The view from insurers: insurance renewals and the hard market

The market was soft for so many years that for some commercial insurance buyers, the hardening market of the last year or two will have come as something of a surprise. There were even suggestions that soft market conditions were the new normal. But the market has certainly hardened, and the issues are whether this is a market-wide phenomena, how long it will last, and what can corporates do to manage and mitigate the impact. Tony Dowding, editor of Global Risk Manager spoke to several of the leading multinational insurers to consider some of the issues relating to the state of the market in Europe. The participants were: Reto Collenberg, head international programmes EMEA, Swiss Re Corporate Solutions; Peter Knaus, country leader, Germany at AXA XL; and Charlie Kitson, international head of client and broker engagement at AIG; Melanie Windirsch, head of global network management, AGCS SE; and Brian McNamara, head of global fronting, Allianz Risk Transfer. How would you describe the pricing environment for European multinational companies and their global programmes/specialty covers? Sierra Signorelli, chief executive officer for commercial insurance, Zurich Insurance Group: More than a decade of rate decreases, increasing loss costs with broadened terms and conditions, and risks that weren’t always adequately priced for, has put pressure on most lines of business. Alongside this, there have been other challenges such as increased frequency in natural hazard events impacting physical risks, not only from a very active hurricane season but also as a result of increasing losses from events that include tornado, hail, flooding and wildfires. There have also been the ‘non-traditional’ losses in 2020, namely Covid-19 and the US riots, which are estimated at approximately $50bn, (according to analysts at investment bank Berenberg in February 2021) and $2bn respectively. And with depressed returns from investment income for an extended period, there is little ability to make up for unfavourable loss ratios. The combination of all these factors made a hardening market inevitable, but some classes and regions are experiencing much greater levels of adjustment than others. Charlie Kitson, international head of client and broker engagement at AIG: There is no doubt that the market remains hard, especially for multinational companies with the more complex risk profiles, which are striving to secure a similar breadth of coverage to what they have been used to. Risk managers continue to find that terms and conditions are more restrictive, deductibles are under more pressure and pricing has seen significant increases in some cases. However, the encouraging news for risk managers is that there are some signs that the market is becoming ‘less hard’, albeit not softening at this point. Risk managers are adapting to the situation. Those faced with big increases in 2020 were often scrambling to react but they are now being more strategic and working more proactively to weigh up their options and manage expectations internally. This year, more buyers are looking at alternative ways to structure their programmes and, in several cases, at their distribution. This has presented opportunities for a broader range of brokers, who are now being given new opportunities to test the market on individual lines for challenging placements, for example on D&O and property risks. Reto Collenberg, head of international programmes EMEA, Swiss Re Corporate Solutions: The global insurance market has clearly changed since last year, as the market has continued to harden during 2020 in the face of many years of unprofitability/poor returns on capital. Clients are facing tougher pricing and the tightening up of terms and conditions as insurers exit certain lines of business because they can’t foresee a sustainable return on their capital in the short to medium term. The consensus view is that this will continue into 2021. Peter Knaus, country leader, Germany at AXA XL: What we’re seeing so far in 2021 is in line with what the market saw last year. On the property side, we’re still very much in a hard market environment, with – still – double-digit rate increases, lower cat limits and higher client retentions. For casualty programmes, the picture is a little more nuanced. For the larger European companies, the market remains hard, with increases around the 10% mark with a focus on limit management; but the middle-market segment remains more competitive, which is driven by local carriers. Which lines are the most distressed in terms of rates and terms and conditions? Reto Collenberg, Swiss Re Corporate Solutions: While the market is increasing in general, there are naturally different dynamics within each line. Property is clearly a line of business in which we observe the hard market. In particular, high-hazard occupancies are experiencing significant double-digit rate increases. Furthermore, customers with considerable exposures to natural catastrophes are requested to pay more for insurance coverage. Executive risk is seeing the hardest market conditions in 20 years. The rise in US securities class actions and broadened director duties generally have led to disproportionate claims activity, necessitating substantial rating correction. Casualty is seeing steady but less severe rate increases, ranging from 10% on some smaller cases to 25% on larger corporate risks. Peter Knaus, AXA XL: For property, we’re seeing a reduction in capacity across the board. For casualty, claims in the automotive industry and large exposures, especially for US risks, are clearly driving rate increases and changes in terms and conditions. Sierra Signorelli, Zurich Insurance Group: Some lines are particularly stressed, such as D&O for example, where we have seen event-driven