For what seems like forever, (re)insurers have been forecasting the return of the industry’s nirvana of a sustained and sustainable hard market. After the significant CAT events of late 2018, many hoped that such a market would follow. However it turned out to be much like the “Curate’s Egg”, good in parts.
Now, in the wake of the pandemic, there is new hope that there will be a broad-based rise in premia, at least in part to off-set an expected significant rise in claims in certain business lines.
Much public “hand-wringing” has occurred over how the negative consequences of the pandemic could be an “existential threat” if worst-case scenarios occur- such as the legislative or judicial compulsion of the payment of supposedly excluded Business Interruption (BI) claims from businesses shut down by government (and so administrative) fiat.
Off-setting this, there are now said to be clear signs that pricing is hardening significantly across a number of business lines, including D&O, BI, and NatCAT, sometimes doubling; while the increasing amount of fresh capital being raised indicates that at least some executives believe that attractive new opportunities exist.
On the face of it, this is a welcome development for (re)insurers. Yet, paradoxically it comes at a time when many insureds are least able to absorb such increases because of the impact of the pandemic on their underlying business.
This combination is going to require a careful balancing act within the industry. On the one hand, premia are the lifeblood of any (re)insurer; on the other, that is not of much use if the client cannot afford to, or will not pay the level of increases demanded.
In addition, in some lines, such as auto, companies are expected, if not required, to rebate premia received because less driving means fewer accidents. This, objectively, is a good thing in terms of the welfare of society, but it yet again reduces premium flow.
And if, as in the case of BI, insurance buyers perceive that they are not being covered for something which they believed they were, they may simply stop buying insurance lines that are not mandatory, even if that is actually counter-productive.
All these competing factors mean that the outlook over next few months and years for the (re)insurance industry as a whole is still rather murky in terms of whether and, if so, how the recent negative trends in underwriting outcomes will reverse. One can try to increase pricing, but that will not “stick” if insureds cannot or will not pay such prices. Compounding this is the clear damage caused to the NII and asset side of many (re)insurers’ balance sheets by both market volatility and low and falling nominal interest rates.
In this context, Awbury is, as always, able to provide high quality, large scale premium flows, which, by definition, come from motivated insureds, who see the value in what we do. At the same time, we can help our partners manage the volatility of the asset side of their balance sheets.
The next few years are, in our opinion, going to lead to a further “winnowing” of the industry’s ranks, in which risk selection, value-based products and pricing, and the ability to dampen volatility will prove ever more necessary.
The Awbury Team