Re/insurers face better rates and disruption in 2018
Brian Schneider, senior director, Fitch’s Insurance team:
Reinsurance rates are poised to improve in 2018 as a result of the significant 2017 catastrophe events, particularly on US property catastrophe lines and in the retrocessional market, but the extent of these rises and the impact on capital in the sector is unclear. Fitch expects that excess capital in the market and the absence of an even costlier event, such as a hurricane making direct landfall in Miami that could have been the case with Irma, leads to less certainty over more widespread rate rises. A key driver of the magnitude of future rate increases also depends on ILS market appetite to invest more capital into reinsurance. The amount of capital that remains ‘trapped’ by lengthy claims settlements or protracted litigation, particularly in relation to Hurricane Harvey flooding losses, will also influence the degree that rates rise.
Demand for reinsurance should increase as a result of the recent hurricanes. Hurricane Harvey, in particular, is likely to stimulate greater demand for flood cover, for which a significant portion of losses were uninsured. Insurers may also seek to purchase more aggregate reinsurance cover or manage specific exposures through per-risk or facultative cover. This increase in demand in combination with a potential constraint in supply is likely to contribute towards an improvement in rates across US catastrophe-exposed lines of business, which may also extend to non-US or non-catastrophe-exposed business.
Fitch forecasts a calendar-year combined ratio of 96% in 2018, reflecting an average level of market catastrophe losses of eight points on the reinsurance combined ratio in 2018, down from 22 points in 2017. Prior-year development on reinsurance segment reserves should remain favourable overall, but decline slightly to about 4 points in 2018 as redundancies subside. We project the underlying accident-year combined ratio excluding catastrophes to improve slightly to 92% in 2018 as reinsurance market pricing appears to have reached a bottom in 2017 and is expected to turn positive in 2018. Fitch projects a net income return on equity of 7.1% in 2018, just above the estimated 6%-7% cost of capital, as both underwriting and investment results remain under pressure.
Johannes Martin Hartmann, chairman of the board of directors, VIG Re:
Nobody seriously denies any more that new technologies and a developing society are changing our risk landscape and the way we deal with this. But I have my doubts that these aspects will be as disruptive as claimed. Insurtechs have failed so far to reach out to the clients. On the other hand, incumbent players have made significant efforts to adapt their business model by partnering up or integrating new technologies, ideas and talents. The trend will continue to unfold and accelerate. On the other hand I do not believe that only size matters, most big players will struggle with their legacy. But the future will shine for the agile players.
Kelly Lyles, chief executive, client & country management, insurance, XL Catlin:
It has to be market profitability. For too long margins have been thin and, year-on–year, were getting thinner. I think we are in a transitional market where serious conversations about the sustainability of the market are taking place. Here, dialogue is paramount; every client is different and each conversation will reflect that, but these conversations with clients and brokers are critical as we move into 2018 together.
Benjamin Serra, vice president and senior credit officer, Moody’s:
2018 may represent a turning point for the P&C insurance sector. Insurers reported good profits in the last five years, but competition is very tough while claims are increasing, and we could see some deterioration in profits going forward, especially if inflation comes back in 2018 with rising interest rates. Increasing inflation could also affect reserve releases which contributed strongly to results in recent years.
For life insurers, adaptation to low interest rates will be the continued focus of the industry. Insurers will continue to change their business mix and adapt their asset allocation. However, as insurers want to accelerate changes in business models, acquisitions or disposals are a solution that many insurers will envisage for 2018.
Erik Abrahamsson, CEO, Digital Fineprint:
Insurers are faced with two key challenges: improving the customer experience and getting access to actionable data sources for underwriting. One disruptive technology which can solve both problems is the emergence of social media, with people today spending more time on social media than on any other medium.
In 2018, insurers will wake up to the opportunity, and realize that they can no longer acquire customers from media which is no longer relevant, or underwrite based on data sources which have become arcane. As well as this, GDPR will be brought into force in May 2018, which will force the industry to adapt to new data sources in a privacy compliant way.
Samit Shah, insurance solutions manager, BitSight:
With GDPR around the corner, as well as other requirements here in the US and throughout the world, I expect to see regulations drive significant conversation in 2018, focused on cybersecurity risk management. Companies are anxious to avoid public scrutiny associated with a large data breach, and will go to great lengths to avoid attention from the media.
