At the 2016 PCI Annual Meeting, a panel discussed the current state of the reinsurance marketplace, emerging risks in the U.S. and around the world, and how these issues could impact the marketplace. The panel included:
- Andrew Marcell – Global Head of Strategy – AON Benfield (moderator)
- James Bradshaw – CEO – Willis Re North America
- Steven Levy – President – Reinsurance Division, Munich Reinsurance America
- Andrew Winyard – Executive Director – Atrium Syndicate
What do you expect from the reinsurance marketplace in the January 1 renewal cycle?
This depends significantly on the line of business and area of the country. The overall rate softening is slowing down and the marketplace is stabilizing.
Will we see an end to rate cycles? Is there a large event that could cause this to change?
Competition always impacts the marketplace, which will always lead to rate cycles. The market is currently situated to withstand a $100 million event, but much of this is going to depend on the type of the event. If it is unexpected, it could have an adverse impact on the marketplace.
Is the rate stability the new normal in the marketplace?
No. Medical inflation is picking up, which could impact multiple lines of business including workers’ compensation. We continue to see deterioration in the courts, which will impact the tort marketplace. We have also seen carriers scaling back reserve releases, which is a sign that costs are increasing which will, ultimately, impact rates.
Do you think we will see reserve strengthening in the near future?
Yes, there has been a significant spread in pricing between competitors. In those situations, someone is not pricing correctly, which will have an impact on their long-term reserves.
How will current interest rates impact the marketplace long term?
It will be interesting to see how actuaries account for the significantly lower investment returns right now and what impact this will, ultimately, have on the marketplace.
Will we continue to see alternative capital come into the insurance marketplace?
Yes, without question. Insurance has always been a stable, long-term investment. People are looking to put their capital to work and insurance provides a good place for this.
Can reinsurance help to correct improper underwriting?
Not any more. This happened a lot in the past as reinsurers were willing to take more risk to put their capital to work, but in these interest environments, disciplined underwriting on the front end is more important than ever.
What will we see in terms of insurance M&A activity in the near future?
This will continue to accelerate, especially with Asian investments.
What about M&A activity on the reinsurance side?
There is certainly capacity for mergers on the reinsurance side, especially among smaller players.
What emerging risks are you concerned about?
Terrorism continues to be a concern. This is not a new risk, but the types of attacks we are seeing continues to change creating exposures not previously contemplated. Cyber is also a big concern because it is very challenging to get your arms around what exactly is a cyber event. Cyber insurance is evolving constantly as people gain understanding of what the risks are.
On the subject of cyber, are we getting a better idea on the retail side about what is covered and what is not?
Yes, but there are still new risks emerging in this area, which will lead to coverage questions. This is not a simple subject.
Can the industry do a better job modeling risk?
We can always do a better job, which will enable us to better provide coverage and price it appropriately. We see new models being developed. However, the models alone are never the answer. We need to understand the limits of the models. There is always a need for good underwriting. The modeling is a tool for the human underwriter to use.
Is technology a challenge or will it improve our industry?
Our industry is constantly trying to adjust to new technology. In the long term, technology will improve our industry, but in the short term, it will be a disruptor.
Is this focus on insurance technology going to continue?
We believe the insurance industry is in the beginning of significantly disruptive change that will change consumer behavior. As an industry, we need to get ahead of these changes because they represent a significant opportunity to improve the value proposition of our industry. It is also important for the insure-tech companies to understand the regulatory constraints that we face.
How will technology impact the “advice” business, such as insurance brokers?
Much of the technology is focused on the process from claims to underwriting. The goal is to promote efficiency and better decision making. We also see the business of being a broker evolving. Clients are more interested in analytics from their broker than relationships and spending time on a golf course. The broker is becoming more of an advisor and clients are looking for assistance on more than just placement.
How is climate change impacting risk?
With Hurricane Sandy, we saw storm surges in the northeast higher than ever recorded. This year, in Texas, there has been a record amount of damaging hailstorms. There is no question that climate change is impacting weather-related risks. This is challenging the carrier underwriter models that focus on prior “worst-case” scenarios.
What type of CAT claim will next impact the insurance industry – weather-related or man-made?
It could be either, but you could also see a catastrophic impact on the industry by significant reserve adjustments on the long-tail lines of business. Competitive pricing does not always follow loss development trends and there is concern that some of the pricing we currently see is too low.
What do you see as the biggest impacts on the industry in the next 10 years?
Advances in automobile technology. Further emergence of alternative capital in the marketplace.
What advice do you have for those in the industry?
Embrace technology. Never forget the important role insurance plays as a safety net to the global marketplace.