Fraught renewals ahead as market stands firm on pricing

After five years of declining rates, and struggling to meet its cost of capital, the re/insurance industry is finally moving towards a place where the market has decided that enough is enough.

Eighteen months of hefty losses and a notable paradigm shift caused by both the COVID-19 pandemic and natural catastrophes have led to questions over whether current pricing is adequate to handle the risks at hand. There is now a broad consensus that rates are set to rise at this year’s renewals.

However, while the industry is pushing for price hikes, will re/insurance buyers be prepared to pay those costs, particularly as more capital continues to flood into the market?

Paul Brand, deputy chief executive officer and co-founder of Convex, sat down with the 1.1 Club, sister publication Intelligent Insurer’s online, on-demand platform for one-on-one interviews with industry leaders, to talk about how the market is set for some challenging discussions in the months to come.

It is hardly breaking news for carriers or clients that a changed market lies ahead. The COVID-19 pandemic has forced a rethink in pricing levels, particularly as claims continue to filter through from 2020’s global economic shutdown. And, is the industry prepared for the losses that are likely to stem from climate change over the coming years?

Tense discussions

Brand said that while the market had clearly suffered from a series of negative events in recent times, there were definite signs of better pricing on the horizon, going into this year’s 1.1 renewals.

“Clearly the market is being dominated by bad news, but there’s been some good news in terms of rate increases. Some new startups and capital are coming into the business, but fundamentally it’s a depressing picture, from cat losses and COVID-19 to questions over the casualty reserving inflation or challenges to business models.

“As we approach this year’s renewal, some people might have started to think that the balance was drifting in the direction of good news, and that they might make a bit of money.

“Some positive results appeared up to Q2, but that’s not going to be the case as people digest the impact of European storms. All the conversation is going to be about loss inflation.

“And yet, what is climate change doing as we think about that property cat piece? That should keep prices firmer and drive them upwards,” he said.

Brand remains confident that price rises would be secured by carriers, but he warned that there were likely to be some tense discussions with buyers who may not be as ready to accept such hikes.

“It’s going to be one of those slow, slightly fraught renewal seasons, because there’ll be a big gap between the expectations of buyers and sellers.”

What of the new players who have come into the market over the last year? Estimates in some quarters put the new capital that has entered the Bermuda market at around $19 billion, split between startups and new investments by legacy players—although Brand reckons that there remains enough room for new entrants without significantly undermining the existing market.

“There is plenty of space, particularly if we’re trying to take a slightly different approach from what you might see in some of the traditional companies’ strategies. You need a market that can regenerate, a market that can challenge the existing business model, improve it and get something good for clients too,” he explained.

“If it was just a closed box, where nobody could come in and nobody could leave, can you imagine how dull that would get? That would be pointless. That’s not a market,” he added.

Future relevance

Looking at the longer horizon, Brand said that the pandemic had forced the industry to ask some fundamental questions about its relevance and value for clients. He highlighted the number of ongoing legal disputes stemming from coverage being denied for coronavirus-related claims as a major issue.

He warned that the market needed to improve its transparency and make a clearer value proposition if it was to maintain its place as a trusted partner of businesses.

“COVID-19 created a challenge in terms of relevance for the industry, because a lot of people had the expectation that policies were covering more than the carriers thought. We’ve already seen that lead to extensive litigation in the UK and Australia. Every time you end up in litigation with your clients—and that happens far too frequently in this industry—that’s a failure.

“Every time a client says: ‘I thought I bought this, and you’re telling me that it doesn’t work like that’, people start asking ‘what’s the alternative?’. That is a real challenge for the industry. How do we adapt?

“We need transparency and clarity on what we are getting coverage for, so that people understand how the system works. That is a minimal requirement. From there, we can hopefully reach a point where we’re starting to cover more of the risks rather than saying ‘we can’t help’,” he concluded.

To view the full 1.1 Club interview click here