Axis Re calls time on the industry’s worst run for 15 years

The main story of 2020 so far has been COVID-19, but the re/insurance industry may come to look back on this year as the moment when it emerged from an historic run of poor performance.

“When you look at industry statistics it is likely that in 2020 the industry will fail to meet the cost of capital three out of the last four years,” said Steve Arora, chief executive officer at Axis Re.

“If you look at a bigger stretch in time, this is the worst run this industry has seen for 15 years.”

Arora acknowledged the challenges the industry faces, but believes the market is on its way to resolving its problems, with increases in rates across most lines of business helping to restore the business to profitability and sustainability.

Arora listed a dizzying array of challenges facing re/insurers: the COVID-19 pandemic; pressure on reserves; reductions in solvency levels due to financial markets volatility; rating agency scrutiny; likely increases in retro prices; depressed interest rates; and increased climate risk.

More broadly, there has been “a general loss of patience from reinsurers due to a lack of profitability in the last four years”, Arora said. “Taken together, this leads to a solid case for real market improvement.”

He argued the debate about hard and soft markets can be overplayed, preferring to frame the issue as a question of defining standards for profitability.

“It is about strong quality, returns, commitment to underwriting selection and also portfolio management through the cycle,” said Arora. “It is about having the right risk:reward balance and managing the portfolio accordingly.”

“It is about having the right risk:reward balance and managing the portfolio accordingly.” Steve Arora, Axis Re

Discipline needed
He argued that re/insurers must be disciplined if they are to survive, focusing on quality of business over quantity, while paying close attention to portfolio construction and balance and driving changes in terms and conditions, as well as simply increasing rates.

“Re/insurers should learn from the past, correcting inadequacies in expected loss projections,” Arora added.

Axis Re believes it is doing those things and is therefore well-positioned to emerge from the crisis stronger than ever.

“We have a strong platform, a strong franchise, a broad product offering, we are global, and we have good relationships,” said Arora.

“Axis is well positioned to take advantage of an improving market,” he added. “Being a hybrid re/insurer is a competitive advantage, and it allows us to assess what business is attractive to us and deploy our capital accordingly.”

These factors will help it differentiate it with clients, Arora said.

“Some carriers are client-centric during soft markets, but when the market hardens, the tone changes. We have invested a lot in increasing our sales capabilities and building a client franchise—and we want to play to our sales emotional intelligence.”

Arora admitted the fallout from the pandemic may have caused some reputational damage to the industry, and put strain in some relationships, especially in exposing shortcomings in policy wordings—especially in terms of primary wordings.

“This has a negative implication on the industry that affects the value chain from customers, to insurers, to reinsurers,” he said.

“Re/insurers must remain present in this conversation and engage, keep monitoring the situation, keep paying claims fairly and be flexible and objective,” Arora concluded.