Navigating a challenging renewal season

The ReInsurer caught up with Willis Re’s James Vickers to discuss the key renewal trends as the reinsurance market gears up for one of its most challenging seasons

What are you expecting to be the key characteristics of the major 1.1 renewal season and how do you see things developing between now and then? 

Renewals will take place early in a hardening market. A lot of work is already underway to ensure clients are prepared to come to market as soon as possible. In straightforward lines that have performed satisfactorily little difficulty is anticipated. However, in more demanding classes such as D&O and stressed speciality lines, reinsurers will place a significant emphasis on understanding cedants’ underlying policy forms and underwriting approaches. Cedants will be asked to explain thoroughly their recent and forthcoming work on remediation of their portfolios, and to demonstrate that they are achieving their underwriting goals. So a return to the basics of underwriting will characterise the 1 January 2021 renewal.

Second, insurers are likely to buy more reinsurance. Given their limited ability to rely on investment returns, and the impact of potential losses arising from Covid-19, insurance company managers will need to take steps to secure the stability of their underwriting results. To achieve that, many will buy more reinsurance protection, since it is a proven earnings and capital management tool.

Third, the reinsurance market may have lagged behind primary insurers’ efforts to improve pricing adequacy as well as terms and conditions, at least in some speciality and wholesale classes. Reinsurers now intend to close that gap, driven by their need to reverse soft-market pricing trends and the damage done to their profitability, and for some the necessity of reserve strengthening.

There is unlikely to be any significant change between now and 1.1.2021, although poor hurricane season, currently unforeseen developments in Covid-19 losses, or some other loss events would serve to strengthen these key market characteristics.

How much regional disparity do you expect in terms of price increases at 1.1 2021?

Regional disparities that have been building over many years will continue, but the spreads are difficult to quantify, in part because of the continued disparity between cedants. Some will come to the reinsurance market with problematic results for 2020 and 2019, but others have done better. That will lead to significant variations in terms of the prices and conditions buyers will be asked to bear. But despite this, most straightforward business will be placed with relative ease.

The market is definitely experiencing a hardening trend, but we are not in a hard, capital-constrained market. Instead it is one which is very much underwriting-driven, with reinsurers paying much greater attention to each cedant’s underlying portfolio, exposures, and historical results, and adjusting prices and conditions to secure themselves an overall underwriting profit. That’s something they must do to deliver an adequate return on capital, which is their key priority after a number of poor years.

Covid-19 has been a catalyst for more favourable market conditions which will continue with the benefits of further rate hardening, but what are the key differences from hard markets we’ve seen in the past?

This time around, reinsurers are being more thoughtful. They have proved reluctant to apply big rate increases to portfolios that don’t need them, because they realise that doing so simply leads to quick downwards pricing movements in the future.

The continuing challenge posed by the low interest rate environment will be a significant concern for reinsurers as they plan for 2021. It hasn’t been present with such persistence in earlier hardening markets. To compensate, reinsurers are looking closely to determine if original units of risk are priced correctly by primary underwriters, and if they are being appropriately shared with the reinsurance market. Understanding in detail how primary companies’ underwriting strategies are evolving will be reinsurers’ key concern. Ultimately this is a more thoughtful approach as concentrating on the terms and conditions under original policies, and pricing reinsurance contracts accordingly, will lead to a more sustainable, profitable and stable reinsurance market.

How long do you expect it’ll take for the true impact of Covid-19 to be fully understood and what impact does that have on demand for reinsurance?

No one can be sure. Many reinsurers have made initial claims reserves in Q2, and in some cases even Q1, but we’ve seen a variety of approaches. Some are setting large reserves in the hopes of putting Covid-19 behind them once and for all. Most of those that have taken this approach have confirmed virtually all their reserves are IBNR. Other reinsurers have been more conservative in their early reserving while awaiting further loss developments.

We have seen a lot of concentration so far on shorttail business interruption claims, but casualty may eventually prove to be more important. It is not yet clear how casualty claims will develop, particularly in workers compensation, D&O, and other professional lines. Gaining clarity will take longer, perhaps 18 to 24 months before the market gains sufficient insight to set appropriate reserves.

Beyond claims and reserving, the impact of Covid-19 is proving more profound. The event has demonstrated the issue around unforeseen tail-risk correlations – pandemic and others – with combined liability and asset-side impairments. It has concentrated minds. At the end of March, the investment market was in freefall, just when Covid-19 losses were emerging as a large significant unknown. The possible impact of large and unexpected risk like Covid-19 occurring at the same time as assets are devalued has caused interest in managing tail risk correlations going forward. We are seeing many buyers re-evaluating their tail risk exposures along with their more usual underwriting profitability metrics to seek ways to manage the volatility of their earnings on an holistic basis.

Are underlying price increases keeping pace with loss costs? If not, how far away from rate adequacy is the market and should reinsurers react to this?

No one answer is right for the entire reinsurance market. Some classes are currently acceptable, but more work remains to be done in others. For example, pure motor insurers’ recent results, even among those who gave Covid-19 related premium rebates, revealed a marked improvement in their loss ratios (although those figures are very likely to bounce back as the world returns to normal). In contrast, in some cases, insurers and reinsurers need to be very careful about the affordability of their product. Examples of this can be seen in loss-hit catastrophe- and flood-exposed areas where policyholders need to be able to afford cover, but in some cases that is going to be difficult to achieve, particularly given the world’s pandemic-related economic challenges.

Covid-19 has, understandably, been a very distracting and disrupting feature for the industry (and the world) in 2020 and will no doubt continue to be so in some shape or form, but it’s important that the industry doesn’t lose sight of some of the areas that need further work. For you, what are these and what should the industry also make sure it is prioritising?

Climate change has to be the most pressing medium to long term challenge as the pressure is beginning to mount on all fronts. Insurers and reinsurers are now constantly being asked to explain to policyholders, shareholders, and other stakeholders how they are seeking to actively manage their businesses in the face of the climate challenge. For some time they have been asked about their actions to manage their investments, to minimise their climate impact on the asset side of their balance sheets. Now they are also being asked about their actions on the underwriting side. As a result, some are scaling back or exiting difficult risks and classes. Others are searching for ways to write the more difficult climate change exposed risks. A few are not yet taking action, but that position is increasingly untenable.

Unlike Covid-19, where there is an end in sight, climate change is going only one way, and the industry must recognise an ongoing commitment to address the issue. Another concern is the global economy’s apparent shift towards a recessionary environment. History shows us that certain lines are more exposed in weak economic circumstances, while others can manage to perform satisfactorily. Reinsurers and cedants need to consider how they will manage this potential risk. Before they begin handling claims in a mounting recessionary environment, the industry as a whole should dust off the historic playbook of past recessions and ensure we have not forgotten the lessons of the past around underwriting and claims management.