NEWS
Hard rates to endure until industry tackles existential problems
The hard market will probably run until investors see it can produce an adequate return on investment, says Convex CEO Paul Brand.
Hard market conditions will run longer and deeper than is typical because the reinsurance industry still needs to fix fundamental, existential problems, Convex Group chief executive officer Paul Brand told Monte Carlo Today.
“This is a different type of hard market. The duration has already been longer than in the past, which is probably because there are more things to fix,” Brand said.
Brand, who founded Bermuda-based Convex in 2019 with industry legend Stephen Catlin, said the industry has yet to prove it can consistently produce the returns on equity investors are seeking, despite improved rates.
“The reason people are struggling to attract capital is investors can’t yet see the industry is fixed. Typically, you’ll see significant rate increases translating into significantly improved profitability and very high returns on equity, particularly from reinsurance carriers. That’s the historic story but we have not seen that this time.”
Brand cites several reasons for this, including a hangover from casualty losses, and potential reserve deficiencies. Also, the directors & officers liability market remains soft.
“Studies on the specialty market show you’re not seeing rate increases translate into improvements in the bottom line,” he said.
“That’s either because people are using today’s money to pay for tomorrow’s problems or because losses have increased—or a combination. The rate increases are not shifting through into excess profit. And until you see that, the balance between greed and fear is still on the fear side.”
Brand said rates had risen more quickly than Convex had predicted, adding: “The hard market can’t go on forever because we are in a cyclical business, but it will go on until the industry demonstrates that it can grapple with some existential issues.
“The balance between greed and fear is still on the fear side.”
Paul Brand, Convex
“The expectation is that the loss trend will continue upwards. That’s not a bad thing in some ways because it shows that the industry has value and purpose.”
Yet he added that it was foolish to try to make predictions on how long it might endure. “The better answer is we’re very careful to monitor rate. We see that as one of the key indicators of what is happening. When the rate of increases starts to slow, we’ll know. At that point in time, the hard market is over and you’re in a soft market.”
A proper purpose
Despite the challenges, specialty re/insurer Convex, as a relatively new business with a clean balance sheet, is well placed. Having reached $3 billion in grow written premium in three years, it is now on course to hit around $4 billion in 2023 although, Brand said, the trajectory is more important than hitting any milestone.
“That very significant growth rate demonstrates that there’s a proper purpose to Convex for clients and brokers,” he said.
“A more useful metric is that I was very happy with the 98 percent combined ratio at the end of 2022. That was a busy major event year: Ukraine, Australian floods and Hurricane Ian. And we posted that combined ratio. We have had lots of growth, but we are a profitable business. This is a good place to be.”
Brand said one big discussion point at Monte Carlo is the number of secondary perils afflicting the insurance industry. “There are big events but you’re also seeing lots of smaller events,” he said. “But reinsurers have been able to reprice and move deductibles and excess points to restrict coverage. That means those losses are being borne outside the reinsurance market. That will have a push on to direct rates.”
He notes that Russia’s invasion of Ukraine remains an uncertainty. It is not clear how claims stemming from the conflict will be resolved. “The resolution of the claims that have arisen from it is still very uncertain.”
Brand says the Vesttoo scandal is also a big talking point. The affair, in which senior executives have been accused of forging billions of dollars’ worth of letters of credit, was “a sign of markets under stress”.
“There is an enormous opportunity to be a bit more client-centric.”
He believes the scandal proves the value of traditional reinsurance. “If you go back three or four years, some people were saying insurance-linked securities (ILS) funds were going to eat the traditional markets’ lunch. That story has proved to be untrue, and it should not be ignored that Vesttoo was part of the ILS market.
“People misunderstood how collateral rules worked and how short-tail losses can take time before they become certain, meaning you have collateral held back.”
Brand believes that many of the ILS market’s problems stem from the benign period in terms of losses in the early 2010s. He believes people’s view of risk became adjusted too low. “A lot of structures the traditional market was declining flowed into the ILS market. Surprise, surprise—it came a cropper.”
Remember the clients
Amid all the noise and uncertainty of the past 12 months, Brand said Convex now wants to focus on its clients who, he feels, can sometimes be forgotten by the industry.
“Clients got somewhat lost in the noise about losses and rate increases,” he said. “There’s a long-term opportunity for Convex to get closer to clients.”
He said the firm makes a point of having underwriters in the office who can speak to clients and make decisions. “Having people who can talk to clients, explain why we are charging more, who can give clear answers is valuable.
“And we have the privilege of coming in with new capital, so we’re growing. That is very different from companies suffering the regrets of previous underwriting errors and having to retrench.
“It’s the clients who put money into this business—you can’t forget that. There is an enormous opportunity to be a bit more client-centric, and not forget about them as prices change. That helps in this market.
“If we were offering property-catastrophe protection, we could be awful and people would still come and find us. But if you are doing it well, doing it professionally, and giving a service, that helps you through the soft phase of the market when clients have a choice,” he concluded.
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