Women in Reinsurance Bermuda
Walking the high wire
“Investors will be increasingly discerning about where to deploy capital.” Victoria Carter, Guy Carpenter
Re/insurers are struggling to digest the influx of new capacity, while the outlook for their customers has rarely looked so uncertain. A panel hosted by Women in Reinsurance Bermuda discussed the various challenges facing the industry.
The influx of insurance-linked securities (ILS) capital into the re/insurance industry has created significant distortions, particularly around pricing, according to a Women in Reinsurance (WiRe) Bermuda panel.
Speaking at the WiRe event on October 14, Maamoun Rajeh, chairman and chief executive at Arch Worldwide Reinsurance Group, said many of the challenges currently facing the industry can be summed up as “capacity, capacity, capacity”. This issue is driving many of the challenges re/insurance executives are currently grappling with, he said.
ILS has brought considerable new capacity into the industry, causing supply to overwhelm demand and preventing prices from rising as soon or as quickly as they might otherwise have done, Rajeh added.
With extra capacity in hand and under pressure from rating agencies, many re/insurers have diversified their businesses and become generalists, active in markets they do not specialise in, he said.
Rajeh noted the flow of ILS capital into the industry had slowed, which he said was good news because it allowed prices and margins to rise to more sustainable levels.
“From a reinsurance buyer’s perspective, tightening terms and conditions have posed a particular challenge.” Deanne Nixon, Weston Insurance Management
Feeling the pressure
Victoria Carter, chairman of global capital solutions, international for Guy Carpenter and Company, said re/insurers are feeling pressure on both the asset and the liability sides of the business, noting that carriers have channelled some of the new capacity coming into the market to increase their reserves and strengthen their balance sheets.
Returns they have made from their government bond portfolios are being hit by the low interest rate environment, Carter explained. Credit spread risk—the risk of counterparty default—has also increased, while the COVID-19 pandemic has increased equity market volatility and triggered a global recession.
These macroeconomic conditions distinguish the current hardening market from previous cycles, said Dan Malloy, chief executive officer at Third Point Re. In the hard market of the 1980s the interest rate was around 16 percent, he said, giving re/insurers a healthy return on their bond portfolios.
“That was a very different dynamic,” he explained, noting the interest return on cash is now so low it is often worth less than the costs of reporting it.
The higher interest rate environments of previous decades made it easier for re/insurers to write long tail business than it is now, Malloy added.
Despite the challenges facing the re/insurance industry, it has been successful in its liaisons with investors, having raised around $12 billion in new capital in 2020—with Arch being responsible for $1 billion of that via its own debt issue.
While some of this capital has been raised by new entrants to the market, the majority was raised by existing platforms, noted Rajeh. “It is wise to raise capital in this environment,” he added, saying that carriers are likely to suffer from more trapped capital while uncertainty around COVID-19 persists.
Carter pointed to new startups in Bermuda and London as an encouraging sign for the industry but warned these startups also face considerable challenges. A new insurance venture needs at least $1 billion in capital to stand a chance of success, she estimated.
“That is a lot of money and raising it is not easy,” said Carter, adding that the regulatory hurdles to starting new re/insurance companies in Bermuda, and London, remain high.
Carter said investors will be increasingly discerning about where to deploy capital, predicting it will typically flow towards businesses with strong management teams. New entrants with strong managers with track records will benefit, she added.
“Over the next few years underwriters will be working on the clarification, repricing and restructuring of risk.” Dan Malloy, Third Point Re
The year the world got riskier
The re/insurance industry is operating in an environment where many things that used to seem too far-fetched to worry about, such as government shutdowns, were now recognised as significant risks, said Malloy.
“Life in general is more uncertain now than it was at the start of 2020,” he said. “The world has never been shut down before.” Re/insurers have had to change their whole approach to risk management, Malloy added, asking: “How do I manage my aggregates in this situation?”
Re/insurers have reacted to this climate of heightened uncertainty the way they always have, Malloy said: by increasing rates and tightening terms and conditions.
“Over the next few years underwriters will be working on the clarification, repricing and restructuring of risk,” he said.
Deanne Nixon, senior vice president and chief underwriting officer at Weston Insurance Management, said that, from a reinsurance buyer’s perspective, tightening terms and conditions have posed a particular challenge.
Weston’s cat bond programme has gone from being 200 to 300 percent placed around two years ago to being only slightly overplaced this year, she said, highlighting the trend insurers face when acquiring reinsurance.
Nixon also expressed concerns about the availability of retro coverage in 2021.
“Many re/insurers have diversified their businesses and become generalists.” Maamoun Rajeh, Arch Worldwide Reinsurance
Panellists agreed that the need to address policy wordings was among the biggest priorities for the industry, the shortcomings of which had been laid bare by the pandemic.
The UK Financial Conduct Authority’s “unprecedented step” in seeking clarity from the courts regarding the status of business interruption policy wordings had been intended to expedite a resolution to the issue and reduce the need for costly litigation for all sides, noted Carter. However, the matter is likely to take years to resolve, like old cases of asbestos, she warned, and will eventually draw in reinsurers.
Rajeh warned that while the early skirmishes between insurers and policyholders over business interruption policies and pandemic coverage had generally gone in favour of the insurers, plaintiffs are tenacious and will likely refine their arguments over time.
He pointed to the precedent set by ammonia release that had rendered properties unoccupiable as potentially applicable in cases of business interruption policies and whether they cover pandemics. Ammonia release was judged to count as property damage, which may leave insurers exposed.