Speaking to The ReInsurer, Richards said he expects pressure on casualty ceding commissions from reinsurers, noting that there are still “many” contracts with commissions that are too high from a reinsurer perspective.
“There’s still many contracts with commissions in the mid thirties. They need to come down from a reinsurance perspective,” he said in a video interview.
On the primary side, Richards forecasts a “really exciting time for casualty” with rate increase set to continue into more classes and geographies.
“We’ve seen primary rate increases around the world, especially in the US, but I expect those to be broader and deeper over the coming period of time with rate increases in more markets and more lines of business,” he explained.
These rate increases are “absolutely” needed, Richards added, noting that the casualty market faces a number of challenges including uncertainty around Covid-19 loss exposures, social inflation, low interest rates and reserving issues.
“All of those are coming together around the casualty class,” he added. “I expect to see limit management continue; people taking smaller shares which are attaching higher up to avoid some of the loss frequency. That’s certainly welcome.”
The impact of interest rates on casualty lines is of particular concern. On the longer tail lines, a one percent reduction in interest rates means that we need to write that business between two or three points better than before, he said.
“Interest rates have come down as much as two points or more in some areas – a lot of action is need to account for that five or six point impact it has on profitability,” he added.
Insurers are starting to see the yield impact in their running yields as they report over 2020, Richards added. As a result, insurers are seeking to find investment strategies to compensate, taking on more risk on the asset side of the balance sheet.
But such efforts can only have a limited impact, he said.
“They’re limited to what they can do and at the end of the day it will come down to underwriting and increasing momentum in rate changes and actions on poor performing lines and portfolios, Richards explained.
These are welcome moves, Richards said: “We want to see both insurers and reinsurers continue to take action in those areas.”
Underwriters need to be more disciplined to collect data, to share and create data and to use data to solve the big questions and topics in underwriting.
The risk landscape is changing dramatically, he said, pointing to emerging risks including cyber and climate risks. But as the risk changes, so does the client’s needs.
“Underwriters need to be up to speed with the risk environment. It changes so quickly. They need to be innovative and creative and have to be able to respond to client needs which also change.”