Age of post-cat payback is gone
Bermuda’s reinsurance executives seem to be increasingly accepting of the fact that the type of hard markets they once enjoyed in the aftermath of big losses may be gone for good—and they seem much more focused on underwriting discipline and how they set themselves apart in other ways as a result.
A common theme when speaking to executives at the start of the renewals negotiations also seems to be that the age of so-called payback is over—and after disappointing rate increases post the heavy cat losses of 2017, this seems a natural conclusion for many to draw.
While year-to-date global reinsurance pricing is up slightly, at 0 to 5 percent in 2018, in aggregate, momentum is fading as the sector heads towards the 2019 January renewals, according to S&P Global Ratings, which conducted detailed research into this ahead of the renewals.
“What’s perhaps particularly disappointing for the sector is if you look at the Florida renewals in the summer, generally rates are flat or very slightly up, even in a market that suffered from hurricane Irma,” David Masters, director at S&P, said during a briefing in London.
Insured losses for 2017 global natural catastrophe events, which included hurricanes Harvey, Irma and Maria, were estimated at $136.06 billion by Swiss Re Institute’s sigma report, a 186 percent increase from $47.56 billion insured losses in 2016.
Market participants were hoping for significant rate increases after the 2017 catastrophe events but were disappointed by only moderate increases in the January 2018 renewals as overcapacity in the sector prevented a stronger uptick.
Accepting reality
Executives on Bermuda seem to be accepting that times have changed. The concept of ‘payback’ in the aftermath of heavy catastrophe losses has gone for good and reinsurers must adjust accordingly, says Charles Cooper, chief executive of reinsurance for AXA XL.
“The reinsurance business model has changed as a result and companies must adjust,” he says. “First, it means that reinsurers must charge an appropriate rate all the time; second, catastrophe business has been subsidising other lines of business for a long time. If the margins are no longer there, the rates on all lines of business must adjust to reflect this.”
He also stresses that he does not spend too much time worrying about rates. “The price is what the price is,” he says. “Everyone always postures around this but market dynamics will play.”
Pina Albo, chief executive, Hamilton Insurance Group, agrees, arguing that structural changes in the market have changed its reaction to big losses and the ‘panacea’ of the rate hikes that followed previous big losses. She says reinsurers must accept this and adjust accordingly.
A successful recipe for reinsurers going forward would involve three things: underwriting discipline; access to clients and meaningful dialogue with them; and responsiveness. In addition, she says, access to alternative capital will become more important than ever, as will a willingness to partner inside or outside the industry, whether that was on capital or even technology.
Kathleen Reardon, chief executive officer of Hamilton Re, agrees. The reinsurance market’s ‘new normal’ has become a reality with the cyclical nature of rates likely gone for good, Reardon says. And reinsurers must adjust, she believes.
“We can retire the use of ‘hard’ and ‘soft’ descriptors, because in the marketplace we’re dealing with right now we’ve got ILS, low interest rates, political constraints, there’s pressure to digitise everything—and it’s forcing clients and reinsurers to change their business models in real time,” Reardon says.
“There are also some pockets of opportunities—we’ve seen some rate rises in property direct & facultative and excess casualty insurance; ILS has been cemented as a durable force—and I would even go so far as to say that it is helping to change the landscape, it’s reshaping the industry dynamic, and that it going to be so evident with what AIG and Markel are doing.”
However, Reardon stresses that underwriting discipline trumps everything—something that hasn’t changed in the market, and those who get that right at January 1 will be successful.
Steve Arora, chief executive of AXIS Re, believes the industry is too preoccupied with its short-term pricing equilibrium based on supply and demand. He says that bemoaning the fact that there is too much capital in the industry is missing the point that a strong and well capitalised reinsurance industry is a good thing.
“Consider the opposite scenario of not having enough capital,” he says. “We should be happy that there is so much capital available.”
He adds that, long term, there are many reasons for the industry to be optimistic. He says the economy is growing, which would lead to more demand; the protection gap is widening; geopolitical uncertainty will translate into risk; and technology will generate new risks.