Separate from this, underwriting is a blend of both art and science, but good underwriters know when they have enough information to make their decision and when they are leaving money on the table. Many cyber underwriters today lack the real, tangible data needed to make accurate business decisions. What does this data look like? How can underwriters obtain it? In 2018, I expect underwriters to get smart about leveraging data to make smarter decisions for themselves and their insureds moving forward.
Nigel Teasdale, head of motor, law firm DWF:
As to the discount rate, I expect we will see definite progress towards implementation of a new realistic rate between 0-1% as soon as possible and hopefully by the end of 2018, as well as good progress towards the Civil Liability Bill passing into law so that it can be implemented soon afterwards. Brexit pressures on parliamentary time will mean that the Bills making these reforms need to continue to be seen as important, and work will be needed to overcome a degree of opposition which can be expected to both.
While on the subject of parliament, the Automated and Electric Vehicles Bill can be expected to become law, as the next step towards an important new way of insuring vehicles on our roads, which will inevitably have an effect on the motor insurance market in the years ahead. May 2018 will see the GDPR coming into effect creating challenges for insurers' processes handling data and keeping it secure.
Brexit though will continue to dominate throughout 2018 as negotiations continue on the form of both the transitional deal and longer term arrangements. Can mutual UK/EU access to the insurance market be delivered as part of a wide-ranging free trade deal including financial services? This will remain vitally important to insurers.
Lastly, the pace of technology continues to accelerate, whether in the vehicles we drive impacting on claims frequency, or in the automation of claims handling processes. I suspect we will continue to hear much more about the progression of AI and predictive analytics in 2018.
Iain Bremner, managing director, Barbican Managing Agency:
The implementation of the General Data Protection Regulation across the EU in May will have a major impact on the market. We expect this legislation will drive increased interest in cyber-related cover, particularly given the robust fines and stringent requirements that it introduces for instances of data breach.
Brexit will of course continue to dominate the headlines in 2018. Efforts are ongoing to establish an insurance-specific free trade agreement for the London Market that will stave off any potential negative impact on our ability to operate across the EU. There is obviously still much uncertainty as to how our departure will impact the standing of the market, but all efforts are focused on creating a workable solution that will enable London to maintain the successful trading relationships it has with member states.
Lloyd’s is forging ahead with its preparations for Brexit, including the establishment of a hub in Brussels, to ensure that it can keep open its access to the single market following the UK’s departure. From the start, Lloyd’s been extremely proactive in managing the impact of this development, and I believe that this will stand the market in very good stead in 2018.
David Gittings, chief executive of the Lloyd’s Market Association:
2018 will be about Brexit. Recent developments that point to a softer Brexit and the possibility of continued free trade with the EU in financial services are certainly promising, but the Lloyd’s market centrally, and at the individual managing agency level, has contingency plans in place to ensure a smooth transition for clients, no matter what the outcome. That said, the continued uncertainty is not good for our market. Over a very long time our members have worked hard to build relationships in Europe, and that work has paid off in recent years. They also employ a great many people from the European Union. Most important of all, we need to reduce Brexit uncertainty quickly, so we can transition smoothly and appropriately for our European brokers, coverholders and customers post Brexit. I am confident that will happen, because of the work of the LMA and others in explaining and highlighting the importance of Brexit issues for the insurance industry.
Julian Tighe, CEO, Asta:
We see a positive year ahead for the Lloyd’s market, for all the reasons stated above. Rates are rising, if only slightly, and we see the likelihood of more profitable business arriving from international markets, driven both by new and existing syndicates. Lloyd’s clearly remains a very attractive platform for the international industry, given its significant advantages of rating, licencing, and capital efficiencies, and we regularly field enquiries from people who want to get involved. In addition, market modernisation is advancing on many fronts, which will continue to make Lloyd’s a more attractive place to do business. Finally, MGAs are a growing positive influence, we believe, because they fill a gap in the market, and often bring in business that is inaccessible through conventional distribution channels. If they were able to come more under Lloyd’s brand, they would become an even more important part of the overall market.
