Specialty lines remain buoyant: Aspen Re
How would you characterise current market conditions?
First, it is important to note that the products that sit within specialty reinsurance are broad and varied. Specialty can mean different things to different people. We categorise specialty into three areas: META, which stands for marine, energy, terror and agriculture; mortgage business; and tech lines.
The market conditions within each of those lines are in different stages of their rating cycle. But it’s also true to say that we’ve seen positive rate increases across all classes. It’s most pronounced in marine, energy and terror reinsurance and retrocession classes, which have been impacted most significantly by Russia’s invasion of Ukraine.
Capacity within specialty remains buoyant—market conditions are attractive. Like many other reinsurance classes at 1/1 there has been a mismatch between supply and demand in some areas. This has caused uncertainty for buyers although that has improved through the year when there’s less time pressure and fewer deals being transacted.
So the conditions are healthy, wordings have tightened and it’s an attractive class of business for capital providers and carriers.
What are the driving forces of these conditions?
There have been capital constraints across the industry which affect every line of business. We have a challenging macroeconomic environment, high inflation, high energy prices and a war in Europe, which could generate some of the most complex and sizable claims we’ve ever seen in the specialty world. In addition, 2022 was another heavy cat season.
All of this has placed an upward pressure on rates and capital providers have retracted a little. The existing capital has been diminished or reduced because of bond prices. Capital providers’ return expectations need to be met and pricing needs to reflect that in all parts of the chain. We need to attract new capital.
A reset is needed in terms of pricing and the way some of the composite coverages are structured, especially those with a focus on terror and war-related exposures.
Do you see anything changing in the next 12 months?
Inflation is predicted to reduce by the end of the year. This may have a dampening effect on rates and assumptions around pricing. But, generally, the specialty market, as with other classes, will continue to be attractive for carriers and capital providers. We continue to live in a challenging global economy and an attractive property-cat market has an upward impact on other reinsurance lines.
Rate is being driven through the insurance and reinsurance chain and it’s important we move as a market to minimise any mismatches. Our specialty team at Aspen is well positioned to respond to different market conditions and provide long-term support to our clients and brokers.
How has Aspen responded to these market conditions?
We’ve used the rating environment to de-risk in some of the more volatile areas of our portfolio. We feel this will help us achieve our targets for the year. If we wind the clock back 12 to 18 months, we have repositioned the portfolio and drawn back entirely from some classes that struggle to make consistent returns. We try to focus on providing clients with products that allow them to trade through the cycle while meeting our own pricing and exposure requirements.
We have been clear in communicating our strategy to brokers and clients about where and how we can offer capacity and support. We have a mature and meaningful portfolio with key leadership positions. The past 12 months have shown the portfolio to be resilient but in need of some reshaping.
What have been the main positives and opportunities?
Because we have a broad range of products within specialty, we can lean into attractive market conditions when it makes sense across our suite of products. Pricing, coverage and wordings were all areas of focus for the market as at January 1, and terms and conditions were pushed as the market responded to a challenging 12 to 18 months. We are a service-orientated company so due to the uncertainty at renewal, we felt that responding quickly and consistently on quotes helped clients achieve a positive outcome.
In addition, because there was a disconnect between supply-demand and expectations, and because it was so late, there were opportunities for us on new business, where it made sense for us. We were happy to support some new clients.
What have been some of the main challenges?
The main challenge was probably negotiating between clients, brokers and markets. That is always a point of healthy tension and discussion. Given the backdrop of the Ukraine conflict and the global economic environment, some bridging was required between expectations on pricing and coverage wordings, particularly event definitions for terror, war and exclusionary language for Russia, Ukraine and Belarus.
That was quite a challenge across the board. Additionally, specialty is a class that continues to attract new capital. We’ve seen several new startups over the last 36 months. There is still competition, but perhaps it is less aggressive given we are now in a harder market. Retro capacity was an issue for quite a lot of our clients. It has become more expensive; there’s less of it. So that was definitely a consideration for clients through the 1/1 renewals and it is continuing in the market now.
Is Bermuda a good hub in conditions such as these?
As global head of specialty and a manager of a global portfolio, Bermuda is certainly a key part of that dynamic. Bermuda has seen several new markets establish themselves over the past 18 to 24 months, so there is clearly a strong pull for specialty offerings and carriers in Bermuda.
“We exist to support clients in an unpredictable world.” Olly Goodwin, Aspen Re
Aspen operates globally. We have an underwriting resource, well spread globally. We have offices and teams writing specialty business in Singapore, Zurich, London, Bermuda and in the US. That means we maximise our client and broker service and have meaningful footprints in our key markets and regions. But Bermuda is a key part of our global offering .
Do you expect changes in the market in the next 12 months?
The variety of reinsurance products that we sell means we have a flexible approach, but the portfolio is in very good shape. The client base we have is excellent and we’ll continue to provide support to clients we view as long-term trading partners. We exist to support clients in an unpredictable world and meet our capital provider requirements. We can react and respond to market conditions. We’re now targeting incremental improvements to the portfolio to help us achieve both in the long run. It’s a case of small wins.
I would add that the market will work towards addressing and solving some of the uncertainty that characterised the most recent renewal period. It was late and stressful, and relationships were tested. I think that will change.
Olly Goodwin is global product head of specialty business at Aspen Re. He can be contacted at: firstname.lastname@example.org