litigation and an increasing number of security class actions. Charlie Kitson, AIG: The challenges in the D&O and – to a growing extent – cyber lines, have been well documented and are likely to persist for some time. However, it is also important not to lose sight of what’s been happening in the property market. Insurance industry losses from natural catastrophes and man-made disasters globally amounted to $83bn in 2020, according to Swiss Re. That makes it the fifth-costliest year for the industry on record. With the frequency and severity of nat cat events, the balance between exposure and pricing is still not yet there. Meanwhile, some of the larger insurers that had struggled for a number of years to run a profitable property book have withdrawn from the market. This reduction in capacity, combined with the high level of losses, has driven down capacity – leading to pressure on pricing and the limits that insurers are prepared to offer. Are certain territories seeing harder market conditions than others or is it universal? Sierra Signorelli, Zurich Insurance Group: Some markets, like the US, started experiencing the hardening market earlier and are therefore firmly in a hard market for most lines of business. Hardening then followed in the UK and subsequently in continental Europe. But even within Europe, there is a differentiation according to geography, and by product and market segment. Peter Knaus, AXA XL: European markets aren’t seeing rate increases as dramatic as the UK and US markets, especially for property. That being said, the hardening of the market can be felt across Europe for property but is starker for casualty in France and Germany, where clients have larger international exposures. Reto Collenberg, Swiss Re Corporate Solutions: Across Europe, all countries are experiencing double-digit rate increases. When dealing with international programmes, the broader global aspects are critical to consider. For example, any US exposure on casualty or executive deals leads to more severe rate increases. London market executive risk deals exposed to US/ASX listings or side-C coverage have shown the most severe increases. Is capacity an issue or are there signs of new capacity entering the markets? Charlie Kitson, AIG: With insurers looking to restore the balance between exposure and pricing adequacy, brokers are struggling to fill towers, for example for some D&O and cyber risks. However, as there is a broad awareness that we are operating in a challenging market, this is translating into more realistic expectations from brokers now than this time last year. There are signs of new capacity entering the market – alongside existing capacity which is starting to look for growth – including in the form of MGAs and startups, and it will be for clients, risk managers and brokers to assess that capacity and the role such capacity plays as programmes are designed together. Reto Collenberg, Swiss Re Corporate Solutions: Capacity remains an issue, yet of course the market doesn't sit still. Brokers work hard to provide customers with the capacity needed and explore different options. In general, we see the major carriers still bringing down exposure by reducing line size. We do not see new carriers aggressively entering the market, nor do we see pure opportunistic capacity at this stage. We believe there is a desire and demand for stability, therefore the purchasing side has clear expectations on the nature and quality of capacity. At the same time, there is disappointment from the customers with some hard market behaviour, as well as the need to complete the required capacity. Sierra Signorelli, Zurich Insurance Group: For certain risks we are now seeing a lack of capacity, or less capacity than in prior years. There is new capacity coming in, but these new entrants are generally dipping a toe in by participating in excess layers rather than providing primary products and services. Peter Knaus, AXA XL: Capacity is definitely sparser than it has previously been, particularly for multinational clients with high cat and CBI exposures. The major carriers are reducing capacities and, so far, there doesn’t seem to be new capacity entering the market, especially for those multinational clients with larger exposures. We should probably expect newcomers to enter some European markets over time to try to fill the gap, but the impact on international programmes would be limited. Are customers looking at greater use of their captives? Are they looking at other alternative solutions? Sierra Signorelli, Zurich Insurance Group: A major concern for customers has been securing the capacity they need at an acceptable price. Customers are responding to the changed market conditions in a variety of ways, from starting renewal discussions early, to retaining more risk through deductibles and co-insurance, and looking at alternative ways to transfer risk. We see our captive customers, for example, evaluating their options to retain more risk and looking at innovative solutions like combining life and non-life risks into one captive, taking an holistic approach to risk. Brian McNamara, head of global fronting, Allianz Risk Transfer: Given the current hard market, global companies are assuming larger retentions within their captives on the traditional P&C lines of business. They are also placing additional lines of coverage in their captive such as cyber, E&O and D&O (side B and C). There has also been an increase in new captive formations and brokers report an increasing number of requests from their clients for captive feasibility studies, and the use of cell captives has also increased. In terms of alternative solutions to their risk financing requirements, companies are increasingly utilising structured insurance programmes – tailored solutions, designed to respond to a company’s