Approaching Nirvana, or Another False Dawn…?
After years of weak pricing across most product categories, 2020 produced some signs of the long-fabled “hard market” for P&C underwriters.
According to the Marsh Global Insurance Market Index pricing rose by an average 22% year-on-year for the last quarter of 2020, with the trend having accelerated since the end of 2018, when it was only 2.1%. And the average masks some wide disparities- 7% in Casualty, 20% in Property and 47% (sic) in Financial Lines.
To say that such increases are needed would be an understatement. The industry as a whole has been barely profitable at the underwriting level (although with wide company-level disparities) over the past decade, meaning that reported profitability has depended on investment results, which have been somewhat more stable, albeit decreasing also. Of course, 2020 demonstrated how volatile such returns can be quarter-by-quarter, with the possibility of rising US interest rates threatening at least “interim pain” in investment portfolios heavily weighted towards bonds and other fixed income products, before re-pricing begins to occur. As Warren Buffett said recently: “Bonds are not the place to be these days.” He could be wrong, but adding the perception of higher investment risk to underwriting uncertainty must give senior industry executives pause for thought.
Of course, the question arises as to how much of the increase in premium rates will flow through to the Combined Ratio on a net basis. After all, “social inflation” remains endemic, while costs for managing claims are also rising. Add to that persistently elevated numbers of catastrophe events (whether “natural” or not), as well as uncertainties around the true scale of risks such as cyber, and concerns that greater climate risk represents a “new normal”, and one has a combination that makes forecasting underwriting outcomes increasingly difficult.
The events of 2019 and 2020 have, in predictable fashion, created a new “Class of 2020/21” cohort of entrants into the P&C (re)insurance arena, all promising to be disciplined and selective in their underwriting, and claiming to benefit from “cutting edge”, technology-driven approaches, free of legacy liabilities or systems. We welcome their entrance, and will watch with interest as to how many of them produce underwriting results which confirm that they truly have a sustainable “edge” (given that most of them have been founded by long-standing industry stalwarts), or demonstrate that they have well-controlled and flexible cost bases in an industry notorious for their lack.
Furthermore, in an era in which the industry should now have the ability to parse its wealth of historical data to produce much more granular and truly risk-adjusted pricing, even in the face of rising uncertainties in certain categories, we also hope to see evidence of that in underwriting results by class of business, and that underwriters will be able to avoid seeking volume at the expense of discipline (an abiding sin) simply because nominal prices have risen significantly. After all, most industries would be more than happy with an average 22% year-on-year increase in realized pricing!
At Awbury, we believe that properly-informed, value-added pricing, based upon rigorous underwriting, is key to building and maintaining our franchise; and that being lured by the potential chimera of much greater business volumes is simply foolish. So, we shall continue upon our path of an incremental, iterative and adaptive increase in scale, being inherently skeptical that this time the pricing cycle is somehow different for the industry, even though we shall be delighted if it proves to be so.
The Awbury Team