David Flandro, former global head of analytics at JLT Re
24 October 2018 Insurance

Macro trends will drive market

Macro sector trends such as rising yields and claims inflation will form the background for the next phase the re/insurance markets will enter, David Flandro, global head of analytics at JLT Re, told Baden-Baden Today.

The yield curve is starting to flatten and shift upwards, which is hugely important to the P&C insurance sector, Flandro said. Insurance companies hold large amounts of high-grade medium duration fixed income securities on their balance sheets. As yields go up, the price of the securities goes down.

The rate at which that takes place is key, he noted. A sharp spike upwards could have implications for carrier balance sheets as the value of bonds on insurers’ portfolios fall. If that were accompanied by an increase in loss cost inflation in the sector, it would have implications for loss reserves as claims payments become more expensive, he explained.

“At which point you’ve got two problems: the value of the bonds on your balance sheet is falling, and the cost of the claims on your balance sheet is rising,” Flandro said.

“If we have a spike in yields and a spike in inflation, the sector could become quite exposed, even controlling for higher yields and higher discount rates,” he warned.

“We can talk about property cat and about trends and the excess capital and supply and demand, but what is subtler but perhaps more important is long-tail and multi-line.”

He pointed to commercial motor liability lines in certain countries including the US as an example, as well as workers’ compensation, or general liability and umbrella cover. “You can see that there has been upward pressure in some of those lines due to loss cost inflation,” Flandro said.

All this means that carrier balance sheets could eventually shift. “We used to be able to get away with this because reserves were universally redundant,” Flandro said.

“Now reserves look pretty close to even.”

Reserve redundancies peaked sometime in the late 2000s, according to JLT research. “While the sector still has redundancies, they are significantly lower than they have been,” Flandro said.

The lower reserve redundancies are reflected in growing demand for adverse development covers, loss portfolio transfers, stop loss covers and all those covers that are related to legacy business, Flandro explained. “That’s an indicator that reserves aren’t as strong.

“On an accounting year basis, redundancies are now very close to the line. If favourable factors don’t persist—reserve redundancies, low yields, low inflation, low catastrophes—if we have a shift in three of those things at once, we would have a coalescence of events which could change the cycle, similar to what caused the last hard market,” Flandro said.

Get all the latest re/insurance industry news with our daily newsletter -  sign up here.

More of today's news from Baden-Baden

Industry has a duty to absorb cyber threat: Munich Re

If you can’t beat new capital, join it: S&P Global

Hamilton CEO echoes Duperreault’s message

Demand creates new risk carrier

New models to unlock cyber

Be wary of rate cuts in CEE

Lloyd’s issue not complex: Ed

Insurtech a big concern: survey

Reinsurers can learn from ILS

Blockchain’s level playing field

Under-pressure German life market ripe for run-off deals

VIG Re seeks similar cedants

E+S Rück anticipates higher premiums in Germany

Real-time data could create live cat cover opportunities

Talanx outlines ambitious plans, will consolidate reinsurance programme

Pickel to succeed Wallin as E+S Rück chief executive

Liberty Mutual places Pembroke under "strategic review"

Challenges of internal models

A watchful eye on insurtech

On a mission to restore trust

Latest models will help insurers get to grips with cyber

Insurtech can fix protection gap

Japanese cats destroy premium

Don't miss our insurtech email newsletter - sign up today

Already registered?

Login to your account

To request a FREE 2-week trial subscription, please signup.
NOTE - this can take up to 48hrs to be approved.

Two Weeks Free Trial

For multi-user price options, or to check if your company has an existing subscription that we can add you to for FREE, please email Elliot Field at efield@newtonmedia.co.uk or Adrian Tapping at atapping@newtonmedia.co.uk