Thierry Léger, group chief underwriting officer, Swiss Re
The continuing fallout and uncertainty created by COVID-19 is creating a “fear factor” in the re/insurance industry that has triggered the first true hard market in 20 years and could mean it will be elongated, compared with previous cycles.
“In a world with new and evolving risks we must be prepared to offer new products.”That is the view of Thierry Léger, group chief underwriting officer of Swiss Re, who told Monte Carlo Today that while multiple forces including several years of high cat losses, ever-lower interest rates, social inflation and the propensity of secondary perils have converged to force hikes, the uncertainty around COVID-19 has been the key differentiator compared with previous years.
“For me, a true hard market is always driven by multiple factors. When 9/11 happened, that was on the back of severe winter storms in Europe, a stock market downturn and a casualty crisis all those things combined to increase rates.
“The same is true now: a number of factors have combined. But the final catalyst was COVID-19 and the uncertainty that a pandemic brings. Rates have started to improve in recent years, but it is now clear they need to increase by a lot more and a tidal wave of forces have emerged to force that to happen.
“For the first time in 20 years, I can feel a fear factor in the market. But as well as driving rates up, that will also make new capital considering entering the market hesitate,” Léger says.
“Investors will be seeing headlines about losses and economic downturns and, even though the barriers to entry are lower than they have ever been, they will become more hesitant.
“That could mean we are in for two or three years of a hard market before new capital flattens the cycle.”
He stresses that the fact that interest rates have been lowered even further, a consequence of COVID-19 devastating economies around the world, should also not be underestimated.
He notes that means that rates on long-term casualty lines suddenly need a correction by several percentage points before the many other factors are considered.
“Although they were low already, people might underestimate the impact of them going even lower it changes the dynamic of pricing,” he says.
New ways for renewals
Moving into a renewals season in the context of these challenges might be tricky at the best of times. But with all major conferees including the Monte Carlo Rendez-Vous cancelled, and face-to-face contact in most countries limited, the 2020 renewals will be conducted in unprecedented circumstances and could be even more difficult than usual for multiple reasons.
Léger acknowledges that anyone who needs to convey a hard or complex message would prefer to do so face-to-face, but stresses that since everyone is in the same boat, everyone will cope.
“It will not make a big difference, everyone is used to interacting in a different way now,” he said. “I don’t see a challenge from that perspective it is just a different dynamic for everyone.”
He does, however, note that some of the young members of the market on all sides, who have not experienced a hard market before, will have a steep learning curve ahead.
“Some of the young talent will have operated only in a soft market and some of them may struggle to adjust to how different things are when rates are hardening,” he says.
“At Swiss Re, we have a very healthy talent mix I would say in the vast majority of our teams we have the right blend of experience and younger talent. There is just a small number of areas I will be watching more carefully.”
Against this complex backdrop, Léger says that Swiss Re’s key messages to its clients will revolve around its long-term values, the importance of a true partnership and clarifying terms and conditions on some contracts in the context of COVID-19. He believes there will be more demand for reinsurance in this renewal.
“We need to clarify things around infectious disease exclusions; items such as terms and wordings can be diluted in a soft market and we need to ensure there is clarity around that. Now is the time to sort that out,” he says.
“We will also be stressing our capital strength and the fact that we are in a good position to help clients. My instinct is that cession rates will move up slightly this year as clients look to better manage their volatility, so it is important we are ready to meet clients’ demands.”
As group chief underwriting officer, he adds, his focus in the short term is ensuring underwriting excellence and that prices, terms and conditions, and the business mix are all correct across the business.
“I must also keep an eye on the longer term,” he notes.
“We are always exploring new capabilities, new analytics, and uses of data and technology so we can develop new solutions for clients. In a world with new and evolving risks we must be prepared to offer new products and new risks classes we must be more future-oriented.”
On top of all this, he stresses the challenge of climate change.
“When you consider how important nat cat business is to the industry, this is crucial. There are no longer-term models on how these risks will evolve so we need an agile way to adapt models. But we have a very good research team and we feel we are in a good place with this,” Léger explains.
He stresses the importance of the industry’s increasing ability to grasp risks and losses relating to what he calls non-physical damage: cyber, intellectual property and supply chain risks. He adds that the use of technology and the way it can translate data and analytics into risk data will be the key to this.
“It is like being in a secure house you know they cannot come through the windows, but now in the cyber world people are being targeted through devices.
“Then there are the accumulation risks that the industry is starting to understand—around supply chains they can be increasingly complex. These are risks that we must learn to tackle through innovation,” he says.
On the nat cat side, Swiss Re tends to explore solutions internally, leveraging its large team and capabilities, but on emerging risks it partners with other organisations to tackle such complexities.
It recently unveiled a partnership with Microsoft, for example.
“They need the right expertise but also the right size and scale and access to the right data,” Léger notes.
Technology is really transforming the entire insurance value chain. The availability of large sets of data is making the space an attractive area for companies ranging from startup insurtechs to the likes of Amazon and Google, which have shown an interest.
Léger says Swiss Re is innovating fast in this space but has a word of warning.
“There is a lot of innovation but remember, these are also highly regulated areas and not everything you would like to see can be done that quickly,” he says.
He notes that he feels that technology actually transcends the development of risks for the industry in some ways.
“It will translate into a battle for talent,” he says.
“Companies will have to invest in recruitment and training to ensure they have the right people to do the job.”
Thierry Léger is group chief underwriting officer of Swiss Re.
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