Act in haste, repent at leisure

The portents of a harshening market are here. Risk and insurance managers need to be fully aware of what is occurring and rapidly digest what it means for them. They must act swiftly and decisively, but most importantly of all, on a rational and well-thought-out basis, or face potentially disastrous consequences. William Congreve coined the phrase that sits so well with the current state of the market in his comedy of manners, The Old Batchelour, published in 1693: “Grief still treads upon the heels of pleasure: Married in haste, we may repent at leisure.” In modern-day business language, and specifically the rapidly changing commercial and corporate insurance market, what this means is quite simple. Faced with an increasingly challenging environment as year-end renewals loom ominously closer on the cloudy horizon, risk managers need to play a cool hand. Now is not the time to assume that it will be all right on the night, but equally now is certainly not the time to make hasty and ill-thought-out decisions. The fact is that insurers are in something of a pickle currently. They have been struggling through the last few years of stubbornly low prices and lax terms, rising natural and man-made catastrophes and, perhaps more significantly, attritional and inflationary losses in a period of stubbornly poor investment returns. No one would suggest for a minute that the only way leading insurers have managed to deliver anywhere near the returns that voracious investors demand has been by taking increasingly optimistic assumptions on loss development and boosting results with ambitious reserve releases – perish the thought. But the UK’s Prudential Regulatory Authority (PRA) does not send letters to the heads of insurance companies without good reason. The one that it sent on 5 November was pretty strongly worded and suggested in no uncertain terms that any insurance company CEO, particularly in the specialty sector, who was planning to see if they could boost their results by massaging reserves for another year had better think again. The PRA states in the letter: “There have been signs in recent months that the risk of reserving deficiencies may be increasing in some lines of business, particularly in specialty classes. Some firms have reported material reserve strengthening and we see increasing areas of emerging risk, particularly in some US casualty lines such as financial and professional lines, medical malpractice and general liability classes. Our ‘Dear Chief Actuary’ letter also highlights some specific areas of concern relating to individual case reserve adequacy, future claims inflation and attritional loss deterioration on older years of business.” So it appears the writing is on the wall. The harshening market is here and probably here to stay for a while. Therefore, Europe’s risk and insurance managers had better prepare, if they have not already. You have to sympathise with statements made by Alexander Mahnke, president of the German association GVNW, at its annual Symposium in Munich in September. He pointed out that one of the main reasons why the insurance market finds itself in this pickle and needs to adopt a harsh attitude at this point, is because its cost base is too high and it is basically inefficient. However, the fact is that while right-minded insurers may be working hard to turn themselves into lean, mean, digital-based underwriting machines, it will take time and they do not have much of that. The next results reporting round is only three months away. So, risk managers need to accept that coming renewals are not going to be much fun and do the following: Take a very close look at what you are buying and what you really need to buy – have you got all that cover just because it was cheap? Use your captive to retain more risk and seek alternative options – that is what it is for. Get your pitch out in the market as early as possible so that you can identify the most troublesome areas sooner rather than later, and work out your options. Challenge your broker to get on the case and secure the best deal for you, not them, and possibly use alternative brokers. Above all, prepare your internal colleagues and bosses for what is about to come and make sure they realise that you are doing a great job to soften the blow. Do not turn up at the last minute and say: ‘I’m sorry, here is a big fat bill you didn’t expect.’ This is actually a great chance for risk managers to really show their worth and the real value of risk transfer. Get your head above the parapet and bang that drum!

Act in haste, repent at leisure

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