Speaking to The ReInsurer, the deputy CEO of Scor Global P&C, highlighted the negative impact the low interest rate environment has had on long-tail insurance classes and raised concern that this may have been “underestimated” by some in the sector.
“Long-tail classes such as casualty and construction have been hit by decreasing interest rates,” Rousseau said in a video interview. “This is something that observers are underestimating currently; the reinvestment rate on the asset side of an insurance company’s balance sheet has decreased meaningfully.
“That means that the adequacy of long-tail classes is further away. Rates will have to increase much more to compensate for lower investment income.”
Rates across property insurance lines have reached much more adequate levels than the long-tail classes, Rousseau added, noting that while hardening in reinsurance treaty business “has only just started”, the impact of the Covid-19 pandemic will accelerate upward movement.
“My gut response is that this hard market has some way to go, both on the insurance and on the reinsurance side,” he said.
Reinsurance rates are much more reliant on capital adequacy and availability, he said, noting that the impact of various central bank fiscal support measures in the wake of the coronavirus pandemic will also be a driving factor in any upward movement.
“There’s no lack of capital at the moment,” he explained. “The hardening of the reinsurance market is not so much capital driven; instead it is a question of how much return do you require for your capital.
“This is where we still see some reinsurers with appetite and with an aggressive posture in this market.”
In its conversations with reinsurance clients at the upcoming renewals, Rousseau said that Scor will take a long-term view of the Covid-19 pandemic.
“We still do not know if this is one event or several events,” he said “There is an acknowledgment that this is going to be a costly event, both for insurers and reinsurers, possibly the single largest insured event ever for the industry.
“The question is how do we embark on a process that will last several quarters if not several years. We are hopeful that rates will respond across classes, particularly longtail classes, but negotiations are only just starting.”
Despite concerns over the lasting impact of the pandemic, Rousseau offered a bullish outlook on the opportunity afforded by hardening market conditions for Scor Global P&C.
Rousseau says Scor has already been seizing the opportunity in specialty classes for a number of years and has seen rate increases “well into double digits”. The executive also forecast an acceleration of property cat rates.
“We do not have the most volatile cat risk appetite, but nonetheless we would expect to see rates increase and be an attractive opportunity for us,” he added.
The pandemic-induced volatility in equity markets, combined with low interest rates and the opportunity from hardening market conditions has also placed the focus back on shareholder value, Rousseau said.
“This hard market has not been driven by a lack of capital like many of the previous hard markets. It has been driven by the expected return on the allocated capital,” he explained
“We’re now starting a phase where returns expectations will be increasing again. There is a global risk aversion that is on the rise and with that we would expect the expected rate of return to increase.”
The valuations of (re)insurance companies are particularly low compared to peers, Rousseau said, noting that markets have not yet seen the opportunity for the sector.
“They do not reflect the strong opportunity that we expect for the market,” he added. “It will be up to reinsurers and insurers to work together for both our shareholders and stakeholders at large and add value to our customers.”