Risk managers should prepare for tricky renewals

Risk managers hoping for further rate reductions may be disappointed if market predictions from leading insurers and brokers that spoke to Commercial Risk Europe are anything to go by. After more than a decade of market softening, some are forecasting a moderation or slight rise in certain lines and geographical sectors at upcoming renewals, especially those exposed to the recent spate of natural catastrophes. The hurricanes and other natural disasters that have affected the US, Caribbean, Asia, Australia and Mexico will lead insurers to review their risk pricing in any lines exposed to these events, the experts believe. However, risk managers’ disappointment at a market hardening will be tempered by the impact of alternative capital, which will force insurers to remain competitive and mean any price increases will be modest and very specific, they add. Their opinion that insurance rates are likely to rise have been backed up over the last few days as leading insurers have released loss figures and suggested price increases. Fitch ratings said that prices are set to increase in the London market for lines affected by recent losses, adding that rises could extend to lines not directly hit by the catastrophes. While there is no doubt that the recent series of global catastrophes will have an impact on the insurance market and pricing, the scope and scale of change remains up in the air as insurers assess mapped and anticipated losses, said Graham Barr, deputy chief broking officer at Aon Risk Solutions EMEA. “Contingent business interruption losses will be considerable and this is the element that is most difficult to extrapolate. Direct insurers will be hardest hit as many have retained more risk in recent years, leaving reinsurers in good shape. The hurricane season still has a bit to run and the market may suffer further losses that will potentially further impact market dynamics for 2018,” he said. Mr Barr added: “We have seen a number of carriers re-underwriting aspects of their portfolio in the last 12 months as they seek to exit non-profitable lines, and this may well continue as US, Caribbean and Asian losses hit their balance sheets.” Although insurance capacity is generally still available, the downward spiral of rate reductions looks like it is coming to an end in most territories, said Mr Barr. While there is clear evidence of rate rises in certain countries, lines or industries, those insurers that have sought to increase rates across their portfolio have been less successful than those that have judged each risk on its own merit, he continued. Consequently, brokers need to ensure they are “well briefed on the strategic intentions of carriers so that clients can make informed insurer selection choices,” he said. Other brokers agreed that there will be an inevitable focus on the hurricane season and additional significant catastrophe losses at upcoming renewals. January’s reinsurance renewals will be a key event, even though current estimates on the extent of insured losses are uncertain and vary wildly, said Philip Smaje, global head of broking at Willis Towers Watson. “Given the economics of the US property market, we would expect some kind of price and potential policy condition adjustment. It’s unclear to what extent prices will increase and where, but markets are quoting and the period of quoting is short, giving room for insurers to further adjust pricing if firm order instructions are not given,” he said. But while insurers consider changes to their rates, there is a substantial amount of capital sitting at the side watching, said Mr Smaje. “If this excess capacity chooses to deploy its capital and enter the market, then the level of increases may not be sustainable,” he added. Even without the impact of recent natural catastrophes, it is likely that some insurers would be considering rate increases due to the unprecedented length of the current soft market and its impact on profitability, said Dr Edgar Puls, member of the board of management at HDI Global. “We are in the 15th year of a worldwide softening market, so I do not think there is any room for further decrease of rates in general,” he said. “To the contrary, we see evidence of first cases of shortage in capacity here and there.” HDI Global, like other insurers, will continue to offer capacity, but does need an adequate price-risk ratio, continued Mr Puls. “Therefore, we will evaluate each client to see if its risk exposure has changed and if the price-risk-ratio is still adequate or whether we need price increases,” he said. Other insurers also argued that the market was in flux even before the Atlantic hurricane season as a result of the extended soft market, increasing complexity of risk and growing political instability. But where there are challenges there are opportunities, said Chris Smith, chief regions and markets officer, international at Mapfre Global Risks. “Carriers have to take the opportunity to be more efficient, more innovative and more relevant and responsive to clients’ changing needs,” he said. Mr Smith added that if the recent hurricanes finally push insurance prices upwards, this would ultimately be to everyone’s benefit including clients, who need a strong and stable market. The continued flow of alternative capital into the insurance market is likely to temper any rate increases, mitigating potential loss of capacity and ensuring that competition remains intense. The influence of this capital has not gone unnoticed by insurers. “The availability of capital seems to be here to stay and it’s having an impact across the industry,” said Enrico Bertagna, senior vice-president of Allied World’s business development group. “This dynamic would only change the moment such capital found another industry that could provide higher returns,” he continued. “And it’s not just capital – there are more aggressive competitors in the market than ever before. Those insurers that will thrive – and survive – in 2018 will set themselves apart from their competitors through strong expertise and niche market differentiators to bring value to clients. With investment returns likely to remain under pressure for some time – despite signs of fiscal tightening in the US – cost control and tight underwriting discipline will be crucial,” continued the insurer. According to Andreas Berger, member of the board of management at Allianz Global Corporate & Specialty, we are still in a very competitive insurance market environment that will be dominated by low interest rates, premium pressures and abundant capacity for the foreseeable future. “We see new competitors entering mature markets in Europe and insurance-linked securities continue to be on the rise, which underlines that the commercial insurance segment is still an attractive segment for both insurers and alternative capital and investors,” he said. Alternative capital is creating “hyper-competition” in the corporate insurance market, added Mr Berger. “Business as usual isn’t enough to further grow in such a challenging market environment. The onus is on us to respond proactively, optimising our setup and processes to reduce complexity and become more productive, while in parallel we must constantly improve our offering and services.” Technology and its disruption of business models is also shaping insurance market dynamics. This impact has been felt elsewhere and the insurance industry is not immune. Within the large, complex risk space this disruption is taking three forms, said Kelly Lyles, chief executive, client and country management at XL Catlin. Firstly, there is likely to be a shift to non-traditional distribution channels and towards ‘customer outcome’ rather than product sales. Secondly, underwriting will become more disciplined and data-driven as insurers increasingly draw on new and novel data sources to deliver insurance on a real-time basis, focusing on specific risks rather than general pools. Thirdly, there will be a reinvention of the delivery mechanism through the application of technology, said Ms Lyles.

Risk managers should prepare for tricky renewals

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