OPPORTUNITIES IN A HARD MARKET

Richards: Pricing in the P&C markets was already facing upward pressure due to capacity constraints and increased demand—even before the emergence of COVID-19. This dynamic was caused by several factors.

In the property markets, we’ve experienced heightened cat activity causing large losses and trapped capital. On the casualty side, we’ve experienced significant loss inflation.

The resulting impact on price has only been accelerated by the uncertainty of COVID-19 and this should further drive the demand for reinsurance at a time when retro capacity is also constrained.

So you’ve got this combination of factors that’s driving significant rate increases, and we think that this should create opportunities for us for some time.

Malloy: We’ve been playing defence for eight-and-a-half years and I’m naturally an offensive person, so the idea of being able to lean into a market and find opportunities that have profit associated with it is exciting.

Prices are up 40 or 50 off a starting point that is probably 50 percent less than where it was five years earlier, so you can say prices are up, but is it enough? I was very impressed with whoever at Munich called a hard market, I respect that.

I was talking to a broker who said ‘my definition of a hard market is when I can’t get deals done’. And he added it’s not a hard market, yet. Depending on what Mother Nature throws our way over the next 90 days, we could have a very hard market or we might just have a hard market.

Investment income in 2020 is a very different situation from buying a bunch of bonds and having them yield 5 percent. Ninety-day Treasury bills on March 1 were yielding 2 percent and they’re yielding nothing now.

We had $300 million to $400 million in 90-day T bills that were the safest investments in the world—that is returns the shareholders aren’t going to be getting going forward, that we have to find elsewhere.

You’re either going to take more risk on the investment side or you’re going to continue to work on the underwriting side to increase your profitability, so we need that market on the back of the reversion to the mean that’s occurring on the property cat side, the unwinding of 10 years of laziness and sloppiness on the commercial insurance side, and COVID-19. That additional rate is needed for our business.

West: Noting that I’m on the climate side of things, and so am more of an observer, I would say that one of the things the hard market is evidence of is appropriate discipline in underwriting and that managers are being good stewards of capital.

That’s certainly something that we think a lot about: doing the work to support a view of pricing, as well as being proactive about creating alternative channels for capital with attractive expected returns.

In terms of investor sentiment, there’s still a good appetite for allocation to non-correlated risks that are well priced on a risk-adjusted basis and continued interest in diversified risks.

From our point of view, there is a lot of opportunity out there and it’s just a matter of continuing with that disciplined approach as well as looking for other ways to deploy capital, to allow for that balance to occur in the market.

Faries: I’m trying to be optimistic but I’m sceptical. We’ve seen there has been quite a bit of capital coming in. Reinsurers are still in a very challenging environment, and you then layer on a changing climate. Secondary perils are not so secondary any more, we’ve got a cyber environment that is dynamic and evolving.

It’s great that rates are moving in a better direction for the health of the reinsurance industry, but we still have a way to go to get a return on equity that is sustainable. A lot of it will depend on how much capital flows in and whether the industry can maintain underwriting discipline in what will be a long-term low interest rate environment.

Seth: Prior to COVID, coming into 1/1 2020 we were experiencing a W hard market. There were significant rate increases on commercial insurance business including E&S business and specialty lines like D&O.

We also saw significant increases on the retro side, but the reinsurance market was caught in the middle and was firming but certainly not hardening as much as the other markets—hence that W shape.

Then COVID-19 hit. The primary carriers do have significant exposure to COVID claims and given the uncertainty around the magnitude of this exposure this has led to a much harder reinsurance market as well in June and July.

Looking ahead to 1/1, that W impact will probably flatten out and we’ll see a significant hardening of the reinsurance rates as well. Looking at underwriting performance over the last three to five years, if you look at Lloyd’s as the bellwether of our industry, the last three years have been at an underwriting loss.

We need significant rate increases to bring the entire market back into underwriting profitability rather than just relying on the investment income to get us through. We need to have that risk-adjusted return now that interest rates are so low, looking at it as a relative measure, a ROE anywhere between 8 percent and 12 percent is a decent return, but we need to have a sustainable model at those sort of levels.

Plianthos: When you have a company that was buying $4 billion of limit for property coverage, it can now only get $2 billion and it has to pay more for that $2 billion, people will definitely be arguing that it’s a hard market.

As a result of that, a lot of our clients are writing new lines of business in their captives and that’s keeping us very busy. If you looked at the BMA registration and statistics, that’s only talking about new companies. I’m pretty certain if you had to ask the BMA to divulge all the applications they get in for new lines of business coming through their captives, you would see a significant increase because of the hardening market.