Insurance industry must find ‘right’ capital management strategy to navigate losses

The insurance industry must find the “right” capital management strategy to navigate its losses.

Since 2011, there has been a clear change in claims frequencies across most casualty lines. This includes large losses from wildfires and the opioid crisis, for example, which has caused market shifts.

Another driver is social inflation, however the change in legal environment, different mindsets in juries, third party claims and medical advancements have all made claims increase.

This was the message conveyed by a panel of speakers last week at Guy Carpenter’s media briefing, titled ’The Changing Nature of Risk’.

Although Guy Carpenter expects pricing to continue to increase and the market to keep hardening, finding the right capital management strategy, it believes, is “critical”.

For example, reinsurance continues to be a highly effective tool to help insurers respond and navigate the pandemic instead of raising capital.

In addition to this solution, insurers can allocate capital to past losses, raise capital and release capital from previous years.

Balance

Guy Carpenter’s managing director Christopher Ross said that heightened claims frequency and severity in recent years had resulted in corrective actions by carriers, including “price increases, limit reductions, attachment point changes and underwriting appetite shifts, all meant to re-position portfolios going forward”.

He continued: “We expect pricing to continue to increase and with limit and attachment point strategies currently in place, further hardening in the overall casualty market will take place.

”To adjust to these conditions, finding the proper capital management strategy is critical. The market will need to find the balance between allocating capital to potential past losses versus deploying it now to support business growth in a hard market.”

Heightened cautiousness

 The Covid-19 pandemic has acted as an accelerator for pricing and capacity.

For David Priebe, chairman of Guy Carpenter, this includes elements such as coronavirus related losses, rate movements at the mid-year renewals, the tightening of capacity across some insurance lines as well as loss developments for lines that have a long settlement period, which have all preceded the 1 January 2021 renewals.

He said: “Fortunately, the sector has a strong track record of responding to periods of change. Putting capital to work to create new coverages and meet evolving demands will be crucial in securing the reinsurance sector’s long-term relevance.

“It is important to remember that transformative events have led to product innovation many times before. We expect a similar play-book this time round. Reinsurance will be crucial in supporting insurers in this endeavour, by supporting capital positions and reducing volatility.”

Meanwhile Lara Mowery, global head of distribution at Guy Carpenter, said the current levels of economic uncertainty were generating “a heightened cautiousness to deploy capacity unless pricing and other terms met specific thresholds”.

On approaching the 2021 renewals, Mowery added: “There is an expectation that renewals will be more complicated and that negotiations will take longer than the norm.

“One aspect of this that contributes to the duration of the process is the increased differentiation we have seen in renewal outcomes. We as an industry have continued to become more sophisticated in this respect.”

Widening protection gap

But intangible assets in recent years have also increased, according to Erica Davis, Guy Carpenter’s managing director and North America cyber centre of excellence leader.

She explained that considering the heightened market complexity created by Covid-19, “the new risk landscape reinforces the importance of reassessing the value of this changing asset base”.

She said: “Despite historical profitability and forecasts of hypersonic product growth, the industry’s cyber growth trajectory has tapered off over the last two years and is evidencing some growing pains.

“This flattening market trend is directly at odds with a heightened threat environment and the increased valuation of intangible assets. And it is creating a widening protection gap for businesses that will only expand.”

She said that Covid-19 has meant that businesses are depending more on digital assets.

Portfolio considerations

Lastly, Jessica Turner, Guy Carpenter’s senior vice president for catastrophe advisory, urged carriers to apply greater climate-specific weighting to portfolio considerations.

Acknowledging that climate change events were ever increasing, she said: “We can no longer be backward looking when considering cat risk. There will need to be greater consideration around risk selection and aggregation, for example, in regions where wildfire is becoming an increasingly prominent peril.

“Pricing of policies should also be examined closely. An individual firm’s risk appetite and exposure will dictate decisions around tolerance for volatility and capital requirements in a changing climate.”