Some reinsurers went “too far” at 1.1: LSM’s Hobbs

Liberty Specialty Markets (LSM) president and managing director Phil Hobbs said he would have “rather been a seller than a buyer” of reinsurance at the 1.1 renewal, which saw some reinsurers “go too far” and risk damaging relationships.

Speaking to The Insurer TV, Hobbs acknowledged reinsurers wanted to “achieve certain things” and that “there certainly are a range of views” on how this was done.

“What characterised it for us was that it happened very late and when we did start to get quotes in, there was a big range of what was coming through the door,” he said.

“I do think some reinsurers did go too far and then we saw them come back in line as the process went on.

His comments come in the wake of senior brokers such as Aon’s reinsurance head Andy Marcell warning that some client relationships could be damaged by the stances of some reinsurers.

“We're probably fortunate here to benefit from long-term reinsurance relationships with our partners and while it happened very late and I probably got a few grey hairs from the process, it did get done and it hasn't caused us to change our risk appetite or anything fundamental,” he clarified.

At the 1.1 renewal, buyers had to navigate sellers adjusting attachment points to a level where they were reducing exposure, particularly to non-modelled cat, subsequently pushing that risk back onto insurance carriers' balance sheets.

Liberty Mutual was one of a number of buyers that increased its retentions, in its case by effectively dropping the lowest layer in its main cat program.

Reinsurers were also looking for more rate and some structural changes by offering less aggregate and more occurrence cover.

Guy Carpenter’s global property catastrophe rate on line index provides a picture of this with rates rising 27.5 percent at the 1 January 2023 renewals to a high last seen in 2006.

One area where reinsurers had less success was a move away from all risks to named perils only, with additional widespread exclusions typically limited to strike, riot and civil commotion type risks.

“I think, by and large, once the reinsurers had achieved those things, there wasn't a shortage of capacity,” he said.

But Hobbs is wary of what the capacity situation will be at the mid-year renewals and is sceptical about predictions there is wave of fresh capital on the horizon.

“There's an interesting question of how much potential capital could come into the reinsurance market by 1.7. My view is probably there won't be a lot, but I know several reinsurance brokers who'd give you an opposite view on that,” he said.

Hobbs said that while there are a range of views on whether property cat business is now being priced adequately, there seems to be a broader industry-shared lack of confidence around modelling capabilities.

“In some areas it comes across as a loss of confidence from the industry that we're not so confident in our models and we're not so confident in our ability to price risk,” he said.

But while this sentiment certainly feels like a current feature of the market, Hobbs believes the industry is well set up to price property cat risk and deal with these exposures.

“That's a problem the industry can solve, should solve, and indeed, will solve and I think I'm a bit more optimistic about our capabilities in property cat,” he said.

“So, from our point of view, we haven't changed our property risk appetite. And we see that as an opportunity going forward.”

Lines of interest

The positive rate movement in property cat is certainly an attractive opportunity, but Hobbs sees this spilling into other lines of business also.

“Well, I think the interesting set of classes of business will really be the specialty focused or Lloyd's specialty focused classes, as they were quite impacted by what happened at the reinsurance renewals,” he said.

Specifically, Hobbs anticipates aviation, terror and marine lines “to be the interesting ones in the next few months, in terms of how much price increases goes through the direct side to compensate from some of the reinsurance rises”.

He continued: “Lower specialty classes have made quite good profits in the last few years. So, there's an element of people looking at how adequate they already are, but I do believe you'll see price increases in some of those areas as we go through 2023.”

Despite expecting 2023 to be a more “muted” growth year for LSM, Hobbs is hoping to grow the group’s participation in cyber.

“We have started to invest in our capabilities at this point in time, and we will grow our cyber book in 2023, but I still do think there's a lot of tests for the industry to come in cyber,” he said.

“Obviously, many insurers are very confident about the cyber risk and the cyber peril, but we've taken a reasonably cautious approach and my personal view is, we haven't seen a systemic event yet.

“That does feel like something that could certainly happen in the future, and I think the cyber market has still got a couple of evolutions to go through as we go forward,” Hobbs concluded.

Watch the 17-minute Leading Voices interview with LSM’s Phil Hobbs for his thoughts on: