Hiscox marks a crucial RVS

The first gathering in three years of P&C re/insurers in Monte Carlo is not merely a longed-for opportunity to reconnect in person, but the most urgent call to arms in a decade, Matthew Wilken, chief underwriting officer of Hiscox Re & ILS, said in an interview at RVS 2022 in Monte Carlo.

Prior to joining Hiscox in January, Wilken was head of reinsurance at MS Amlin in London. Before that, he was at Kiln Reinsurance, Argo Re and Ariel Re.

“Hiscox is a fantastic brand and very well established, with over 100 years of history and decades of that in reinsurance,” Wilken said.

The company has a “refreshed” team, with several new executives “augmented by” underwriters who have worked there for many years.

Wilken explained: “One of the differentiating qualities of Hiscox is the investment that it’s made in terms of rigorous intellect applied to understanding the business that we’re doing. That’s particularly pertinent around climate change, about rate assessment, coverage issues, inflationary aspects, all of those things that are currently hitting the topical agendas of everyone’s conversations in Monte Carlo.

“It doesn’t mean we’re complacent—there is always more to learn—but we’re seeing increasing demand from our customers who are trying to protect their own portfolios in the face of what appears to be adversity.”

Vulnerability to primary and secondary perils are assessed by continually improving modelling, he said, but then an unexpected dimension will always appear. That’s because the world isn’t only impacted by natural perils, he said, but also by geopolitical issues, such as those related to the conflict in Ukraine.

“We’ll help our customers with some of those really challenging problems in the best way we can, but it’s bigger than just us. It’s up to the entire reinsurance society on the one hand and to society in general to find solutions to these problems.”

A key example of that is climate change. Wilken said: “Previously there were conflicting stances towards climate change, with both sides of the debate each showing demonstrable scientific evidence to support their theories. It’s now generally accepted that climate change is real and that we need to do something about it. And things are being done about it! There has definitely been a sea change in acceptance levels as to what is really, genuinely going on, but measuring all of that is complex.”

Good timing

In terms of the hardening market that has been the main talking point in Monte Carlo, Wilken said: “Timing is everything.”

“There is increasing demand at a time when capacity is arguably plateauing,” he explained. “There are various protagonists in the market, some of whom think it’s marginally up and some who think it’s marginally down but, broadly, there’s not going to be systemic change to capacity in the next year.”

While capacity “stands still”, however, demand is increasing largely because the effects of inflationary pressure are resulting in customers wanting to buy more cover.

“I don’t know what that’s going to end up being, in terms of the total market, but billions of dollars of limit is probably what customers are going to be out there looking for,” he said.

That situation is in addition to a number of secondary peril events, such as hail and convective storms in the US, Australian floods, and the impact of the Ukraine crisis on aviation, marine and energy lines.

“Hiscox’s half-year results were good,” Wilken said, “even in the face of the Australian floods, but we all know that there’s a lot of impetus put on Q3 and the impact on the North Atlantic storms and, for the first time in approximately 25 years, we’ve seen no landfalling named storm in the Atlantic’s hurricane basin.”

He went on: “That’s an interesting dynamic of climate change as well, but it all plays to the uncertainty that we see in the market. The cost of that has been a diversification strategy that gives perhaps false confidence in the level of uncertainty that’s been priced for. I feel the cost of that uncertainty has risen and will continue to go up.”

Hiscox Re has a diversified portfolio with non-correlated cat lines such as marine & energy, aviation & cyber, that complement the natural perils exposure. Within the cat book itself it continues to diversify geographically where terms and conditions warrant it—offsetting Europe against the US, for example.

“That proved to be very efficient for the market, but I see the cost of that diversification being more expensive next year and almost everywhere. For the first time I can remember in my career, I can honestly say that nearly every single line of business we do is getting some pressure to increase price. Not to the same degree, but everywhere is simultaneously experiencing some hardening,” he said.

A complex market

After property-cat and retro, political violence (PV) will likely be the next hard market.

