Catrin Shi, Adam McNestrie, Fiona Robertson
Covid-19 has acted as an accelerant for existing market trends which were yet to come fully into force – such as increasing rate momentum and the squeeze in delegated authority capacity.
Those trends will continue to play out in 2021, but others will also come to the fore to challenge the industry with greater urgency.
This is likely to be the year when greater focus is placed on climate change, both from a corporate responsibility and an underwriting perspective. The market is poised for a major reassessment of cyber risk, and businesses will need to readjust to the prospect of ultra-low interest rates, as well as other macro forces as the world edges out of the pandemic.
Meanwhile, the broking space will experience the full impact of the Aon-Willis combination, and Lloyd’s is set for a pivotal year in terms of performance and transformation.
Insurance Insider has identified 10 themes in (re)insurance which are likely to shape both the industry and the news agenda for the year ahead:
1. Rates: Sustainable development?
Rate momentum in primary lines has been strong in the London market since the second half of 2019, having moved into positive territory in 2018, with an acceleration through 2020 to around 10%-15% for a typical portfolio.
Reinsurance rates lagged through 2019 before accelerating through April and June and slowing up somewhat at 1 January.
There is an expectation of continued strong momentum in primary lines, with Lloyd's business plans (which typically show enforced conservatism) believed to point to 10%-12% rate rises in 2021. Confidence in the sustainability of the rally in reinsurance is less fulsome.
Critical to developing dynamics will be the extent to which a risk-off mentality eases as the macroeconomic environment improves.
In addition, many carriers – including all Lloyd's syndicates – have now passed through two years of underwriting remediation, with many now ready to pivot to growth. This has scope to be a more decisive dynamic than the relatively small influx of new capital ($12bn of equity) that has come through from scale-ups, start-ups and recaps.
A range of factors that are difficult to forecast will shape the duration of the market correction. These include the way in which loss-cost trends develop as the economy normalises; whether interest rates remain at rock bottom; cat loss experience; and the Covid BI and third-party Covid claims experience.
Broadly, there is greater confidence around the sustainability of rate rises in longer-tail and specialty lines than in property.
2. The class of 2020: Convenient scapegoats
Year one for the class of 2020 will be closely watched, arguably more so than for any prior vintage of (re)insurance start-ups given that last year’s newcomers were born in a relatively healthy market rather than joining a shocked, stressed set of peers.
For that reason, their impact on the market will be put under the microscope, as they are easy scapegoats for the segments that are experiencing a slower rate upturn than was expected – even if these newcomers are no more of a “culprit” for this trend than any incumbent market.
This may be less of a focus within the E&S market, where arguably stress is greater than in the reinsurance sector, but within the reinsurance market, the start-ups may also be seen as the marker of a shift away from the soft-market consolidation phase.
As major players such as Axa XL or MS Amlin experience continuing difficulty smoothing out volatile reinsurance units, and as Ariel Re has returned as a standalone brand, it remains to be seen to what extent previous consolidation may be further unwound in this improving market, as carriers such as PartnerRe remain content to forge their own course.
Of course, flip the perspective and these newcomers can also be seen as the starting point for the next longer-term cyclical shift back towards consolidation.
They could be acquired over the longer term, and in the shorter term be acquirers of starter platforms (indeed many are already doing just this by building on shells of prior companies, or have specifically signalled plans for E&S acquisitions). The question will be whether this can happen sooner rather than later if any rival carriers start struggling post-Covid and become vulnerable to being picked off.
3. The Covid unwind
After a massive multi-focal impact through 2020 – although certainly a less dramatic overall hit than initially expected – the pandemic will again be in focus this year. However, the central questions will now be the extent to which the effects seen this year unwind as vaccination programmes bring the virus under control in the developed world.
Last month sister title Inside P&C set out five questions to focus on as we track the unwind. These include macro questions around whether interest rates will rise and the strength of the economic recovery, which will feed through to exposure units and growth. Both will be closely watched in 2021.
The sector will also have to begin finding an answer to the question about what the future of the workplace looks like post-Covid, with the big consultancies predicting a shift to "hybrid" environments where most staff spend some time in an office and some time at home. The degree to which business travel snaps back is more uncertain, with tension between on the one side cost control and quality of life, and on the other client service in a competitive industry.
Arguably the two critical questions around the Covid unwind relate to confidence and loss-cost trends.
In contrast to prior cycles, the hardening phase of 2019/20 has been driven not by capital destruction or a straight capacity shortage. Instead, it has reflected a constrained appetite to deploy capacity, initially owing to a period of sustained underperformance, but subsequently intensified by the macro backdrop of the economy and the pandemic.
If we get a robust recovery through the course of the year as restrictions lift, the psychology of risk aversion should dissipate, which – all else being equal – will encourage a loosening of underwriting controls.
The picture on loss-cost trends is more complex, with insurers trying to de-emphasise the frequency benefits in casualty lines seen this year, and stressing that pre-pandemic claims inflation will return after Covid-19.
In private, leading industry figures acknowledge that this is a huge wildcard, with scope for the recession and pandemic to have disrupted pre-existing dynamics.
