RENEWALS

Taking the temperature: where do P&C rates go from here?

The COVID-19 pandemic caused wholesale disruption to re/insurance market pricing. With restrictions easing and some semblance of normality fitfully spurring the economy forward, how will re/insurance pricing in the US and Bermuda react?


You do not need to wait for the passage of time and the clarity of hindsight to acknowledge that 2020 was a year which changed everything.

The world has run out of superlatives to describe the social, economic, and political cost of the coronavirus pandemic, with even the green shoots of recovery currently emerging through the rubble threatened by the onset of yet another variant to the disease.

For the US and Bermudian re/insurance world, 2020 will in some ways be a year to forget.

The combination of the socio-economic chaos of the pandemic and a series of catastrophe losses eroded much of the industry’s profitability, and that is to say nothing of the various lawsuits related to lockdowns and business closures currently working their way through the courts.

The volatility has elicited a reaction in pricing, with rates rising across lines and a deepening sense after three consecutive years of price hikes that the industry has entered a longer hard market.

Association of Bermuda Insurers and Reinsurers president and chief executive officer John Huff, speaking on a panel session with the Re/insurance Lounge, Intelligent Insurer’s online, on-demand platform for interviews and panel discussions with leaders in the industry, said that the association’s members were in broad agreement that rates were still rising as we head into the second half of 2021.

“Most people in the market will agree that we’re in a positive rate environment.”
John Huff, ABIR

Current conditions

“Most people in the market will agree that we’re in a positive rate environment, the rates are increasing. Looking ahead, particularly on casualty and specialty lines, you’re definitely seeing some hardening,” Huff said.

“In those lines, if you look at pure property, you need to get very granular very quickly to understand what is going on. There’s some dynamics going on there with potentially some tapering of those increases.

“If you look at the excess and surplus side of P&C, where not all the players may have the licensing to get into that space, and you do not have some of the rate restrictions through regulators, you’re seeing quite a bit of growth and rate adequacy.

“So I don’t think anyone is concerned that there is not the opportunity there to get a proper rate for risk,” he explained.

Cautions

While the broad picture remains tilted towards rate rises, there remain a number of factors at play that should provide a caution against assuming that the market will continue to harden over the coming years.

Steve Chirico, director, AM Best said that the current pricing dynamics are likely to persist in the short term, but that the switch to a truly “hard” market has not yet taken place.

“It’s a black and white or two-dimensional picture where, at best, we’re also concerned about loss costs inflation and rates as a proportion of what we predict to be loss cost inflation, whether it’s climate change in property, or social inflation in casualty, it seems to be hitting across the board,” Chirico said.

“We monitor rates, and I agree with John, we are in a good rate environment. I would not call it a hard market, but a hardening market. It is clearly three years of rate-on-rate compounding, as has been very helpful for the industry.

“However, we have points of concern over rates keeping pace with some of the underlying loss increases that we expect to see over the next few years.”

“The switch to a truly ‘hard’ market has not yet taken place.”
Steve Chirico, AM Best

Alternative capital markets Insurance-linked securities (ILS) is firmly established as an integral part of the insurance world, but in contrast to traditional carriers, the sector has suffered some “fairly significant” rate declines with renewals and issuance over the past year, according to Aon Securities chief executive officer Paul Schultz.

“The way we talked about rate adequacy and risk-adjusted returns, that’s all very consistent whether you’re transacting in ILS, or back into the more conventional markets. But unlike my two colleagues on the panel, I think we are seeing fairly significant moves in ILS today,” he said.

“ILS was hardening faster than the traditional markets but now it’s just the opposite.”

Schultz added that the market is likely to see record issuance of new instruments this year, and that the additional risk capacity will exert notable downward pressure on pricing.


To view the full Re/insurance Lounge session click here


Image courtesy of Shutterstock / Rawpixel.com

“The market is likely to see record issuance of new instruments this year.”
Paul Schultz, Aon Securities

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