Wilken said: “PV is a complex market in that it doesn’t have the same scale as a natural peril market would have. It’s a lot more complicated to model and therefore individual companies have created their own models around it. A lot of it’s done on a geographically diversified basis, and much of the coverages has been taken into composite type covers. There’s a question in the market as to whether or not there’ll be some dilution of those composite covers, and breaking out certain lines that have been exposed to loss, such as aviation.”

How that plays out will hinge on whether people have the “net appetite” to absorb the individual lines of business.

“There’s an exciting opportunity in that market, and also to augment it with improved data capture,” Wilken said.

One of the challenges of the softening market was a broadening of coverages and a degree of opacity.

“I’d welcome clarity through contractual changes,” he said. “By definition as a reinsurer, we always want to be aligned to our insured and ensure that they’re getting the broader coverage that they need from us. However, we also as an industry owe it to ourselves to be able to price adequately for all of those different underlying perils and regions.”

Conversations on changes to original policies are “too complicated” to be held during half-hour meetings in Monaco, he said, and people are waiting for the completion of RVS before they go back to their jurisdictions and have those conversations.

“When it comes to retrocession, for example, we are very keen to start becoming much more focused on those specific perils that were being covered.” he said.

Hiscox has been impacted by the conflict in Ukraine “although not beyond our expectation, directly or as a consequence of it”.

“We came out of aviation direct business a few years ago, so nothing on that line. We do have some modest market shares on the aviation reinsurance side, but it’s only a very small part of our overall reinsurance portfolio. We’ve had no losses reported to us directly at this stage although we would anticipate something at some point.”

On the book

Hiscox Re & ILS has a “pretty sizable” portfolio, Wilken said, of over $1 billion in gross written premium.

“We’ve grown that book and we’ve used 2022 to be able to grow again. We’ve probably bucked the trend in being able to raise additional insurance-linked securities (ILS) capital to support us during 2022,” he said.

In the first half of this year, the company raised approximately $560 million to deploy. It now has $1.9 billion in assets under management in an “aligned capital partner model”.

Wilken explained: “We’re augmenting our net line with the gross line that’s allowed to expand as a result of the ILS. The communication between the ILS team and the Hiscox Re underwriters is totally seamless. Underwriters are in the same place, at the same time, and discuss all risks simultaneously. We’re on ‘99 point something’ of all of the covers we write together. So, it’s not trying to take capital out, finding a specific home for it that we wouldn’t ourselves do and then deploying it; it is actually a shared ownership of the deals that we’re writing.”

He continued: “The flavours can be quite different depending on how capital is deployed around the market. Ours was a very conscious decision to make it appear like that because we think it adds significant strengths, both to our ILS partners, and our customers because we’re totally aligned. We both have ‘skin in the game’ on all of the deals, and our customers like that.”

ILS will require an innovative approach to create the comfort required to deploy capacity in lines of reinsurance business it currently doesn’t materially participate in, he said.

“One of my challenges is how we crack the nut of ILS capital to make it comfortable with the non-core cat classes. We’ll definitely explore it and I think we’ll get there because there’s definitely demand, and cyber is a classic example of a market that is full.

“It’s possibly one of the more complicated coverages in that it transcends geographic, temporal and socioeconomic boundaries in terms of defining occurrences that are likely to impact it.”

That demands innovation in terms of creating products, at both the insurance and the reinsurance level, in order to draw more capacity in to support it.

“We write a book and the reinsurance book is specifically geared only to stop loss programmes because it is quite hard to define events,” Wilken said.

“When the ILS markets get comfortable with two things—the ability to quantify and determine what ‘single occurrences’ are, and the ability to have comfort knowing when the exposure is exhausted—it will suddenly catalyse much more interest in that space and we’re exploring that already.”

He concluded: “Coming back to Monte Carlo after three years, isn’t just a matter of a nice catch-up. These are the most serious conversations to be had in a decade.”