particular risk management needs. The multi-year and/or multi-line nature of these solutions means the client is able to manage the volatility emanating from partially retained risks efficiently over longer periods. Charlie Kitson, AIG: In any hard market, in the face of rising prices for insurance, risk managers will consider alternative methods of risk transfer. Recent reports have suggested that the use of captives is on the rise, but our experience suggests that it is less a case of the formation of large numbers of new captives but rather a shift in how risk managers are looking to use their existing captives. For example, they may now be more willing to consider placing some risks into their captive that they wouldn’t have done previously, as they may now be struggling to place these risks in the open market, or they have been advised that it would be easier to get insurance on other risks if certain ones were taken into their captive. Reto Collenberg, Swiss Re Corporate Solutions: We are seeing a lot of current captive owners considering higher risk retentions in their captives, whether for the traditional lines (property, marine, casualty,) or for new lines such as cyber, D&O, credit or NDBI. That often comes with a need for additional captive capitalisation or capital protection by way of stop-loss reinsurance. Customers who do not (yet) have a captive are looking for other risk retention vehicles to achieve the same risk financing strategy without the same need for capitalisation and setup efforts, such as cell captives or virtual captives. We expect the demand for these structures to remain high over a longer period and are continuously developing solutions to better address that need for our customers. Peter Knaus, AXA XL: Clients with existing captives tend to increase their retentions and an increasing number of clients are looking into setting up a captive to outweigh some of the market trends impacting their property coverage. In addition, some of our climate-dependent clients with already sophisticated risk management strategies are investigating combining traditional direct insurance and/or the use of captives with parametric solutions. Are renewal discussions taking place earlier? Reto Collenberg, Swiss Re Corporate Solutions: We have definitely observed a change. Especially in the different phases of the hardening market during recent years, ‘hard lessons’ of the beginning have been learned. Based on this, brokers were better prepared for the renewal process in general during the 2020 renewals. This was demonstrated by an earlier start of renewal discussions, including earlier delivery of submissions. Customers are learning that timely delivery of more detailed insights on their risks supports a better renewal in hard market conditions. In addition, we have seen an increase in customer contact during the last year, despite the challenging times restricting the ability to meet in person. Of course, there are big differences per line, customer, market segment and broker organisational readiness. Charlie Kitson, AIG: Insurers need to bring more options to the table and look at how they can best benefit their clients. Part of this is greater transparency around providing solutions. But it is also about early communication; being upfront and having conversations sooner around issues, wordings and capacity. Early dialogue should avoid last-minute surprises for risk managers. Providing good-quality data is so important, as well as discussing alternative options with their carrier, both in terms of risk transfer and captive solutions. Melanie Windirsch, head of global network management, AGCS SE: Renewal discussions for global programmes are starting earlier, considering the current market developments – this does not automatically result in renewal negotiations being closed earlier. Hence, we need to increasingly focus on and work closer together with brokers and clients to finalise the terms and also define premium allocation earlier, in accordance with local risk and exposure. This is vital for the success of a timely global programme implementation and for achieving the timelines as well as appropriate policy documentation required by customers. This is particularly important in cash-before-cover countries and also in cases where customers require certifications of insurance for the authorities. Sierra Signorelli, Zurich Insurance Group: Insurers are looking to support their customers during this challenging time, and open, clear and early communication is critical. Generally speaking, this is a tough market regardless of which side of the table you are sitting at, and early discussions are absolutely necessary. Insurers need to be willing to listen to the customer’s needs and propose alternatives that allow them to consider the trade-offs available.

The view from insurers: insurance renewals and the hard market

Want to read this article?

Read Next

ESG underwriting debate hots up as GVNW gathers in Munich

UK Covid BI litigation heads for showdown as insurers drag their heels

Ferma hopes ongoing dialogue over PPPs will now pay off

AI to enable more proactive and predictive risk management

Crises may help in battle for talent

ESG underwriting debate hots up as GVNW gathers in Munich

UK Covid BI litigation heads for showdown as insurers drag their heels

Ferma hopes ongoing dialogue over PPPs will now pay off

AI to enable more proactive and predictive risk management

Crises may help in battle for talent

Want to read this article?

Read Next

ESG underwriting debate hots up as GVNW gathers in Munich

UK Covid BI litigation heads for showdown as insurers drag their heels

Ferma hopes ongoing dialogue over PPPs will now pay off

AI to enable more proactive and predictive risk management

Crises may help in battle for talent

Related Articles