Price rises continue, but diminish

Senior brokers and underwriters have typically emphasised that current market conditions constitute a hardening market, not a true hard market (one where rate increases are imposed across the board, and some programmes cannot be completed at any price). Still, the bottom line for almost all insurance buyers has been steadily and often significantly increased insurance costs. I don’t expect this to reverse in 2021, but the price increases are very likely to ease, or even level off, although with distinct differences by risk class and client. The entry of new billions into an already-overcapitalised industry means that competition between underwriters will collapse their resolve to push rates dramatically higher, and some buyers will be offered unchanged prices at their 2021 renewal (even though many carriers’ income remains below their cost of capital in our world of negative real interest rates). To be clear, this is not the prediction of a return of a soft market!

Buyers look to broker alternatives

Pandemic aside, the biggest news for me in 2020 was the pending merger of Aon and Willis Towers Watson. I have considered this from all angles, and it can only drive many commercial insurance buyers to seek alternatives for at least part of their risk transfer programmes. The big beneficiaries will be the group known as ‘mid-tier brokers’ (somewhat misleadingly, since they tend to have all the skills, reach, and capabilities – more or less – that the two behemoths offer). Many of these intermediaries will expand by recruiting individual brokers and even entire teams from their larger competitors and elsewhere, as buyers seek insurance advice which is a little less rote, a little more customer-focussed, and very much more personal.

New insurers bed down and broaden opportunities

A big chunk of the new billions that have entered the sector has been raised by the so-called ‘Class of 2020’ risk carriers. Hard-market start-ups from previous decades have in general enjoyed exceptional success (Ace and AXIS are two at the top of the alphabetical list); the current crop is likely to fare equally well. 

Vantage Group in Bermuda ($700m), Mosaic (the new Lloyd’s casualty Syndicate 1609 with a 2021 stamp of $210m), Inigo (the $800m Lloyd’s operation launched by former Hiscox executives), Bowhead Specialty (American Family’s new E&S casualty carrier), Conduit Re (a London-listed operation which raised $800m in its IPO), and 2019’s $1.5bn Convex Group have the advantage of hand-picked underwriters, balance sheets free from legacy liabilities, and a broking market seeking alternative capital choices in the hardening market. 

My Class of 2020 list excludes rebooted companies like ProSight Speciality (bought by private equity in January, then cleansed of old years by Enstar) and Core Specialty (the recapitalised StarStone US, with about $670m of new capital). All of these companies will easily find business to write, edging out competitors weakened by years of losses and low rates, and refilling capacity pools diminished by withdrawals and losses. Over the course of 2021 they will begin to expand their horizons, growing opportunistically as underwriting talent and market opportunities materialise. Ultimately they will become part of the landscape. 

Programmes become increasingly fragmented

In today’s market many insurers have focussed their risk appetites narrowly. That has and will continue to lead to increased layering of insurance programmes, with various attachment points and limits concealed within every coverage tower. Brokers will exercise increased focus to assemble the necessary insurance protection, and to align terms and conditions. Meanwhile, behind the scenes a similar fragmentation of pricing will continue. Ever more often, insurers are charging their own discrete rate for their specific slice of a programme, marking a break in longstanding London-market practice. Buyers pay the weighted average. This too will continue, and even accelerate in 2021, although disconnects between coverage and deductibles may be storing up issues for another day. 

Climate change rises up the agenda

Reinsurers have sat quietly at the forefront of climate change concern and research for more than a decade, but now almost everyone in the market has a climate-change agenda. It has become almost undeniable that climate change is having an impact on losses, although it can be very difficult to isolate (the word ‘non-stationarity’ is gaining ground as a result). Concern is now set to become action for everyone, with decisions made to ‘green’ both sides of the balance sheet. Organisations that fail to react will begin to feel the sting of their neglect of this planet-threatening issue in 2021. 

Covid casualty claims gather pace

Predicting the total quantum of the industry-wide Covid loss has become something of an international sport. But since most of the loss reserves posted to date relate to property- and event-cancellation-related losses, too many of the forecasts we’ve seen seem, in my mind, to underestimate the huge third-party claim waiting in the wings. You can be confident that the trial lawyers have not made the same oversight. The arrival of the international ‘second wave’ has shifted the balance in favour of potential claimants, since the millions who caught the bug this winter can argue that everyone then knew what precautions were necessary to prevent them falling ill. Expect a tidal wave of suits against employers from workers who contracted the virus on the job, against organisations that the infected were required to visit but where the virus lurked, and a great many others. Expect class actions and television advertising. (The voraciousness of the plaintiffs’ bar knows no bounds, and will be unchecked by the incoming Democrat administration.) 

Captives gain popularity

Major insurance buyers often turn to captives when prices rise, and rightly too: owning a mini, tightly held, third-party managed insurance company can be an extremely efficient means of risk transfer, especially during a hard market. With the clarification of tax regulations in the US, and the implementation of protected cell company laws in jurisdictions around the world, captives will become even more appealing to sophisticated risk managers with large potential liabilities during 2021. Expect multiple formations. 

Facilities and consortia gain importance

When groups of insurers unite and place the underwriting of specific types of risks into the hands of a single, trusted leader, multiple inefficiencies inherent in the traditional subscription insurance process are eliminated, and large pools of capacity for easy deployment are created. Facilities (typically arranged by brokers) and consortia (created by insurers) will gain in popularity over the course of 2021 as risk carriers deploy their reduced line-size appetites and seek to slash expenses, and the coverage limits sought by insurance buyers increase. 

Technology tools gain ground

This trend is obvious to all. The insurance sector has now embraced technology wholeheartedly, from the back-office to the front line. While the world-changing reinvention of the business promised by some insurTechs has failed to materialise (and was never going to happen, I always believed), continuous improvement in processes will continue to deliver benefits to buyers, brokers, and insurers alike during the year ahead. 

Legacy deals proliferate

The decades-old practice of occasionally handing off whole portfolios of prior-years’ insurance policies to third parties for run-off has leapt forward in recent years. Run-off is now actively and openly used by insurers as a capital management tool, while the number of enormously well-capitalised acquiring players in the space has perhaps tripled (and as a group adopted the legitimising moniker ‘the professional legacy market’). New regulations in several US states which allow portfolios of old busines to be sold to a third party entirely – along with the legal obligation to pay future claims, to grant true ‘finality’ – will see this form of risk management gain significant ground in 2021, as its benefits to all parties involved are increasingly appreciated by insurers and regulators. Expect more states to adopt a run-off regime following the NAIC’s publication of a model law.