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Insider in Full: Eight themes to shape the (re)insurance market in 2022

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  • Topics:
    • Claims & Losses
    • Covid-19 (Coronavirus)
    • ESG
    • Property - International
    • Property - North America
    • Property - UK
    • Rates

Last year proved to be another eventful 12 months for (re)insurance, as the industry sought to navigate rapidly changing market dynamics influenced by “surprise” cat losses, the introduction of new start-ups and the failure of the biggest broker takeover in history...

Throw in existential hand-wringing over cat-pricing adequacy, the challenges of hybrid working and a market-wide push on ESG, and the stage is set for another undoubtedly dynamic 12 months.

Some of 2021’s themes are likely to return to the fore in 2022, but packing a bigger punch. Rising loss costs and inflation will push carriers to ask more urgent questions on rate adequacy as the hardening phase of this cycle reaches its fifth year, while the structural problems in cat still prevail. Lloyd’s again is in the spotlight in a last-chance year to show tangible progress on the execution of Blueprint Two.

In the agonisingly slow move towards Covid-19 endemicity, how will carriers think about reserves and macro trends, and position themselves accordingly?

Insurance Insider has identified eight themes in (re)insurance which are likely to shape both the industry and the news agenda for the year ahead:

 

1. The pandemic unwind – an agonisingly slow move away from centre stage

The progress of what looks increasingly like the latter stages of Covid-19 will again shape the industry in 2022.

With the incredibly contagious but less severe Omicron variant raging around the world, and 9.2 billion vaccine shots administered, Covid-19 looks to be making progress towards endemicity. 

 A key question for the industry will be when they choose to draw down Covid-19 reserves that now look substantially over-cooked due to positive results in property BI litigation, and limited loss emergence in other areas including trade credit, D&O and political risk.

Well-placed carriers will likely hold the reserves for now, although those under pressure could look to use them to bolster earnings.

The unwind of the pandemic will also impact loss-costs, with scope for increased frequency but potential benefits on severity (see below for detail).

Firms will all be wrestling with the question of what future working patterns look like, with a spread of approaches to home-working likely. Business travel is likely to pick up, although it will remain below pre-pandemic levels, eroding some of the T&E benefits of the Covid-19 era.

Stock market volatility resulting from the emergence of new waves of coronavirus seem less likely. But the tightening of monetary policy – including some degree of normalisation of interest rates – could result in hits to equity valuations. While insurers may face mark-to-market losses on bond portfolios, in the long term any progress away from ultra-low rates should support earnings.

 

2. Loss-cost environment – a wildcard

The industry has had little incentive to own up to it, but Covid-19 has been an inhibitor of claims frequency in commercial lines, as is widely privately acknowledged by industry executives. At root this reflected people staying in their homes more and therefore a reduction in the amount of risk being taken, as well as the closure of the courts.

Insurers have tended to emphasise the long-term trend towards nuclear verdicts that has increased claims severity in casualty, as well as professional and some specialty lines classes – as well as a 2019-21 surge in ransomware attacks that has ravaged cyber underwriters. 

The highly uncertain loss environment largely reflects the balance between these two structural dynamics, which are in turn largely a function of the speed with which the pandemic’s influence wanes.

A fast unwind would squeeze the frequency benefits, and potentially allow severity to resume its upward journey as a result of the pro-plaintiff environment and the influence of litigation financing.

Whereas additional challenges with the course of the pandemic in the developed world would continue to offer frequency benefits, while holding litigation-driven severity in check. With insurers having had over 20 months to insert communicable disease exclusions into policies, or to pull cover in the most challenging areas, the exposure to additional direct losses from new variants would be limited.

All of this is set to play out against a macro environment featuring the highest rates of fiscal inflation seen in recent times.

While many carriers will already be adjusting for inflation in pricing models, as Beazley CEO Adrian Cox mentioned here, the transition to sustained, elevated inflation rates could prove to be the most painful aspect for (re)insurers.

 

3. Primary specialty pricing – time to prepare for winter?

What goes up must come down, and as the specialty market enters its fifth year of rate rises, the question on the whole sector's mind is how long it can last.

