A new reinsurance world: the paradigm shift of 2022

19-12-2022

A new reinsurance world: the paradigm shift of 2022

This year has witnessed the hardest hard market for decades, but 2023 is expected to eclipse it bringing ever greater opportunity, says Matthew Wilken of Hiscox Re & ILS.

As 2022 draws to a close, Matthew Wilken, chief underwriting officer at Hiscox Re & ILS, reflects on the major market influences of 2022, the lessons the industry can take from them and the opportunities the past 12 months has created as we move into 2023.

Many in the industry have called the market in 2022 the hardest hard market for decades, certainly for some classes and geographies. Wilken agrees with this epithet, but he tells Intelligent Insurer: “While it was a hard market last year, we’re going to see an even harder one in 2023.”

With Hiscox Re and the rest of the industry still negotiating the January 2023 renewals, Wilken says that the hard market has “highlighted a paradigm shift in our reinsurance world”, brought about by five to six years of subpar performance in the industry.

Hiscox Re has “probably outperformed” compared to its peers, he adds, but acknowledges that the results have still not been adequate to support the volatility coming onto the book.

“I see great opportunity, but the opportunity is going to come at a price. And that price is currently being debated now. We’re a market and the market will ultimately come to the best landing, but at the moment it’s heavily focused on climate and catastrophe reinsurance,” he says.

Geopolitics, particularly the war in Ukraine, is another aspect that impacted the market in 2022, especially the marine market, aviation, and the cyber world. “There is inherent uncertainty in so many places. And the cost of that uncertainty is undoubtedly rising.”

The high inflationary environment added to already rising costs, inflating claims costs further. Wilken says that inflation is driving up demand from Hiscox Re customers who want to buy more cover at a time when there is not enough additional capital to satisfy that increased demand. This, in turn, is heavily influencing the pricing and availability of capacity within the market, he says.

“The cost of uncertainty is always a difficult thing to measure. That’s where experience comes in.” Matthew Wilken, Hiscox Re & ILS

‘On everyone’s lips’

Climate change is a topic that’s “on the lips of every single board member of every single company irrespective of whether they’re insurance or reinsurance at the moment”, Wilken says.

The industry has been addressing the issue for decades, he says, and the uncertainty and volatility that come with climate change are something re/insurers deal with every day as part of rigorous pricing and analytical techniques.

“We’re fundamentally seeing rising temperatures globally, we’re seeing excessive amounts of rainstorm, precipitation and flooding occurring globally. Droughts and forest fires that were perhaps seen once every 20 years are now being seen once every 10. That is a fundamental underpinning of what we do as well. It’s a longer term trend and we build that into our models, as many do.”

He flags demographic change as another market influencer. As the global population continues to grow, more people want to live near the coast and migrate to areas that are more vulnerable, creating challenges for the re/insurance industry.

“We have to take that into account as well, so there are many different facets impacting our industry at the moment.”

“To attract new capital to support global cyber needs is a very interesting opportunity.”

Lessons from Ian

You cannot reflect on 2022 without mentioning Hurricane Ian and its aftermath in Florida. Wilken says he sees this catastrophic event as a catalyst that has accelerated the final behavioural aspects of reinsurance renewals. But, he adds, Atlantic hurricanes and where they make landfall are “probably the most modelled part of the entire world”. As a return period storm event, everyone has been planning for it, he says.

“I don’t consider it to be a surprise at all. This is exactly what our industry is set up to respond to. However, when such an event comes along, there are always elements of uncertainty.”

This uncertainty, he says, is valuable and important in re/insurance because in spite of all of the investment and the intellectual rigour the industry uses to understand the re/insurance sold, every event is slightly different. When such events occur there are lessons for everyone and Hurricane Ian “was no different”.

Many in the industry will have never experienced a market like the current one as they began their careers post Hurricane Andrew in 1992.

Wilken saw the impact of Andrew on the industry and witnessed first-hand a market in flux, where there was a lack of supply to satisfy the demand. He is seeing that again now.

“I’m seeing it at a time when the intellectual rigour and the mathematical techniques and the modelling techniques are exponentially larger than they were decades ago,” he adds.

And as these perils increase in frequency and severity, the industry is once again questioning its models.

“Our industry is undoubtedly embedded with uncertainty and the cost of uncertainty is always a difficult thing to measure. That’s where experience comes in.”

Wilken says that in such times the industry is best served by “cool heads and warm hearts” as it’s crucial to understand that there’s a customer need and that the cost of volatility must be priced accurately.

“Florida is a highly populated area with associated storm surge, which was significant, and again, it causes us to question our ability to be able to model everything with precision on any one specific event. Hence, we need to thoroughly understand the products we’re selling.

“For me it’s not just the fiscal responsibility as an industry, it’s the social responsibility. There are people whose livelihoods have been destroyed, homes have been destroyed. The fundamental business we’re in is making sure people get back in their homes and making sure that businesses survive, and that we restore their ability to endure and live safely and comfortably.”

Opportunity in adversity

A market such as 2022’s has, of course, brought opportunities. In the past year, Hiscox Re has been able to understand and support its core customers, and build very strong strategic relationships with them, Wilken says.

He points to the “exponential growth” of available data in 2022 and the use of that data along the whole value chain.

“There’s an opportunity to use that data to get to a much better understanding and pricing of the products we’re selling.”

In the last year, opportunities for re/insurers have arisen, and not just in property-cat. Aviation and cyber are two areas that have been hugely affected by the Ukraine crisis and therefore represent opportunities for re/insurers.

“The cyber market is continuing to grow, but it’s a very hard market because there is a lack of supply to satisfy the growing needs. It’s a very specialist area, which demands expertise,” he says.

Hiscox Re continually develops its cyber expertise to assist customers and provide products but, Wilken adds: “That’s an opportunity where I think we can continue to grow. It would be a phenomenally good area to be able to attract third party capital into. At the moment, third party capital is very heavily aligned to property-cat because there are very good models there. They are confident they understand the risk. Cyber is perhaps more embryonic, it’s emerging.”

He says that so far the industry hasn’t been tested in the area of cyber quite as severely as in the natural peril world.

“To that degree, to be able to give them the confidence and to attract new capital to support global cyber needs is a very interesting opportunity,” he concludes.

 

Matthew Wilken is chief underwriting officer of Hiscox Re & ILS. He can be contacted at: matthew.wilken@hiscox.com

 

 

Hiscox Re & ILS, Matthew Wilken, reinsurance, insurance, , market, opportunity, uncertainty, paradigm, shift, re/insurance, hard, lessons, climate

Intelligent Insurer