AXA XL predicts ‘firm’ market with higher rates but steady capacity

AXA XL expects the commercial insurance market to firm over the coming months for most short tail risks, with rates up by mid to high single digits but buyers not suffering capacity reduction, its chief underwriting officer (CUO) for Asia Pacific and Europe, Etienne Champion, told Commercial Risk. But Champion warned that casualty is likely to be an exception to this market trend, with insurers chasing both higher rates and lower limits to combat rising loss costs. He also stressed that many war-related coverages will be difficult for primary buyers because reinsurers heavily restricted cover for insurers and end-of-year renewals. However, there is slightly better news for risks managers operating in the D&O market this year, where Champion said rates are still rising but conceded by not as much as AXA XL and other insurers would like. The CUO explained that macro-economic risks, not least inflation, and heavy nat cat losses over the last few years have combined to cause harder-than-expected reinsurance renewals at 1 January. These three factors are combining to deliver the firm primary space that Champion expects to see this year. “So we think on short tail business, property, construction energy and the like, we will see what we call a firm direct market. We think it is likely that we will see a firm market trend as opposed to a clear, truly hardening reinsurance market,” he said. “What is firm? It is not hard and it is not flat. It is halfway in between. It is not hard because we see a hard market as a combination of price increases but also decreasing capacity. We think the direct market is actually going to see higher prices because we have to pass on the higher costs of treaty renewals to customers, but we won’t see a clear decreasing trend in capacity,” he predicted. The CUO thinks rate rises will be in the mid single to high single-digit range at coming renewals in these short tail lines. He said renewals would probably have flattened out this year but the higher cost of reinsurance treaties has skewed things and will inevitable translate into higher prices for insurance buyers. “The rise of the treaty costs wasn’t forecast at this level... Obviously if the treaty goes up 50% that doesn’t mean it will go up the same for our clients. There is not a linear relationship but we think it will result in those mid to high single-digit rate increases,” said Champion. But he stressed that after hard work derisking books and re-underwriting certain risks, AXA XL and other insurers have carried out enough remediation that primary buyers won’t face further capacity reductions and falling limits. “After three years of work derisking the books and decreasing the limits, we think that on average we are there when it comes to capacity, despite a fall in capacity on the reinsurance side,” Champion explained. He predicts that the casualty market will be tougher for insurance buyers, who will likely have to deal with both higher rates and less capacity. The main reason for this is rising exposures faced by insurers from social and economic inflation, he said. “Unlike the short tail lines, rate alone in casualty is, unfortunately, not a sustainable solution yet for profitability in the direct market. So the challenging market conditions combined with deterioration of prior year developments may force us to refine our underwriting approach a bit,” said Champion. “This means looking at risk selection and limit reduction where it is still needed. We have moved in the past 18 months on limits but the magnitude of the US losses has increased again in the last year. It is moving very fast. So on certain risks we will have to manage the volatility and reduce limits, especially those that are heavily exposed to the US,” he said. And, unsurprisingly, war-impacted lines of business are also set to be more difficult as the market comes to terms with the war in Ukraine, prompting reinsurers to reduce exposure at 1/1 renewals. “For instance, marine war underwriters have been asked to write risks relating to the war on a net basis, in order to continue participation in the market, cutting line sizes to control their aggregates simply because the treaties have come down significantly for this risk. So we are in a phase where for a limited amount of time some insurers accept to take on the net risk but are still forced to reduce limits where it is possible,” said Champion. The other cover that has been impacted is war terrorism and political violence, he continued. “This cover was significantly cut in reinsurance treaty renewals and this is going to be reflected in inceptions to come at primary level,” said the CUO. One cover that looks increasingly positive for risk managers is D&O. Rates are still rising but several insurers have admitted being surprised by how quickly that market has turned back in favour of buyers as competition heats up following several very difficult years. Champion agreed with this assessment. He told CRE last Autumn that AXA XL was targeting international financial lines growth in Europe after addressing problems in its book of business. He said that this remains the case despite the insurer expecting rates in this market to be higher than they are now. But he also urged D&O underwriters to maintain discipline in the face of worrying exposures. “We did probably underestimate the speed of the capacities and players coming back into that D&O market. So competition has heated up and we see rates that are still rising on average, but we see they are lower than we had forecasted. It is not as big rating momentum as we had hoped for but we think the underlying factors needed to sustain these prices are there and the market needs to be wary of those,” he said. “It is a very long tail business, and the market needs to be aware there are some trends that could bring losses – climate-related litigation, ESG duties and the recession, for example. These trends shouldn’t be underestimated. We must remember that not long ago capacity really fell because people weren’t on top of the risk. We must not get back there again,” he continued. “So we are maintaining our limit per policy but our wish is to increase our client base and not increase our limits for the moment. That is our strategy in financial lines overall,” Champion concluded.

AXA XL predicts ‘firm’ market with higher rates but steady capacity

Casualty buyers likely to face higher costs and lower limits

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