-related losses or from any severe nat cat events in the near term.

“These two factors combined are creating the ideal environment for significant hardening in the retro sector,” he says.

Less face time

Market hardening has had a helping hand from the pandemic, but the COVID-19 outbreak has also accelerated industry evolution.

Michael Papworth, head of property and casualty at Miller, says the situation has forced the insurance brokerage industry to embrace 10 years’ worth of modernisation in just six months.

“The way brokerage has traditionally worked at Lloyd’s could be more efficient,” says Papworth. “It is nice socially, so it is understandable that brokers want to hold onto that, but it is inefficient.”

This culture is so ingrained that some thought it was impossible to change it. Many more thought it could be changed, but only with a considerable amount of time. COVID-19, however, has proved these people wrong, Papworth says.

“The pandemic has been a catalyst for doing business electronically, it has probably pushed the industry forward 10 years.”

The impact is not confined to the brokerage industry, but is particularly noticeable there, given the extent to which Lloyd’s has resisted change. As the insurance industry has embraced new technology, and become more efficient overall, “that has increased pressure on brokers to show how they are adding value”, says Papworth. “The way business is done is evolving.”

There are good reasons why the face-to-face model has been so enduring in insurance brokerage, and it is not a simple case of migrating all business to electronic platforms.

“Some business, like auto or retail home contents insurance, is highly commoditised and has to be done electronically.
“Other business is much more complex. If you are insuring a mine in South Africa that needs expertise and is probably always going to require some form of face-to-face meeting.”

It will take time for the industry to find the right balance, admits Papworth, where the optimum amount of business is done electronically, without losing the ability to look at risk on a case-by-case basis.

“The brokers that find that balance first will do well,” he thinks.

Graham Card, senior management consultant at WCL, also views technological advance as a clear benefit of the pandemic.

“Most of the market has been forced to abandon face-to-face meetings during the crisis and there is no guarantee that this way of doing business will fully return when we do move into the post-COVID phase.

“Clients are looking closely at their technical and IT capabilities and many are realising that it is possible for external resources to support.”

A lot of carriers are now taking a more fundamental look at their business, he adds, and they’re realising the major advantages of running their business digitally, and are looking to review and strengthen their digital strategy.

Like Papworth, Card says that before the crisis, digital transformation was perhaps not at the very top priority of all insurance businesses. But being forced to work from home during lockdown “has focused minds on finding ways of running a business at least in part remotely rather than from an office”.

Card adds that his firm sees major opportunities to help carriers and brokers as they look to digitise their businesses.

With so many positives and negatives coming out of the current economic situation, it is tricky to predict how the re/insurance landscape will eventually look. One thing is certain, though: after COVID-19 things will never be the same again.