4. ILS: The post-Covid rebound
The ILS market was relatively subdued in 2020 – in what some participants described as a “pause”, although as sister publication Trading Risk observed, this external stasis masked change and upheaval behind the scenes.
In 2021 expect continued evolution from ILS managers to address the challenge of competing with rated providers which are resurging even in the heartland of collateralised capacity and the retro market, and as some flagship reinsurers have gained major pension allocation wins in the past 18 months.
As with last year though, the major question that surrounds the ILS market’s contribution to 2021 will be how fast it returns to growth. Private equity provided the bulk of 2020 inflows, but if pension funds follow them into the market through ILS funds, this could have a major influence on the duration of the rating rebound.
Will pension funds start seeking enhanced, diversifying yield through more allocations beyond the bond market, after a phase characterised more by rebalancing and withdrawals? This will rely on the extent to which investors are willing to give the market’s 10-15 year track record, and current yields, more weight than the industry’s dismal near-term performance (with the ILS Advisers index still lagging its January 2017 position by 5.6% as post-loss gains have been slow and creeping).
Cat bond funds have come through that timeframe in much better shape, with this component of the index gaining 7.9% since 2017 versus the 14.2% drop on the private ILS fund segment of the index.
Meanwhile, cat bonds are also looking attractive compared to corporate debt, which could draw in multi-strategy managers.
On the bond side of the market, gross secondary market rates-on-line were around 5% by year-end 2020 on a trailing 12-month basis, according to Willis Re figures – eclipsing the sub-3% yields on corporate BB rated debt. This gap had prevailed throughout the second half of 2020 after corporate debt fell back from the initial coronavirus panic peak.
With this contributing to healthier capacity on the bond market by year-end 2020, the liquid side of the market provided significant limit to reinsurers and is expected to be strong again in 2021 – invoking the prospect of more cedants using the cat bond market to drive more competitive outcomes on their programmes after a quieter 2019 for volumes.
5. The Aon-Willis fallout
The next stage of the Aon-Willis saga will play out in 2021. The deal looks certain to complete, with Aon still projecting an H1 close.
The central outstanding question is the outcome of the European Commission's Phase II anti-trust review, which is examining scope for the deal to damage competition. It has pointed to services provided to multi-national companies across a range of classes, space and aerospace manufacturing customers and – to a lesser degree – reinsurance as areas it will focus on during its more in-depth look. In the last 10 years of Phase II reviews, the EC has approved 23% of deals without remedy, 62% with remedies and blocked 15%.
As we approach the deal’s close and obtain further details of who will get which roles – and afterwards as staff digest the new reality – we will see an acceleration of talent disruption. There is a likelihood of significant moves from both legacy firms, although expect the most from Willis alumni.
There will inevitably be substantial news flow around departures, paralleling what was seen in the wake of the MMC-JLT deal. But this will give us only a fraction of the story, with much of the reality effectively remaining hidden.
Forced departures due to poor cultural fit or to secure synergies will look like voluntary ones. High-profile staff may not control any revenue, and some who are unknown outside of their niche could have substantial brokerage.
It will take time for it to become clear whether or not revenues genuinely follow departing staff, or whether Aon can effectively retain business. The professional services giant’s organic revenue performance will come under sharp analyst and investor scrutiny.
But regardless of whether rivals prise away accounts, the deal looks set to create substantial value for shareholders, with both MMC-JLT and the pandemic proving how expert the large brokers are at managing their expense bases.
6. A pivotal year for Lloyd’s
After what will be four years of annual underwriting losses and a major programme of operational reform in the works, it is imperative that 2021 is the year when Lloyd’s gets it right on both performance and transformation.
Covid-19 derailed the Corporation’s ambitions to turn a reported underwriting profit for 2020, and delivering a sub-100% combined ratio for 2021 is now of the utmost importance for CEO John Neal and the rest of the Corporation if they are to protect Lloyd’s rating and franchise.
Half-year 2020 results showed that three years of remedial actions have started to bear fruit on an underlying basis, and this progress must be built upon in 2021, especially with the added tailwind of improved rates.
However, again this year the Corporation must tread the fine line of permitting growth and keeping a hold on performance, and that will be increasingly difficult as carriers grow anxious to make the most of the current upturn in conditions. How flexible the performance management directorate will choose to be on budgets in the Q1 business plan review will set the tone for the rest of the year in this regard – it may well be that again, only the better performers will be allowed to grow.
If it does, expect significant tension between Lloyd’s and the managing agents facing a fourth year of constraint as the market enjoys rate-on-rate-on-rate-on-rate gains.
At the same time, Blueprint Two looms large. The huge programme of work to “fix the pipes” will lay the foundation for the success of the wider Future at Lloyd’s transformation plan, and it is vital that this work is executed smoothly and to the best possible standard. However, the sheer scale of the work will require huge resources and skills that the Corporation itself does not have immediately to hand. Sourcing and deploying this workforce effectively will be a major challenge for Lloyd’s this year.
7. Market-wide repricing of cyber risk
Ever-rising concerns about rising ransomware losses during 2020 set the scene for what looks to be a transformational year for the standalone cyber market in 2021.
