NEWS
Today’s challenges: a bevy of grey swans
None of the trials facing the industry is unique, unexpected or something that has not been seen before, says David Flandro of Howden.
The challenges reinsurers are facing should not be termed a black swan situation since all were foreseeable—but it might fairly be described as a confluence of grey swans, David Flandro, head of analytics at Howden, told Baden-Baden Today.
He said none of the trials facing the industry is unique, unexpected or something that has not been seen before. But the fact that so many have hit the industry simultaneously is unprecedented—and will make for one of the toughest renewals in at least 10 years.
“This renewal is completely different from anything we have seen in the past decade, including last year, which was also challenging,” Flandro said. “It is the first time since the financial crisis that we may well see reinsurance capital actually shrink.”
He lists the many issues reinsurers are grappling with, many of which were unexpected—but not unforeseeable.
This is the fifth year in six of above-average cat losses, he says, leading to concerns over climate change; the war in Ukraine surprised the world; inflation is at levels forecast by few economists; interest rates are higher than anticipated—and many reinsurers have been hit on the investment side of their balance sheets, resulting in unrealised losses but a meaningful reduction in the capital they are able to deploy as a result.
“None of these events is, in its own right, unexpected,” he said. “It is the confluence of them that is acute. Even Hurricane Ian was well within a standard deviation of hurricane activity at this time of year. In fact, prior to Irma, it had been more of a surprise that Florida went so long without a major hurricane. But dealing with all these things at the same time is a challenge.”
“We may well see reinsurance capital actually shrink.”
David Flandro, Howden
It is notable, he says, that despite capacity shortages on the cat side and rates hardening, new insurance-linked securities (ILS) capacity is not entering the sector as it has in previous hardening markets. He believes this is partly due to the challenges the sector had in 2017 and 2018 when the issue of trapped capital emerged for the first time and investors realised their investment was not always limited to a specific period of time—usually one year.
He stresses that the sector remains robust and investors are committed. But, at between $90 and $100 billion of dedicated ILS cat capacity, he believes it has reached a ceiling.
“In real terms, it will stay at around this level for now. The class remains attractive to investors, especially its low correlation with other investments,” Flandro said. “But they have perhaps realised it is not quite as perfect as they once believed. It is here to stay but I think most investors currently in the space have reached their target allocation.”
New forms of cover
The caveat, Flandro added, is that the journey investors have been on in recent years with cat-linked ILS may make them more open to other forms of risks being transferred in this way. He suggests the door is now opening to there being multiple classes of ILS: securitised whole account cover, cyber and casualty, to name but three.
“The ability to identify market opportunities ahead of peers is crucial.”
He added that this added nuance and complexity seen in the market is reflected in other ways. Reinsurers are becoming much better at using data and business intelligence to make decisions. Although Baden-Baden still represents the traditional side of the industry, he said, things are changing in the way decisions are being made behind the scenes.
For Howden, there is much more interest in the use of NOVA, an insurance business intelligence platform launched last year, which enables users to better understand the insurance market and its drivers.
NOVA amalgamates unique datasets, including proprietary Howden pricing and placement information, loss trends, regulatory submissions and broader market financials, to provide users with a view of the insurance market and competitive dynamics across business lines and regions. Flandro said it allows users to better identify market opportunities, anticipate trends, mitigate risk and make data-backed decisions.
“The industry is changing. It is becoming more data-savvy. As we enter this unique market environment, the ability to identify market opportunities ahead of peers is crucial.
“With market-leading data, NOVA users can better identify and capitalise upon opportunities early, gaining a crucial competitive advantage to boost profitability,” he concluded.
Main image: Shutterstock / Wirestock Creators