“Overall our prospects are very healthy,” he says. “There are so many ways we can look forward to strong growth.”
With all this in mind, AXIS Re has tweaked its strategy to allow itself to offer clients a more bespoke service (see box).
Some optimism
Surprises can still have an effect on the market, it seems. The exception to the rule seems to be loss-hit lines of business where there has been an element of surprise for the market. In these instances, things can change.
A good example is the wildfires that have hit the market of late—these losses have triggered some big increases, of up to 200 percent in some cases, according to Adam Szakmary, director of underwriting, Bermuda, at Hiscox Re & ILS. He too, however, accepts that this is the exception rather than the rule.
In the mid-year 2018 rate renewals for the US and Bermuda, Szakmary says some accounts hit by losses from the wildfires were hit by rate increases of between 33 and 200 percent, although this was mainly on utility accounts and a small sub-set of contracts.
However, he adds: “The personal lines insurers hit by wildfire losses in 2017 haven’t had their renewals yet. I would expect to see further pricing pressure. We haven’t seen the kind of property damage loss caused by the 2017 fires in 2018 but it remains hot out there. I do suspect that it will be a stabilising force on that part of the North American book.”
Szakmary adds that pricing on larger, national, US accounts will be driven more by hurricane activity. “The wildfire losses might have an influence but I don’t think that it will drive up the overall renewals.”
He adds that the ILS markets responded well to the 2017 losses with most investors reloading. But even more capacity may have entered the market if rates had increased more.
That said, S&P can envisage certain scenarios that could trigger a hardening of rates—certainly recognisable as the cycle of old. Masters suggests that a simply much bigger loss could do it—or other factors could also come into play.
“We don’t think the cat events were clearly sufficient to have a real impact in terms of pricing,” Masters says. “We are increasingly moving away from a situation to say that a one-in-50-year cat event would do the job in terms of leading to significant rate hardening.”
Instead, S&P analysts increasingly believe a significant rate hardening may be triggered only by an overall reserve strengthening in the market.
“If reinsurers ultimately turn out to have undercut their reserves and have to make significant reserve strengthening, that is the more sort of pervasive risk that would lead to a broad rate hardening across multiple regions and multiple classes of business, rather than a single large cat event in San Francisco or in Miami,” Masters explains.
One company taking a close look at its business model at the moment—not explicitly because of the flatter cycle in the market although it will certainly help—is AXIS Re, which plans to fundamentally change its offering by becoming more client-focused, offering bespoke, structured, reinsurance deals and expanding its footprint in Asia.
By doing this, and making other changes, it is targeting becoming a top 10 reinsurer, according to Steve Arora, chief executive of AXIS Re.
Arora says that, since joining the business in January from Swiss Re, he has conducted an extensive fact-finding exercise to establish what clients wanted and what its employees thought. “The message I can now give is that we are changing into a new AXIS Re,” he says. “The industry can expect more from us.”
He says it would listen to clients more and be “bolder” in its approach to the products it offers. A nod to this approach was unveiled earlier this year with the launch of AXIS Re Strategic Partners, which is appointing dedicated sales executives to focus on its top relationships and their requirements.
Arora wants to build out its capability to offer customised, structured reinsurance solutions for its clients. “There is a shrinking need for commoditised business,” he says.
Arora is also targeting growth in Asia where he feels the company is underweight. It will start by targeting the more mature markets of Australia and Japan and run its operations in the region out of Singapore. It is seeking hires in this region, he says.
It also plans to expand the capabilities of its Lloyd’s platform, which it took on board after acquiring Novae Group. “Lloyd’s is a great platform to operate from; we want to write more London Market business and participate in this market in a more meaningful way,” he says.
“We are looking at this process with a five-year horizon,” Arora says. “In that time, we want to rise to the top of our peer group. We will measure ourselves by our profitability and the satisfaction of our clients but we are triggering a movement and instigating real change.
“We will not set superficial targets, but that should also mean securing a top 10 position in the market.”
