Interview: Christian Dunleavy
The welcome re-emergence of fundamentals
There is something afoot more than merely a cyclical hardening of the market, Christian Dunleavy, Aspen Re’s chief underwriting officer, tells Bermuda:Re+ILS. He believes established and reputable businesses such as Aspen are well positioned to benefit.
“Today more is being raised in the capital markets with third party capital, and the majority of that money is going to existing franchises.”
Christian Dunleavy, Aspen Re
It is tempting always to see markets in terms of cycles: hard markets follow soft markets, before they soften again and the cycle is repeated. Similarly, bear markets follow bull markets before giving way again, as prices are bid beyond realistic levels and fall back again.
We could be tempted to identify the same phenomenon at work today. After a protracted soft market in insurance, a hard market is the natural order of things. Observers have been predicting a hard market for years, and there have been many false starts. Now it is finally here.
The reality, however, may not be quite so simple, says Christian Dunleavy, chief underwriting officer of Aspen Re.
“The current market does not feel like the markets of 1992, 2001/02 or 2006,” he explains.
“This is not a classic hard market, it is in some ways better. In a hard market underwriters tend to be trading around price. What we are seeing now is more of a refocusing on fundamentals, a reassessment of the true cost of risk.”
In a typical hard market, Dunleavy notes, there tends to be a short and steep increase in prices—with these upward curves getting shorter, more localised and less steep since the turn of the century. Today’s price rises have been longer-lasting and broader, extending across classes and geographies, he says.
“What we are seeing is the re-emergence of fundamentals in underwriting.”
Whatever the cause, there is no disputing the fact that prices and the terms and conditions attached to insurance coverage are changing in a way that is altering the dynamic between brokers and underwriters. This is broadly welcome among underwriters.
“Brokers have become used to having it their way and underwriters giving in to them on price,” says Dunleavy. “Brokers are used to convincing reinsurers to come down to the price that their clients want to pay, but what they need to do now is convince their clients what their coverage will cost.”
He adds: “Aspen is not a bureaucratic organisation. I sit very close to my underwriters in Bermuda and I work closely with my teams in other offices around the world. I know what my underwriters are doing, so I know we need to be paid more for the risks we take.”
Dunleavy stresses his desire for constructive relationships with brokers and clients, despite this change in dynamic. It is in nobody’s interests that reinsurers collapse because they were so intent on getting a deal done that they do it on unprofitable terms: insurers don’t want to be forced to constantly change providers because their old reinsurer went bust.
“They saw the same thing happen with the recent closure of a number of Lloyd’s syndicates,” he adds. “We don’t want to say no, but give a ‘no but’. We would rather do that than do a deal on terms that don't work for us. It is a very different dynamic.”
Today, it’s different
Evidence for this new dynamic is all around. In the excess casualty market there have been an increasing number of deals that struggle to get fully placed, because reinsurers are no longer willing to make compromises to protect their market share. “Insurers and reinsurers are staying true to their risk appetite,” says Dunleavy.
He sees other differences between the current market and hard—or hardening—markets of the past.
“The way companies are raising capital is different,” Dunleavy explains. “Back then it was a lot of equity capital, and investors were interested in startups. Today more is being raised in the capital markets with third party capital, and the majority of that money is going to existing franchises, to companies with proven solutions and a good understanding of risk. These companies can deploy the capital more quickly.”
As an established and reputable franchise itself, Aspen has been the beneficiary of that. As an example, in October 2020, sister companies of Highlands Holdings Limited, the parent entity of Aspen Insurance Holdings Limited were able to capitalise on Aspen’s established and reputable franchise to raise $500 million via a bond issue. A significant portion of the bond proceeds from this dynamic transaction were then contributed to Aspen.
“We’ve received a significant capital contribution from our shareholder that gives Aspen additional flexibility and offensive capital as we see opportunities for growth,” says Dunleavy. “Aspen is in a strong position. We are happy with our own capital base and the third party capital we have raised and manage via Aspen Capital Markets, which we think is a vindication of our strategy and our approach to insurance and reinsurance.”
Capital has not only flowed to the established franchises, however, and there is increasing talk of a “class of 2020”, a new batch of startups that aim to leverage their size and lack of legacy exposures to shake up the market.
“There are definitely some startups out there that will succeed,” agrees Dunleavy. “But the range of startups is broader than in the past, with some being more targeted, focusing on specific markets like excess and surplus, and with very credible teams.
“New companies have the advantage of not having any uncertainty around possible COVID-19 exposures, but they will be slower to deploy capital.”
Challenges ahead
Dunleavy predicts a more challenging road ahead around third party capital, however, as investors become increasingly discerning. “For years a lot of capital came in without much consideration being given to non-modelled perils, but that led to surprise for investors who paid losses they didn’t anticipate with wildfires or a pandemic for example,” he says. As a result, “insurance-linked securities as an asset class is getting back to basics,” he adds.
