In the current hardening insurance market, many companies are struggling with capacity, availability and higher retention, according to Al Gier, global director of corporate risk management and insurance at General Motors Company.
Speaking at the ‘Insights on a hardening insurance market - is there an end in sight?’ panel, chaired by Brian Quinn, managing director at Granite Management, at the virtual Bermuda Captive Conference, Gier indicated that the current market is “hitting all major lines of business with speed and velocity”, on top of operational difficulties as a result of the COVID-19 pandemic.
Judy Gonsalves, division president at Chubb Bermuda, added that it is important to note that the year 2020 does not mark the beginning of the hardening market; instead, the insurance industry has seen around three years of rate-on-rate increases and prolonged loss cost trends.
She emphasised the importance of communication to promote transparency between clients and underwriters.
“It is critical to educate clients on the impact of social inflation and the erosion of tort reform, as well as the macroeconomic conditions in terms of the decline in investment income for insurance carriers because of low interest rates”, she added.
Gonsalves also highlighted that despite the current hardening market conditions there is still capacity available in the marketplace, as there are always underwriters to deploy that capacity rather than suffer a shock loss.
In order to access this capacity, pricing must be recalibrated in order to more correctly reflect the current landscape, according to Patrick Tannock, CEO of insurance operations at XL Bermuda.
Tannock noted: “Although portfolio sustainability is difficult to offer right now, there is always an offering of data to allow clients to manage their expectations with an appropriate budget for coverage.”
There will be a much more selected deployment of capacity, as responsible entrants are not expected to alter the current landscape up too much, he added.
Any capacity shortage is partly a result of the consolidation of reinsurers. As John Turner, chairman of Ed Broking, pointed out, “capacity comes at a price” and requires a stable risk management strategy.
Turner used the example of Bermuda following 9/11, whereby the jurisdiction was able to welcome many new captive players for specific terrorism-related risks.
He said he expects to see four or five new players enter the captive space early next year, with Dallas in particular as a rising region. However, he highlighted that these potential new players will simply fill existing gaps in the industry, rather than cause a dramatic change.
Gonsalves affirmed that new entrance and capacity in the traditional property and casualty insurance space will be disciplined to fill gaps rather than deploy massive new lines of business that could drive market shares. She added that, for the foreseeable future, liability concerned around businesses may not be viable, and there may be increased litigation risks against security class actions.
In the next few years, the balance between insurance-linked securities (ILS) capital and conventional capital may tip in favour of alternative capital, owing to the current complex risk landscape.
Tannock pointed out the events of Hurricane Katrina and the 2008 global financial crisis both caused alternative capital to dominate the marketplace as businesses sought diversified portfolios in order to widen their coverage.
He commented: “The contraction of collateralised catastrophe events is subject to runoff from ILS funds. However, all capital is interrelated and will regardless have an impact on market dynamics.”
The alternative capital market is beneficial to reinsurers, according to Tannock, and provides an opportunity to selectively service direct clients on a wider basis, as parametric triggers are easy to put in place and the cost between alternative and traditional capital has significantly narrowed.
He said: “Captives are the most appropriate structure to help risk managers take back control of self-insurance, and can be used as negotiating tools when trying to balance captive insurer capacity and reinsurance capacity. Using a captive in a strategic way can help with frequency of loss, and opens up the opportunity for alternative structures to explore innovation.”
Gier added that in his personal experience, captives are an effective tool for first part risk to take higher retention, as the commercial insurance market can be perceived as a catastrophic risk provider because the perception by risk managers can change over time.
Data can also be used alongside a captive to better understand its capability, added Tannock, who cited the exponential growth and evolution of data in the last five years to be a gamechanger in helping build and offer insurance products of value.
The panel also discussed how a captive can be used to mitigate the impact of the marketplace on renewals, with Turner noting that it must be able to access all markets potentially available with a willingness to pay claims.
He said: “Since captives present risk in a way that is palatable to the market, different structures on the property side are able to bring in different markets to offer additional capacity, proving insurance brokers can work innovatively.”
Tannock affirmed that the role of captives here will “continue to increase in significance and value”, while Gonsalves noted that clients have expressed interest in using captives in the high excess low frequency markets.
The panel concluded by discussing the potential flattening out of the current market, with Gonsalves warning “it will be here for a while” despite some lines of business rates moving in the right direction and innovative capacity solutions. She predicted that both market underwriting discipline and pricing discipline will continue to be prominent.
Turner agreed the hardening market “is here to stay”, with low interest rates and the pandemic affecting all areas of the market. However, Tannock concluded the panel by stating that the delta between short risk and economic risk will grow to solidify the relevance of the captive industry, creating a “somewhat optimistic” outlook.
