Hard rates to endure until industry tackles existential problems

Hard market conditions will run longer and deeper than is typical because the reinsurance industry still needs to fix fundamental, existential problems,  Convex Group chief executive officer Paul Brand told Intelligent Insurer.

“This is a different type of hard market. The duration has already been longer than in the past, which is probably because there are more things to fix,” Brand said.

Brand, who founded Bermuda-based Convex in 2019 with industry legend Stephen Catlin, said the industry has yet to prove it can consistently produce the returns on equity investors are seeking, despite improved rates.

“The reason people are struggling to attract capital is investors can’t yet see the industry is fixed. Typically, you’ll see significant rate increases translating into significantly improved profitability and very high returns on equity, particularly from reinsurance carriers. That’s the historic story but we have not seen that this time.”

“The balance between greed and fear is still on the fear side.” Paul Brand, Convex
Brand cites several reasons for this, including a hangover from casualty losses, and potential reserve deficiencies. Also, the directors & officers liability market remains soft.
“Studies on the specialty market show you’re not seeing rate increases translate into improvements in the bottom line,” he said.

“That’s either because people are using today’s money to pay for tomorrow’s problems or because losses have increased—or a combination. The rate increases are not shifting through into excess profit. And until you see that, the balance between greed and fear is still on the fear side.”

Brand said rates had risen more quickly than Convex had predicted, adding: “The hard market can’t go on forever because we are in a cyclical business, but it will go on until the industry demonstrates that it can grapple with some existential issues.

“The expectation is that the loss trend will continue upwards. That’s not a bad thing in some ways because it shows that the industry has value and purpose.”

Yet he added that it was foolish to try to make predictions on how long it might endure. “The better answer is we’re very careful to monitor rate. We see that as one of the key indicators of what is happening. When the rate of increases starts to slow, we’ll know. At that point in time, the hard market is over and you’re in a soft market.”

A proper purpose

Despite the challenges, specialty re/insurer Convex, as a relatively new business with a clean balance sheet, is well placed. Having reached $3 billion in grow written premium in three years, it is now on course to hit around $4 billion in 2023 although, Brand said, the trajectory is more important than hitting any milestone.

“That very significant growth rate demonstrates that there’s a proper purpose to Convex for clients and brokers,” he said.

“A more useful metric is that I was very happy with the 98 percent combined ratio at the end of 2022. That was a busy major event year: Ukraine, Australian floods and Hurricane Ian. And we posted that combined ratio. We have had lots of growth, but we are a profitable business. This is a good place to be.”