It is a fool’s game to try and predict the duration of hardening cycle phases, but this current upswing has arguably gone on longer than other recent market cycles and, unlike previously, has largely been driven by market willpower rather than capital flight.

The Lloyd’s market can be a good proxy for wider specialty market pricing and as we reported in late 2021, 2022 business plans point to a low-to-mid-single-digit risk-adjusted rate rise for the year. 

 The jury is out on whether this is enough to keep up with loss costs and inflation (see section above) and whether these factors alone can sustain momentum a little longer. Nevertheless, 2022 will be a year of transition for the specialty market as carriers look ahead to the inevitable downturn whenever it comes.

While each class is on its own trajectory (cyber is set to continue with rock-hard conditions, for example), those carriers which aim to practice good cycle management will agree that in the main the party’s over, and the period of gunning for growth has ended.

While undoubtedly they will look to make the most of the small rises available, 2022 may well be a year when carriers will start to take stock of their portfolios and begin preparing for the soft market.

And in London, the extent to which carriers are prepared for scale back amid softening conditions could well be varied, following Lloyd’s constraints on growth for most of the market during the “best years” of this current cycle.

 

4. Catastrophe – restructuring and repositioning

It is hard to make forecasts for a segment in which profits are based on fortuity. If 2021 had been less eventful, the current outlook might not be quite so challenged and the path of the January renewals may have been far less stressful.

Reinsurers’ attitudes to catastrophe risk have undergone a 180-degree shift from prior market eras when cat risk was the profitable cream on top of their portfolio. Now, it is more likely that brokers will be twisting underwriters’ arms to write more struggling cat placements in exchange for access to sought-after casualty programmes.

Reinsurers are having to reassess their stance on what the “new normal” level of catastrophe activity looks like – in a business segment dedicated to taking on volatility and handling the concept that there isn’t really any such thing as a “normal” disaster event.

But regardless of how Mother Nature treats cat reinsurers this year, some ongoing issues will keep the industry’s focus on catastrophe risk, and maintain upward pressure on rates.

Firstly, ratings agency oversight will keep the appetite for volatility more constrained. S&P is consulting on changes to its methodology that involve stress-testing more extreme disaster loss scenarios than previously – which some expect could require double-digit increases in capital for carriers with heavy cat exposure. 

 Secondly, the seized-up retro market and higher costs of hedging mean more is riding on the net performance of catastrophe portfolios – again, suggesting that more caution will be built into portfolio construction.

We raised the question of whether a “bonfire of PMLs” was likely last September, and while the outcome of the renewal is far from suggesting this was the case, there has certainly been a lot of rebuilding of woodpiles from scratch.

Higher deductibles, hard event caps, limiting peril coverage: all of these are sensible changes which should reduce exposure to some of the expensive secondary peril losses that have cost reinsurers in recent years.

The question of how far it goes to rebuild profits for investors is yet to be seen. But as drum-beating over climate-change risk grows, reinsurers must show they will be part of the solution in taking on these risks...at the right price.

 

5. Reinsurance/retro – the squeezed middle

Reinsurance may have fought its way out of the “U-shaped” pricing curve as rates are now on the way up in tandem with the primary market, if not at such pace.

But it is still very much the lesser favoured child at many hybrid (re)insurers who are all chasing growth in US E&S markets, or in quota-share reinsurance business where they’re effectively getting primary business exposure by proxy.

It is hard to think of any factors that look set to change that, outside of some kind of massive shock event. Capacity is still overall strong, the market is growing slowly, and even though primary market increases are tapering back, reinsurance rates have been modest.

Indeed, Fidelis CEO Richard Brindle told this publication that cat reinsurance business had given up a "real terms rate reduction” at January 1, as inflation and climate change meant increases of 15% were required to stand still. 

 Moreover, one of the big questions for the reinsurance market this year, as we alluded to in the catastrophe segment, is how much of a knock-on impact the increased cost and lack of availability of retro cover will have on their net portfolios. How much do reinsurers need to cut back their incoming portfolios in response? Are business plan targets still achievable?

For now, buyers are still working out their strategies – much has yet to be placed and alternative sectors such as the ILW market are benefitting from demand overflowing from the indemnity retro market.