Ståle Hansen, president and CEO, Skuld:
Developments in technology and digital disruption will continue to impact the insurance and shipping industries significantly. In that respect, the sectors are running in parallel. It remains to be seen if this disruption leads to more players, further consolidation, or power shifts in existing value chains. I believe that the survivors are most likely to be those companies that successfully combine human expertise and competence with technological know-how, and use it to deliver added value. Rather than merely relying on us to provide additional capacity, I am confident that members, clients, and brokers will continue to trust insurers’ human factor to protect their businesses and balance sheets.
John Andre, managing director, AM Best:
At the forefront in 2018 will be the U.S. P/C industry’s reaction, on a variety of fronts, to the weather-related events of 2017. Chief among these issues are the potential for changes in catastrophe pricing and terms and conditions and the related impact on primary company retained exposures, and whether alternative reinsurance capital will remain a viable reinsurance option for the industry. Other areas to watch include: rate increases by primary companies for home and auto in both the affected and unaffected geographical areas; the implementation of stricter underwriting standards/restrictions on coastal, flood and wildfire prone business; the impact of commercial market participation in flood business; and changes and enhancements to catastrophe models. It also remains to be seen whether business interruption (BI) and contingent BI policy language will be less ambiguous following hurricanes Harvey, Irma and Maria than it has been following other events.
Peter Allen, partner, Moore Stephens:
As my actuarial colleagues are fond of saying: trends continue until they stop.
One trend I expect to continue in 2018 is the increasing location of innovation in Shoreditch and E1 rather than in EC3. In other words, innovation in the re/insurance market is increasingly happening in the world of distributed underwriting and associated technology. These innovators may well be backed by insurance capital whether in form of equity or underwriting capacity but their intellectual impetus arises outside the supposed constraints of the large companies’ remuneration and regulatory structures.
None of us would be surprised by a very major loss occurring due to political, war, terrorist or cyber risk, would we? Many geopolitical actors appear keen to increase the ambient temperature. The recent trend has been that geopolitical stress does not in fact convert to major catastrophes in the re/insurance sense. But WTC demonstrated that catastrophe triggers and aggregations in this field are opaque, and indeed recent experience of aggregation estimation in the more conventional area of storm damage does little to add comfort.
Michael Tripp, head of financial services, Mazars:
More focus on the large scale management of capital (more mergers, acquisitions and derivative swaps) but the increasingly tailored customer front end - as technology and human imagination push the boundaries of our industry with delegated underwriting.
AI and technology is pushing the boundaries and so are the likes of Google and Amazon which are coming off the fence. They will be looking for more growth and insurance hasn't yet been exploited.
Culture and regulation continuing to get focus as society and probity push for transparent ethics - including management and use of data, and better insights into cyber risk.
Luzi Hitz, CEO, PERILS AG:
The impact of HIM will continue to influence the market into 2018. It will be very interesting to see how the industry loss estimates will compare to the actual insured loss numbers once they are in. There will be lessons to be learned from this.
Secondly, Cyber risk will likely continue to make headlines in 2018. This could be as a result of more attacks as well as new business developments. We are only at the beginning of the development of the Cyber line of business and given our increasing reliance on the Internet it is likely to become a major insurance class. This will of course open up significant growth opportunities for the industry at large, particularly given the emergence of new cyber-related regulation, such as the General Data Protection Regulation (GDPR) in Europe – which will create business opportunities as well as affecting internal processes.
It is also possible that new entrants from outside the insurance industry will make the headlines in 2018. The music, travel and telecom industries, to name a few, have undergone major changes in their business models driven by new technology and new entrants better able to exploit these new technologies. The re/insurance industry is well aware of the threat new entrants pose and many companies are proactively introducing measures to help counter this. Digitisation offers the chance to make the re/insurance industry more efficient, while also creating the opportunity to do things differently. However, outsiders are also well positioned to capitalise on both of these opportunities.
Adam Safwat, vice president, underwriting & business development of IGI:
The insurance and reinsurance industries have entered into a new wave of uncertainty, as current global dynamics look to have a major impact on the political risk landscape. The constant rhetoric from the U.S President suggests major political and economic changes globally, which has made insurers and reinsurers question future strategies. Closer to home, the uncertainties surrounding Brexit will undoubtedly bring unforeseen challenges to the sector, and at the moment, nobody knows how it will play out in the long term. However, rest assured whatever the outcome is, the insurance industry has been around long enough to have witnessed many major economic, political and catastrophic events that will ensure it is well prepared for whatever comes next.
