Maloney: Industry cannot plan for future on foundation of weak returns

The (re)insurance industry must get back to making sustained and robust returns if it is to move forward in terms of technology, product and talent, Lancashire CEO Alex Maloney has said.

During a fireside chat at Insurance Insider’s (Re)Connect virtual event, Maloney said that when you look at return on equity figures for the industry over the past five years, “we are not on a strong base”.

“Until we get to a stronger market it will be a death by 1,000 cuts,” he said. “I am sure this year we will see more businesses fold. It is very hard to think about the future if you can’t make money today.

“We do need to think about how to be sustainable, charging the right price for our products and making a sensible return, then we can look at the more ambitious goals we have.”

He continued: “If you think about the London market, we are currently struggling to write marine business [profitably] after we have been writing it for 300 years. It is very difficult to think about the future if you can’t master what you have been doing for 300 years.”

During the discussion, Maloney said there were differing levels of rate adequacy in the market, but the signs were positive that forward momentum would continue.

Non-marine retro is an example where the market is “pretty hard”, with rates a similar levels to those seen in 2006, the executive explained. Meanwhile, he estimated rates on Florida cat business were around 2012 levels.

Given the modelled estimates on go-forward investment returns, climate change and uncertainty around both casualty reserves and Covid-19, “I am very confident to say that reinsurance rates will rise for the foreseeable”, he said.

Lancashire joined the raft of (re)insurers opting to raise capital in Q2 in order to capitalise on the rating opportunity. It raised £277mn ($365mn) in an equity issue.

Lancashire will aim to deploy this capital in the next six to 12 months, and the CEO did not rule out the possibility of further raises, adding that Lancashire constantly reassesses its capital requirements.

“We don’t think [the rate acceleration in] Q2 was a short-term blip, we think this is sustainable and we raised capital on that basis,” he said.

Maloney added that he was “very comfortable” that the current level of capital raising seen across the market was not going to slow positive rating change.

“If you look at the aggregate number, I don’t believe all that capital has been raised for growth, I think an element has been to replace capital which is no longer there for whatever reason – whether that is trapped capital, or perhaps capital providers are unhappy with their returns, perhaps carriers are raising capital because of the uncertainty on their books.”

As revealed by this publication, Lancashire has recently decided to enter the accident and health market with the hire of Tom Ing.

Maloney said that “timing was everything” for class entries and Lancashire was watching developments in specific lines closely to see which would fit the business.

“If we can make money within three years, and projection rates are going in the right direction, that’s when we are interested,” he said, adding that finding the right people was another important factor.

Only two classes are off limits, Maloney said: retail lines and standalone cyber.

“I am still very concerned about cyber,” he said. “Clearly, if there is a big cyber event, that will be a real test for our industry.”

But overall, Lancashire is looking to expand, Maloney said.

“We believe this cycle will follow most other cycles. The market will go back to basics, pricing will improve for two to three years and then competition will increase again.”

To view this discussion and other (Re)Connect sessions on demand for free, click here. 

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