As reported by this publication in late December, insurers were detailing plans of 20%-30% rate increases during reinsurance renewal discussions, as reinsurers pressed hard on how cedants would tackle swelling attritional loss ratios. Many reinsurers warned that the ransomware challenge would be more than just a question of rate – that T&Cs also needed to tighten to suppress losses.
Enter the first week of 2021 and evidence of this is already starting to happen – as sister title Inside P&C revealed, ransomware sub-limits are already being introduced by major primary writer AIG, and there is anecdotal evidence that other market leaders are introducing much tighter terms at renewal.
The additional threat of substantial losses arising from the breach of management software company Solar Winds is also creating deep concern among market practitioners – who warn that the aggregation of claims from the hack could lead the class to become seriously distressed.
The widely felt impact of ransomware has underscored how systemic cyber risk can be, and will have led C-suites to consider how much risk they would run net in a “cyber cat” scenario. As yet, reinsurance programmes are not large enough to take out the tail.
Further class exits are possible, although carriers will first look to trim line sizes and manage exposures before taking that decision.
After years of sluggish rate momentum and intense competition, the way the cyber market chooses to tackle a rapidly evolving threat landscape in 2021 will likely be looked back on as a major turning point in the maturity of the class.
8. ESG in focus amid regulatory and investor pressure
Last year Lloyd’s released its first-ever environmental, social and governance (ESG) framework, which outlined commitments to the phase-out of the underwriting of coal, oil sands and Arctic drilling risks by 2030, among a number of other measures for a more sustainable future.
It brought the topic firmly into focus for the London market and followed existing pledges from a number of global peers, including Zurich, Axa, Scor, Swiss Re and Munich Re.
However, this year the topic of ESG will become more pressing for the (re)insurance industry as a whole, and it is likely that we will see stakeholders rolling out more measures and commitments over the coming year.
Politicians and government leaders have set the tone, with President-elect Joe Biden putting climate at the front of his agenda and Prime Minister Boris Johnson revealing his 10-point plan for a green industrial revolution in November.
However, companies are also increasingly facing both regulatory and investor pressure to give ESG policy greater weight in their business decision-making and strategy. At the same time, activism and climate-related litigation is on the rise.
Culture will also form an important part of this discussion – as the “social” aspect of ESG – with increasing expectations from both inside and outside the industry for tangible deliverables on issues such as gender and racial equality in the workplace.
With the Black Lives Matter movement in particular having triggered more urgent discussion around race during 2020, it is imperative that the industry builds on this momentum and demonstrates that proclamations and promises on diversity leaders made at the time were more than just words.
9. Climate change: Social inflation for cat?
Covid was of course the top news last year, but the much longer-term threat of climate change was another underlying driver of the market turnaround, particularly within the ILS markets. It is also one that will remain a key talking point throughout 2021 in terms of renewal negotiations and investor discussions.
How global warming may influence future hurricane severity is still a difficult topic for scientists to quantify, but the major current fear from investors and risk takers surrounds frequency risk given recent experience, including from secondary perils.
This has already led the market for low-hanging aggregate retro cover to shrink drastically, and prompted some shifting buying patterns as more cedants sourced cat bond cover.
Climate change remains a persistent hurdle to getting new ILS investors comfortable with the industry, and one which influences the tone of the broader debate on the industry’s approach to ESG matters.
Its resonance carries particularly within a couple of the most cat-exposed lines of business.
As well as retro, the Florida market stands out as a segment that is highly exposed to shifting views of climate risk. The thinly capitalised state or regional insurers active in Florida took a battering from repeated retained losses throughout the 2020 hurricane season, which will undoubtedly change reinsurance buying patterns as it has exacerbated underlying financial distress amongst these carriers.
The Gulf Coast took repeated storm hits during a year that produced record-breaking numbers of storms, even though a degree of luck in where storms came ashore helped limit insured losses.
Secondary perils are also of increasing concern following major wildfire and tornado losses in recent years, contributing to the trend for narrower named-perils coverage within the retro segment.
10. Continued pressure on MGAs
Last year, the existing capacity crunch in delegated authority capacity continued with greater force, given greater impetus by the acceleration in open market rates.
Capacity was redeployed away from delegated authority books and a number of outfits were left scrabbling for replacement paper – and where gaps were filled, it was often on less favourable terms for MGAs.
This year it is unlikely MGAs will be granted much respite, with improved rating conditions looking set to prevail for the months ahead.
Pressure points will be in classes where profitability is challenged or rates are failing to pick up – such as cyber, warranty and indemnity (both of which have heavy MGA participation) or accident and health. Monoline MGAs in particular are vulnerable unless they have a very distinct and unique value proposition either in product or distribution.
The flight to quality will continue. As we predicted last year, in the current market conditions only the biggest and smartest MGAs will prosper.
The super MGAs in the London market are likely to put their war chests to take on distressed assets or teams where there is some residual value – Castel’s takeover of renewables MGA Albus being one example.
All carriers are keeping an eye on expenses and will likely use this favourable imbalance of power to push for better terms from their MGA partners – a greater weighting towards profit commission and a shift away from fixed fees.
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