In an underwriting career spanning more than 36 years, Convex co-founder and deputy CEO Paul Brand has experienced a few hard markets, but the high level of uncertainty that underpins market conditions today makes the current one very different.
Brand, the former Catlin Group chief underwriting officer who co-founded Convex with Stephen Catlin in 2019, believes the continued lack of certainty around Covid-19 losses as well as other compounding factors such as negative casualty reserve development, a challenging investment environment and high geopolitical uncertainty all point towards continued positive rate momentum at upcoming renewals.
“In some ways this has been very similar to previous hard markets – it has been driven by a scenario where people have lost more money than they expected, and this has led to a change in the perception of what they consider to be the right price,” he tells The Insurer.
“But if you overlay the impacts and uncertainty of Covid-19 on top, this makes the current situation very different,” he says.
“This makes it a much slower burn, and how bad the bad news will be remains an open question. With Covid-19, there is a large unknown gap between the reserves the industry is holding and what the loss might be.
“At the moment the industry is holding somewhere between $30bn and $40bn in published reserves. There are some suggestions the loss will be in excess of $100bn, perhaps higher, and it is entirely legitimate for people to hold different opinions about how bad it may be.”
“Some people may try to outgrow the problem and in the short term, this could even lead to a slowing down of rate increases”
He believes this uncertainty, alongside the potential for further negative development in the casualty tail, has yet to be fully addressed by the market.
“It’s a dynamic I don’t think I’ve seen since the late 1980s and early 1990s – there is very much a sense of the can being kicked down the road,” he says.
While in most hard markets the good news of rate increases can come through very quickly, Brand believes the current market dynamics point to a slow momentum of positive rate movement.
“Some people may try to outgrow the problem and in the short term, this could even lead to a slowing down of rate increases,” he says.
Building a portfolio
Brand’s reputation was built during more than 30 years at Catlin Group (latterly XL Catlin), where he served as chief underwriting officer as the company grew to become the largest Lloyd’s carrier with a significant international base.
He reunited with Catlin Group founder Stephen Catlin to launch Convex in 2019, with its initial $1.7bn capital base expanding to $3.2bn following equity and hybrid raises last year supported by existing and new shareholders.
“We have had our most success on short-tail lines,” Brand says of the company’s growth to date. “My anticipation is we will start to grow our casualty portfolio as pricing improves as Covid-19 and casualty losses emerge.”
Brand said that while there are parts of the US casualty portfolio that “we wouldn’t go near at the moment”, in other areas Convex was more comfortable with the pricing it was seeing.
“When looking at portfolio construction, it is important to pick business where you will get a decent return through the market, and to recognise you may not get it every year,” he explains.
“The question is do you think that you get well paid through the cycle or not? If not, then don’t go near it. If you do, then the question is when is a good entry point?”
Over time, Brand expects Convex to build out what is currently a US-driven portfolio into something more global, highlighting the strong reaction of Japanese pricing to recent losses and the potential for upward pricing movement in Europe.
“Recent estimates for the European flood losses are reasonably broad with the market seeing around €6bn of losses but some estimating as high as €9bn,” he says.
“In any event, it will represent two to three years’ worth of premium for one series of events and it will be fairly extraordinary if that doesn’t move pricing.
“However, one of the ways some people try to ignore bad news is to try to outgrow it. My hunch is there is enough bad news coming out for people to recognise it as a clear signal that prices need to go up, but you could see people saying this is a good time to take market share.”
Another area hit hard by losses is the cyber market, where ransomware claims have escalated over the past two years.
“There has been pandemonium in the cyber market, which is an area Convex has deliberately held back from,” Brand says.
“We didn’t think 2019 or 2020 was a good time to enter and I’m not certain 2021 will be either, but we are watching developments to assess when a good time might be.”
“My hunch is there is enough bad news coming out for people to recognise it as a clear signal that prices need to go up, but you could see people saying this is a good time to take market share”
One opportunity the company is assessing is in the digital underwriting space, where Brand believes there is potential to provide solutions to a high volume, low complexity risk base.
“Most of Convex is there to manage complex risks, but for smaller businesses you need an entirely different solution,” he says.
Advice for the next generation
After more than 36 years in the business Brand remains passionate about what he does, and he believes this is a key attribute for any budding young underwriter looking to make a success of an insurance career.
“Only do it if you love it. You have to have a real passion for this business, otherwise you can’t bring the right level of engagement to it,” he says.
“Getting the balance right between IQ and EQ is also important. You can be completely right but if no one is listening and trusts you, you can’t get your message across. You see a lot of people that have one and not the other.
“And it’s a business where you need to have a certain amount of resilience. You can have the right strategy but still be hit by a big loss – that’s the nature of the business.
“Expect to get knocks as it’s not plain sailing. If you take all the micro knocks that there are in this business home with you and sleep with them, you’ll blow up.
“Being able to navigate through difficult moments requires resilience, and the right sense of humour.”
He also believes there is an onus on employers to create the right environment to attract new talent into the industry.
“Through most phases of my career, I’ve worked in a very fun environment. You won’t attract and retain young talent if you put them in an organisation that is culturally quite miserable.
“This was one of our design principles at Convex – can you have fun doing it? If you can, a lot of other difficulties become easier to sort out.”
“Expect to get knocks as it’s not plain sailing. If you take all the micro knocks that there are in this business home with you and sleep with them, you’ll blow up”
Creating an enjoyable working environment is one of several challenges facing the industry as people begin to return to the office environment following Covid-19, Brand says. He believes the long-term impact on market reputation from Covid-19 business interruption disputes is “a bit of an unknown”.
“But some clients might well think, why bother?” he says. “We do have a duty to get in a position where there is enough clarity around what our policies do cover, so that there isn’t an expectation mismatch.”
“Technology is changing the world very rapidly, other than in the insurance industry, which doesn’t seem to be changing very rapidly at all.
“There is a lot of effort going into triaging things that are fundamentally broken, and some initiatives are too broad,” he says.
“Data and technology is both the biggest challenge and the biggest opportunity. Someone will get that right and I hope it is Convex. We are spending a lot of money trying to make sure it is us.
“The market is about as uncertain as its been for a long period of time, with challenges ranging from how we return to work to the bigger picture around what London’s role is in the insurance market of the future. All is to play for at the moment.”