Sellers’ market

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There are a number of uncertainties around the Covid-19 pandemic for the reinsurance industry. One key unknown is how long the crisis will last, with individual states moving towards recovery at different rates and imposing varying restrictions on movement.  

Another uncertainty is around the scale of potential business interruption claims, with several lawsuits underway in the UK and US over whether policies respond to pandemic or not.  

All of this is overshadowed by the potential for governments to intervene in disputes and demand that carriers pay out or at least compromise on claims for Covid-19 losses they would otherwise reject.  

For Scor Global P&C CEO Jean-Paul Conoscente, however, there is one certainty: that the rate momentum that has been building since 1 January will continue throughout the year, rather than fizzling out once the immediate crisis has passed.  

“We think this hard market is going to carry on into 1.1 for several reasons,” says Conoscente. “First of all, the world economy is likely entering into a global recession, with financial income severely depressed.  

“Insurers and reinsurers need more technical margin, and that will drive longer-term improvements. We’ve also had a capital depletion, both on the (re)insurance side and the retro side, and that’s going to be a driver for improvements.” 

Gathering momentum 

Conoscente says there were rate improvements at 1 January, but because this renewal is dominated by European treaty business – where prices have not hardened as much as in parts of the US – the impact was muted.  

However, Covid-19 has so far revealed “lots of issues with wordings” in (re)insurance, and losses on European accounts are expected, meaning there is likely to be a push for tighter terms and conditions as well as price hikes at the end of this year, he adds.  

The 1 April renewals had already been underway for a number of weeks before Covid-19 lockdowns were ordered in several major economies in late March, and for this reason the pandemic had a limited impact on the negotiations, Conoscente says. Rate hardening at this date was primarily driven by the loss experience of Japanese cedants, which had booked tens of billions of typhoon losses in 2018 and 2019.  

“We saw an acceleration of the hardening at 1 May, which is a small US renewal, with a big difference between 1 April and 1 May; and June confirmed that this is now a hard market,” he adds.  

At the 1 June renewal Floridian carriers paid aggregate price increases of 30 percent, although with some significant outliers.  

Conoscente also describes a squeeze on terms and conditions: “At 1 June we saw differential terms, the removal of cascading structures and, on loss-free programmes, a drop in commissions on property and casualty proportional treaties, whereas in the past renewals, we saw improvements on proportional casualty treaties and less so on property. Now, it’s across both.” 

Power shifts to sellers  

From this point onwards, in Conoscente’s view, the market will favour sellers rather than buyers of reinsurance, exemplified in the widespread imposition of contagious disease exclusions on property treaties.  

“The June and July 2020 renewals have confronted client expectations with the realities of the market, and not all clients and brokers have accepted the fact that we’re in a hard market now,” says Conoscente.  

So we’re seeing different behaviours from different brokers and clients who are still trying to push aggressive terms relative to what the market is now willing to accept. Those are the programmes that are really struggling.” 

Rate rises aside, there is the potential for carriers to see demand for certain (re)insurance lines drop while businesses are in lockdown, or as businesses in financial distress have a reduced ability to pay premiums.  

“I think you’ll see reductions in premium levels in certain lines of business that are driven by economic activity,” Conoscente concedes.  

However, he adds: “Business segments with a high cost of reinsurance as a percentage of their total premium income are very limited.” 

Overall, the executive believes most cedants will be able to absorb an increase in the cost of their reinsurance. One exception is the Floridian carriers, which will be unable to pass on the increased cost of the reinsurance to consumers, putting additional strain on their financials.  

More M&A ahead 

Conoscente believes that the pandemic and the market conditions resulting from it will lead to more consolidation in the insurance sector next year.  

“The industry is still overcapitalised and stakeholder requirements, for example, from rating agencies or regulators, are getting higher and higher, which drives the need for scale,” he says.  

“In addition, as we enter a hard market, M&A becomes more attractive. There are opportunities to draw the most from the hardening market, by providing larger capacities and [an] increasing global footprint,” he adds.  

On the flipside, companies hit by Covid-19 on the loss or liability side (or both) may need to sell to a larger entity to survive.  

The crisis has led ratings agencies to put reinsurers under increased scrutiny as they assess carriers’ vulnerability to losses. In May, Moody’s downgraded Scor’s outlook from stable to negative, noting the reinsurer’s vulnerability to higher mortality claims arising from the pandemic. 

“Rating agencies and regulators are putting a lot of pressure on individual companies, demanding more information and more clarity on what the crisis means for them,” says Conoscente.  

“But we’re all going through this at the same pace and trying to better understand the implications across different lines of business and geographies as we gradually collect additional information.” 

He adds: “From Scor’s perspective, based on the information we have today, we are comfortable with the measures we have taken to date.   

“We believe our capital shield and flexibility put us in a good position to meet our client obligations and maintain our ratings.” 

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