This theme could have further to play out, especially as global hybrids such as Axa XL seem disinclined to take on volatility. In theory, this sets the scene for a return to growth within monoline ILS specialists – and the cat bond market has had a relatively strong year in volumes which bears out the scope for potential. However, the problem is that the pitch of diversifying return appears to be falling on very wary ears.

 

6. Future at Lloyd’s and the future of Lloyd’s

This year is now a crucial year for execution for Lloyd’s on Blueprint Two, after 2021 saw multiple delays, a round of redundancies and an overhaul of strategic priorities for the ambitious build.

The project has had a healthy dose of realism since this time last year and focus is now on delivering functional platforms which can start to be adopted by the market, before bells and whistles are applied.

As we outlined here more fully, success of delivery to an extent hinges on factors which are out of the Corporation's control, including the capabilities of its delivery partners and a convergence of views across the market on what new forms of data and processing will mean in practice.

If it is to allay market frustration around the lack of clarity on delivery dates and encourage the market to embrace adoption fully, it must this year show tangible progress on the delivery of key milestones in the project, or face eroding market confidence further that this ambitious work can indeed be done. 

 With Lloyd’s full-year 2021 result expected to show a long-awaited underwriting profit and the heavy lifting of the remedial underwriting work now over, the focus from CEO John Neal and management is likely to start to shift to the longer-term goals for Lloyd’s, while ensuring a baseline of good performance is maintained.

Key to this will be setting out more forcefully the value proposition of Lloyd’s after some worrying losses of capital and market share. This stall must be set out to multiple stakeholders, including existing and potential market players, and investors (see: The changing face of the Lloyd’s market).

There are also key questions around distribution and how Lloyd’s can glean more business from both the big brokers and its global network, without adding substantially to its acquisition cost base.

It will also need to figure out how it can position itself to capitalise on the opportunity presented in insuring the transition to a more sustainable global economy – when in the past the inflexibility of the PMD has not allowed the market to grab other opportunities wholeheartedly.

 

7. The ESG Awakening enters a second peak year

After exerting influence for a couple of years, the ESG Awakening became an irresistible force in 2021 that management teams could not choose to ignore.

This resulted from a combination of intrusive political activism directed at CEOs and board members, an often-cynical push from the asset management industry which was seeking to create new ESG-friendly products, increased regulatory pressure, and a changed zeitgeist resulting from events including the murder of George Floyd and the attack on the US Capitol.

The Awakening may be a structural change, but regardless of whether you ascribe to that view, it seems likely to persist at least into 2022. Management teams and boards this year will have no excuse for being surprised by the need to present credible plans to deliver against non-financial goals like reduced carbon emissions or increased minority representation at senior levels. 

As time goes on, the emphasis will inevitably shift from making pronouncements to judging management teams for their delivery.

Although a welter of companies has sprung up to score firms on their ESG credentials, these essentially form part of the ESG asset management industrial complex, and it is unclear they will provide a true gauge of whether companies are living up to their promises.

This could make it difficult to effectively distinguish companies that are trailblazers from those with effective communication functions. 

 

8. Talent dislocation – after the Great Resignation

The war on talent has surely never been waged harder than in 2021.

On top of the worldwide phenomenon of the Great Resignation – where employee resignations hit historic highs globally – there has also been a wave of talent dislocation in the (re)insurance market as the result of mergers (both completed and failed) and the scaling of new start-ups.

This was nowhere more acute than in the broking market, where challenger brokers not only sought to capitalise on the Aon-Willis fallout but also targeted former JLT teams and rivals. On the underwriting side, 2021 brought talent challenges to some of the biggest market names (Hiscox, Axa XL) as the lure of nimble, fresh start-ups became an attractive proposition.

This year – major mergers notwithstanding – (re)insurance businesses will surely hope that the movement of talent will slow, not least due to the wage inflation 2021 brought upon the market’s expense base.

However, what last year has shown is that businesses cannot afford to rest on their laurels when it comes to talent management in a market with high employer optionality – and there should be a recognition that many of the factors which prompt staff to leave are often seated in the way a company feels and operates from an employee perspective.

This year there will surely be a continued emphasis on corporate culture and employee wellbeing, as well as companies continuing to underline their ESG commitment and credentials in a bid to attract and retain talent.

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