David Edwards, founder and CEO of ChainThat:
In 2018 we will see the first Blockchain Distributed Ledger ‘coordination’ platforms being deployed in the industry. Initially, these are likely to be small scale implementations that provide capability between small groups of brokers, insurers and reinsurers that have existing commercial relationships and need to speed up and reduce the cost of their operational management between those parties.
We anticipate these first platforms will appear on wholesale or reinsurance products that are managed on a ‘facility’ basis. This is because ‘facilities’ are a distribution mechanism that create clusters of counterparties that tend to work together on a pre-arranged basis, and this creates relatively stable relationships. Consequently, creating an infrastructure that offers low cost of operation from set-up - through premium payments and claims agreement - is attractive for each party in the distribution chain and one in which benefits can be passed on to the insured in terms of cost and improved speed of service. This is an ideal start point for getting real experience in using distributed technologies, as well as gaining the benefits of doing so quickly.
Thus, after the investigation and experimenting of 2016-2017, 2018 is likely to herald the blossoming of real business solutions using distributed technologies in the insurance sector. On this occasion, we can expect insurance to be keeping pace - and possibly leading - the banking sector because these ‘relationship clusters’ are an enabling feature in our sector.
2018 is also likely to see larger market clusters - e.g. Lloyd’s and the London Market and some of the major reinsurers - doing more material developments, but these are unlikely to move into live operation in 2018. Both the London Market’s innovation initiative and the B3i organisation have continued to look at, and develop, thinking around distributed ledger application. This shows that the insurance market recognises the value in these technologies and also the potential for disruption they offer in the distribution chain. However, these large consortia move at a slower pace than smaller groups can, and it will be sometime beyond 2018 - we predict 2020-22 - before we see the industry re-converge to provide full interconnectivity between the many distributed solutions in a global and competitive market.
Dennis Sugrue, director of insurance ratings, Standard & Poor's:
We anticipate that in 2018 we will see further unwinding easy monetary policy dating back to the financial crisis, with further rate rises in the US on the back of yesterday’s 25 bps increase in the federal funds rate (the third this year) and the ECB likely to begin tapering it’s asset-buying program that began in 2015 (though we don’t expect the ECB to raise rates until 2019). Historically low interest rates have led to an inflation in asset prices as the market has been flush with cash, and while we expect an orderly unwinding of easy monetary policy in 2018, any mis-steps by the Central Banks could lead to volatility in credit spreads, equity prices or foreign exchange rates; all of which could have adverse impacts on insurers’ balance sheets.
As life insurers in Europe continue to shift their books of business away from capital intensive, interest rate sensitive savings products toward unit-linked and protection products, we see increasing interest from some companies looking to sell off back books of business to manage their capital positions and earnings streams. This market has been open in the UK for some time, but we are seeing increased interest in the UK, as well as in continental markets such as Germany and the Netherlands.
As mentioned above, it will be interesting to see how reinsurance pricing and alternative capital investments respond to the 2017 catastrophe losses. We don’t anticipate a large spike in global pricing, but rather a change in direction as we forecast average reinsurance premium rates to increase 0-5% in 2018. We expect these increases to be in the double-digit range for loss-affected lines and regions. However, if alternative capital investors fail to reload after having their fingers burnt, or have their collateral locked up for too long to be able to respond, it could lead to more significant pricing increases.
Also, as mentioned above the development of the ICS and G-SII designations will be interesting to keep an eye on as well.
Longer-term, we believe that the digitalization of the insurance business model could reshape the industry. A smart digital solution to distribution can improve insurers’ competitive positions with existing and new customers, and allow for faster re-pricing of risk and adjustment of products. It could also disintermediate the value chain of insurance, which may pose a threat to the broker business model. Improvements in back-office operations and claims efficiencies can help to keep costs down as well. But on the flip-side, more interaction with digital technology opens insurers up to cyber risk; something that they must look to understand, measure and price for their own protection but also for developing a new line of business. We believe that the digitalization of the insurance business model will develop over the medium- to long-term, and that rating implications for the industry in general are still some way off. However we expect that this will be on the top of management’s agendas in 2018 as many will continue to ramp up investment in this area.