“Third party capital inflows have slowed down in recent months,” Dunleavy explains. “If pension funds and other institutional investors want to increase their allocations to ILS in this pandemic environment, they tend to prefer increasing their allocations to existing managers rather than appointing new managers.”
Aspen is still developing solutions for customers, he adds. “We just need the risk-reward balance to make sense.”
Dunleavy has no doubts about Aspen’s ability to model cat risks profitably—or the industry’s, for that matter. “Our understanding on nat cat perils in general is very good, in some regions we have data going back thousands of years for hurricanes and earthquakes,” he notes.
“Climate change has an impact but it is about using our experience and understanding of these perils to adjust for these changes.”
“Climate change has an impact but it is about using our experience and understanding of these perils to adjust for these changes.”
Climate change has had a greater impact on some perils than others, or at least exposed gaps in reinsurers’ understanding of those risks that they did not previously know existed—the most obvious example being wildfires.
"Before 2017 there had been 10 or so years with no significant wildfires in California, but that changed from 2017 onwards,” recalls Dunleavy. “Reinsurers and investors are now thinking more about what climate change means for wildfires. It remains a not-well-understood peril although we are gaining a better understanding, for example the impact of the Wildland Urban Interface, a longer fire season and better mapping of primary exposures.”
In other cases, and particularly with other perils, the issue has not been around improving the models, says Dunleavy. “The improvements we have made in terms of exposure management, in avoiding too much concentration of risk, are as important as changes we have made to the models themselves,” he says.
A long-term player
Then there is the impact of COVID-19, a new kind of natural disaster that has been playing out in slow motion since the start of 2020, for which reinsurers have no historical data to fall back on and no models they can trust. Reinsurers are working out their loss estimates, notes Dunleavy, but many uncertainties remain, which is making them understandably cautious.
As a driver of the market, Dunleavy sees COVID-19 as a catalyst, rather than a cause, of broader market trends. “The pandemic has been an accelerant for the market in the sense that reinsurance pricing was already moving, especially in the retro market,” he says.
“There was the litigation environment in the US impacting casualty trends, and challenges in the aviation market—all that was building before the pandemic.”
Aspen itself deployed less capital during the January 2020 renewals, notes Dunleavy—and that was before COVID-19 had become an issue outside China. “We didn’t think the price reflected the risk and deployed more mid-year as pricing began to move,” he recalls.
As the global economy has teetered in response to economic shutdowns, the prospect of any rise in interest rates has grown more remote—another way that COVID-19 has reinforced the status quo. Here, again, Dunleavy argues Aspen’s existing business model has stood it in good stead.
“The lower-for-longer interest rate environment has had a big impact on long tail lines and that means cash flow underwriting has gone out of the window, although Aspen never did that anyway,” he says.
“Our focus has always been on our underwriting results and we have increased that focus. We do not want to take a lot of risk with our investments, we want our performance to be driven by underwriting and any return from the investment side is gravy on top.”
In other ways, however, the experience of going through a pandemic has been more profound, especially in terms of preventing face-to-face meetings between reinsurers and their clients, and significantly reducing travel.
“We want our performance to be driven by underwriting and any return from the investment side is gravy on top.”
While many are predicting the impacts of COVID-19 will outlast the virus itself, Dunleavy looks forward to something like a return to normal for the reinsurance industry.
“Underwriting is a team sport and reinsurance is a team game,” he says. “The industry works best when people can work together, which includes face-to-face meetings.”
Dunleavy sees something special in the relationship between reinsurers and clients, born out of the short-term nature of insurance contracts. “The fact that renewals happen every year has always been a huge advantage for the industry,” Dunleavy explains.
“It means we see and negotiate with our clients regularly and the personal relationships remain strong. I hope COVID-19 doesn’t change that. I would like to see a return to the in-person model but with more flexibility and perhaps a slightly more sensible approach to industry events.”
In the meantime, Dunleavy remains confident in the Aspen business model, in the quality of its relationships and the longevity of its business. “There will always be opportunists and there will always be longer-term players,” he says.
“Aspen is a longer-term player. We don’t need to extract every dime out of every deal, we want stable relationships because too much churn in our portfolio is no good for us.”
This vantage point offers at least some level of detachment from the vagaries of the market cycle, a feature of the market that will endure as long as markets themselves.
“Market cycles will never go away, that is the nature of business and markets when there is competition,” says Dunleavy. “But perhaps we can get to a place where we have less volatility in the cycle, with peaks that are not quite as high and valleys that are not quite as low, with less overreactions from both sellers and buyers.
“That would be a better environment for everyone.”
