Speciality lines and diversification: a broker’s perspective

As investors look to diversify amid volatile market conditions, speciality lines become more interesting to many—a trend that has been repeated in previous hard market cycles, according to Steve Hearn, chief executive officer of Inver Re, a reinsurance broker launched in 2021 by the Ardonagh Group.

Hearn suggests that this trend of how capital moves during periods of global macroeconomic challenges can be clearly reflected in Lloyd’s, which has often grown significantly through such periods, the financial crash of 2008 being a case in point.

“Specialty becomes an interesting place for capital seeking diversification,” he says. “The specialty market is very resilient and almost countercyclical to the macroeconomic environment. Therefore a flight of capital to the specialty market is not a surprising consequence of that diversification.”

Commenting on the broader hard market conditions the industry has been navigating for several years now, he adds that such conditions are conducive to more innovation—and the role of the broker can change and facilitate such periods.

“You might think a broker’s job would be no different in hard or soft market conditions, that we should provide value throughout that cycle, but the reality is that it is. When there is a surfeit of capacity and the industry is struggling to provide solutions, the broker becomes more important,” Hearn says.

“You can use things like analytics to differentiate your client’s proposition from their peer group. You can emphasise the advantages of partnering with them in terms of reinsurance capacity, the longevity of relationships and their importance in a hard market.

“Brokers have a big job to do in reminding all parties of the importance of that. It is a hugely important ingredient in all aspects of the cycle.”

Aligned with this is the challenge of carriers changing their business models in response to pricing pressures and becoming more stringent in risk selection. He says the extent to which carriers do this will depend on their business model. But they may seek to innovate more—to explore new lines of business and specialty lines, as they seek that diversification.

“If carriers are comfortable in their fundamental business model, which can survive cycles, and has proven resilient, you shouldn’t see major shifts in strategy. It would be odd. We’re a long-term industry going through cyclical change all the time. A business model should fundamentally survive that.

“That said, we do see opportunistic plays. Some firms have certainly marched towards the sound of gunfire—those who take opportunistic plays, but that’s their business model. So, in that sense it’s not changing their business model.”

Hearn explains that it can be a form of diversification. He suggests more carriers do explore such options, including greater geographic spread and new lines of business. There are also some obvious lines to explore.

“Cyber represents a largely untapped opportunity,” he says. “In addition, there is a growing need for intellectual property insurance. The reinsurance required around that all offers diversification, which by its very nature, creates some balance to the climate-related risks and environment and some of the lines that have been hit by inflation in the property and casualty worlds.

“More diversification, more new products, more new territories—all those things would help carriers.”

That said, he says he does not see enough of it. “That’s what should be happening. I just don’t see a lot of it happening. It would create a more balanced market, a greater equilibrium. Maybe it’s still coming.

“But we’re also in an environment of scarce capacity. Is new capital really available? Or is the capital already fully deployed, servicing its legacy? I don’t know. But there should be more diversification going on, as I say, by product, class and geography,” he concludes.