A clear adjustment in risk perception among (re)insurers is set to drive continued pricing momentum at other significant renewals in 2021, said David Flandro, managing director of HX Analytics and Howden Capital Markets.
Speaking to this publication following the publication of Howden’s analysis of the (re)insurance market and the crucial 1 January 2021 renewals, Flandro said that while a confluence of factors and events have contributed to rate rises, it will be the shift in risk perspective driven, in part, by Covid-19 that will continue to drive pricing momentum in 2021.
While considering his key takeaways of this recent renewal, Flandro said during the video interview that it had been “different from any we’ve had since 2006 in that rates on line across most lines and classes of business are almost uniformly up and that is due to a confluence of events”.
In its “Hard Times” report published on Monday (4 January) on the reinsurance and retro renewals, Howden said the 6 percent increase in its global property cat index was the biggest year-on-year rise at 1 January in over a decade, and the 13 percent increase in retro pricing meant a cumulative uplift of more than 50 percent over the last four years.
Flandro commented: “There has been a lot of soft market underpricing in the last 10 years and there is some correction taking place.
“We’ve had more frequent catastrophes taking place in the last four years combined with social inflation, lower investment yields and this is causing heightened risk aversion.”
The impact of Covid-19 is a ubiquitous feature of this renewal and Flandro said this is causing a “a lot of action” in many lines of business, specifically in relation to exclusions and terms and conditions.
But while this is the case, Flandro described the impact of the pandemic as a factor more in terms of perception of risk than in terms of capital destruction.
“If you look at initial Covid-19 losses which were flying around in April and May last year – $100bn of underwriting losses and $200bn including asset-side losses – those now actually look pretty high in terms of what we can catalogue,” he said.
“At the moment we can catalogue around $30bn of reported Covid-19 losses and that includes IBNR. Now, that seems relatively low compared with what was predicted, but Covid-19 will continue to develop – it’s just a question of how much. The way Covid-19 really affected the renewal was in terms of exclusions, terms and conditions and there was a lot of appetite for there to be pandemic exclusions.”
Room to run
While contemplating how the 1 January renewal will impact pricing momentum in property cat reinsurance and retro at mid-year renewals, Flandro said that although this is “the million-dollar question”, there are a couple of things that “look good” in terms of sustainability at mid-year.
“First of all, we’re coming off a very low cyclical base with property catastrophe risk-adjusted reinsurance pricing and secondly, mid-year renewals are very much US affected.
“For the last two years, at least, mid-year renewals have outperformed 1 January renewals, particularly in Florida, and we’ve had hurricanes in the Atlantic basin, wildfires and we’ve had a huge derecho. So, all of these things certainly portend pressure at the mid-year renewals.
“But,” he added, “time and capital can heal all wounds, so we will see.”
However, the story in the casualty sector is different.
“Sometimes casualty doesn’t get as much attention as property catastrophe at 1.1, but it should because it’s a huge class of business and it’s also very differentiated,” said Flandro.
“When you say casualty, you’re talking about a massive range of different businesses, but in terms of rate adequacy generally, we saw London market casualty up by a risk-adjusted basis of 6 percent and rate adequacy in casualty really is a function of loss cost inflation, of combined ratio and loss ratio, but also interest rates and yields.”
According to Flandro, with investment grade yields – a pervasive element on a reinsurer’s balance sheet – at all-time lows, casualty underwriters have to make up for the lack of this investment yield.
Second to that, the litigation situation, particularly in the US, is seeing an increased number of negative verdicts for insurance companies in general, which is also adding pressure.
“All of those things together, combined with the fact that a couple of years ago, casualty is coming off from a cyclical bottom, means that there is probably room to run in casualty in terms of rate – both in the primary market and the reinsurance market.
“I’m not exactly sure how it will play out, and again, casualty is a very broad and diverse class of business, but certainly there are spots of hardening still to come I should think,” he said.
The other takeaway of the 1 January renewal for Flandro – which has been developing throughout much of 2020 – is the inflow of new capital in the form of start-ups and various capital raises.
“In 2020, we saw a significant inflow of new capital and we calculate all new forms of capital to amount to $19bn,” he said.
In terms of how this will impact rate increases at other major renewals in 2021, Flandro said that while it will have some impact, the shift in risk perception will negate this to some extent.
Commenting on the impact of new capital on rates during other renewals in 2021, Flandro said: “It could [have an impact] to some extent, certainly at the margin because, of course, when you have more supply, the demand curve moves down the supply curve and has an effect on price.”
However, he added: “The thing to remember, though, is that the rate movement that we’ve seen at 1.1 isn’t necessarily a function of capacity, it is a function of risk perception and risk premium, so in that sense, there is more room to run.”
The (re)insurance sector attracted substantial amounts of new capital in 2001/02 and 2005/06 to compensate for loss of capital and reduced capacity and 2020’s inflows are now in the same range, with close to $20bn of capital entering the market between March 2020 and the year end.
“So, we are raising capital rapidly and it is increasing, but this isn’t a capital drive hard market, it’s not a capacity driven hard market, it’s driven by risk perception,” Flandro concluded.