Learning from the global financial crisis

Liberty Mutual Re’s Uwe Haug reflects on lessons from the 2008 global financial crisis and how these can be applied to challenges today.

Financial crisisa

In managing Covid-19, what can financial risk reinsurers learn from the global financial crisis (GFC)?

2021 has been a testing year for reinsurers. Uncertainties around appetite and pricing post Covid-19 have created fresh urgency to offer greater transparency on appetite, respond faster on submissions and deliver the high levels of agility, expertise and service which are hallmarks of today’s successful operators. With surety, cyber and political risk markets posing challenges for reinsurers, we are considering if any lessons from the 2008 GFC can be applied to the Covid-19 pandemic.

Similar challenges in surety and political risk

In the aftermath of the GFC, surety business did not experience a run of losses. These materialised three to four years later, once impacts on construction balance sheets had fed through. Instead, loss activity was seen on short-term books including trade credit as a result of insolvencies.

As in the GFC, a hallmark of governments’ strategy to manage the economic fallout from the pandemic has been an emphasis on infrastructure stimulus to support growth. But although laws have been passed and billions committed, there is still a degree of uncertainty, as then, about how and when that money will reach the balance sheets of major businesses.

A further complication is that 2021 has been characterised by significant supply chain interruption, creating more challenges for surety companies and their reinsurers. As material costs and shortages increase, will demand stay high in terms of the number, scale and time schedules of construction projects? Will construction companies manage to avoid cost overruns and delays in completion wiping out profits and leading to contractual penalty payments?  

In these conditions, it is inevitable that demand for surety bonds will continue to increase as project uncertainties escalate.

Dislocation in the political risk market is less acute, but here too warning signs abound as they did following the GFC. Markets are keeping a close eye on geopolitical developments with existing tensions exacerbated by the fallout from Covid-19 in commodity and oil-based emerging market economies everywhere from the Middle East to Latin America and Africa. This is driving demand for traditional political risk and trade credit covers – including government confiscation of assets, contract frustration and political violence – all of which impact reinsurance rate and appetite.

New challenges in cyber

Where the GFC is less useful as a model for analysing potential reinsurance market impacts is cyber risk.  

There is no doubt that cyber risk has been increased by Covid-19 for the simple reason that more business than ever is being conducted online. We continue to see a rise in ransomware events, which will undoubtedly cause significant loss activity in the insurance market. IT companies have been targeted precisely because they are the perfect vector to spread cyber threats and we expect to see cedant loss ratios increase. Our reinsurance underwriting strategy will need to be very mindful of this increasing threat to stability in the class.

Going forward, however, success in this market will be all about reassessing cyber underwriting models and supporting cedants that can demonstrate solid risk selection capabilities.

The future is bright

Despite the challenges presented by the post-pandemic market environment, as we look ahead to 2025 and beyond our goals are clear. 

We want to leverage our mutual heritage and skills in exposure management to shape a diversified, profitable portfolio that stands on its own feet and can support our financial risk cedants for the long term. 

We are confident we will achieve that by working together with our clients and brokers to offer integrated specialty and P&C reinsurance services out of our regional hubs and tailoring solutions for our clients’ specific needs.