How brokers can grow in a hard market: Inver Re’s Hearn

In an ideal realm, brokers would hold a steadfast position regardless of market conditions. But the reality paints a different picture, says Steve Hearn, CEO of Inver Re, speaking ahead of Re/insurance Outlook Europe 2023, a conference taking place in Zurich in June.

When market turbulence strikes and the quest for suitable solutions intensifies, brokers don their transformative guise. Armed with the tools of analytics, fortified by long-standing relationships, and driven by a commitment to diversification, brokers become unwavering pillars of support, guiding their clients through every facet of the market cycle.

That is according to Steve Hearn (pictured), chief executive officer of Inver Re, speaking in the context of the role brokers play in resolving the tensions between reinsurers and cedants, while simultaneously addressing the delicate equilibrium between capacity and risk appetite in a hard market. Hearn will expand on his thoughts further at the upcoming Re/insurance Outlook Europe conference, being held in Zurich, June 19–20.

“You might think a broker’s job would be no different in hard or soft market conditions, that we should provide value throughout that cycle. But the reality is that it is different,” Hearn says. “When there is a surfeit of capacity and the industry is struggling to provide solutions, the broker becomes more important.

“You can use things such as analytics to differentiate your client’s proposition from its peer group. You can emphasise the advantages of partnering with them in terms of reinsurance capacity, the longevity of relationships and their importance in a hard market. Brokers have a big job to do in reminding all parties of the importance of that. It is a hugely important ingredient in all aspects of the cycle.”

There has been a significant decline in the amount of dedicated capital to the reinsurance sector. With double-digit declines, estimated at between 10 and 20 percent compared to 2021, Hearn believes the downward trend will only continue.

“The factors that have been driving that sort of dynamic continue to feature and don’t seem to show an end. We have another test coming through the June and July renewals, and as far as I’m aware, no flood of new capital is arriving,” he says.

“I’d be very surprised if we don’t see a further deterioration in the capital dedicated to reinsurance.”

Expanding horizons: diversification and specialty lines

In light of these circumstances, Hearn puts forth diversification as a crucial and radical suggestion, including pursuing greater geographic spread and exploring new lines of business. He believes that would create a more balanced market and a greater equilibrium.

“We’re in an environment of scarce capacity of capital. A big play here is of course, diversification. That’s what should be happening, but I just don’t see any big shift,” he says.

“More diversification, more new products, more new territories—all those things would help carriers.” Steve Hearn, Inver Re“Cyber represents a largely untapped opportunity,” Hearn suggests. “There is also a growing need for intellectual property (IP) insurance. The reinsurance required around that all offers diversification which, by its very nature, creates some balance to the climate-related risks and environment and some of the lines that have been hit by inflation in the property and casualty worlds. More diversification, more new products, more new territories—all those things would help carriers.

“I’d like us to see this as a real opportunity for people to innovate in areas such as IP and cyber, and maybe deepening our agri sector capability,” he says. “How can we develop product capability and get more involved in emerging market opportunity that is underserved at the moment in terms of reinsurance capacity and expertise? The other area I’m hoping we’ll see some developments in is data and analytics.”

Taking Lloyd’s as an example, Hearn points out that specialty lines has emerged as an intriguing avenue for capital seeking diversification amid volatile market conditions—a trend that has been observed in past hard market cycles.

“If you look at Lloyd’s results during periods of tremendous global macroeconomic challenges, the financial crash of 2008 is an obvious reference point. Lloyd’s has grown significantly through those periods,” he notes.

“Specialty becomes an interesting place for capital seeking diversification,” he adds. “The specialty market is very resilient and almost countercyclical to the macroeconomic environment. Therefore a flight of capital to the specialty market is not a surprising consequence of that diversification.”

According to Hearn, although insurance carriers should generally stick to their established business models, which are designed to withstand market cycles and demonstrate resilience, there are instances where they may adopt opportunistic strategies to take advantage of favourable circumstances—such as exploring new lines of business and specialty areas.

“If carriers are comfortable in their fundamental business model, which can survive cycles and has proven resilient, you shouldn’t see major shifts in strategy. It would be odd. We’re a long-term industry going through cyclical change all the time. A business model should fundamentally survive that,” he says.

“That said, we do see opportunistic plays. Some firms have certainly marched towards the sound of gunfire—those who take opportunistic plays, but that’s their business model. So, in that sense it’s not changing their business model.”

Talent the top priority

The other big thing that the industry should be focusing on, Hearn insists, is talent, particularly in the post-COVID-19 pandemic world. With businesses embracing remote and flexible work arrangements as the new norm, providing hands-on training and mentorship has become more difficult in the absence of traditional office settings.

“Where and how is the talent coming into the industry? How can we effectively nurture and develop the next generation of professionals? You can’t do it all on Teams or Zoom,” he argues.

“Talent development should be high on that list alongside addressing other challenges that the industry has, such as navigating wars, inflation, and market conditions,” Hearn concludes.

Hearn will be discussing some of these themes in more detail at the upcoming Re/insurance Outlook Europe conference, being held in Zurich, June 19–20.