The COVID-19 pandemic has been a game-changer for most industries – not least the re/insurance sector. Whilst the past few months has been a difficult and, for some, distressing period, when eventually viewed through an historical lens, such adversity will evidence resilience and innovation that not only reduced the likelihood of future events having such a serious impact, but provided an opportunity to pause and realign society to people’s evolving needs and expectations.
Take remote working as just one example. Large, global companies such as Aon had already long-embraced the technology that would allow their employees to work effectively outside the office, but the pandemic has provided a rare opportunity to stress test these capabilities at scale. This has helped to evaluate both the efficacy of the technology and systems themselves when used as the primary way of working, and whether teams can operate in a cohesive and effective manner in a continuous virtual environment.
Over the past few months, along with many of our trading partners, we have fine-tuned remote operations in order that high levels of client service could continue unabated, and in many cases, even improve as colleagues began to increasingly adapt to a new way of working. What we are now seeing is that, rather than hindering business productivity, these proven remote infrastructures are actually opening-up new possibilities for growth. This situation will only be amplified as we further embrace what has been termed the “new normal” – a phrase which has negative connotations when interpreted as a compromise, but could in fact represent a much-needed evolution with long-lasting benefits.
Pulled into a new future
The pandemic has significantly accelerated customers’ adoption of remote services –particularly in banking and retail. For some, such as the elderly and vulnerable, this will have proved to be a lifeline. In our own industry, we are seeing a similar seismic shift: the move to online placement platforms is gaining momentum as a result of the pandemic, and despite the shorter-term challenges faced in terms of potential losses and continued provision of comprehensive cover, we may actually find that COVID-19 has helped save what was – as we all knew – an industry that desperately needed to modernise.
We have been pulled into a new future, one which is proving itself to work effectively, and one which will have benefits beyond the need to maintain business continuity in difficult times. Indeed, our insurtech partnerships now seem even more relevant, as prevailing conditions serve to align us on a similar vision for the advancement of our industry.
For all the long term benefits this period may bring, we need to remain mindful of the near- to medium term impact of COVID-19 on our sector and our clients. No-one needs reminding of the devastating effect the pandemic has had on the global economy, precipitating what seems likely to be the worst recession since the 1930s.
According to forecasts from both the International Monetary Fund (IMF) and the World Bank, global gross domestic product (GDP) is set to decrease by around 5% in 2020. Global stock markets quickly lost around a third of their value by the end of March and, while an unprecedented policy response by major economies resulted in the stabilization and partial recovery of stock markets in the second quarter, valuations in the insurance and reinsurance sectors have been lagging, seemingly due to the persisting uncertainty around, the evolving nature of COVID-19 related losses.
Challenging market conditions
And I want to emphasise the word ‘seemingly’, because given that so much negative news flow on our sector focuses on the pandemic, it would be easy to forget that market conditions were challenging even before COVID-19 took a ubiquitous hold. Back in January, our analysts were already forecasting a modest tightening of reinsurance capacity in 2020, driven by below par results over the past few years, generally lower capital adequacy, concerns around the adequacy of casualty reserves and the prospective impact of lower interest rates. Furthermore, losses and trapped collateral in the alternative capital sector were impacting the availability and cost of retrocession capacity.
Most of these negative factors have been amplified by COVID-19; earnings and solvency have been impacted, and significant uncertainty remains around the ultimate extent and distribution of associated claims. Demand for reinsurance is generally increasing as cedants look to de-risk, while reinsurers have simultaneously become more discerning when it comes to the deployment of their capacity. Consequently, the mid-year renewals have shown pricing increasing on a broadening front.
Importantly, the prospect of improved returns has enticed new capital into our sector. New equity issuance exceeds $8bn over the past few months and more capital is likely to follow, given the numerous press reports of expansion plans and potential new start-ups. The property catastrophe bond market has also been a bright spot, as the liquidity of the product and the peril-specific nature of the coverage continues to attract strong interest. Around $6.5bn of limit was placed in the first half of 2020 – exceeding the amount placed in the whole of 2019. In addition, we’ve seen significant activity in the industry loss warranty (ILW) market, given the more limited availability of UNL (ultimate net loss) coverage.
Change for the better
As we head towards the important January 1 renewals season, many of the existing pressures will remain in play. Globally, all markets will have their own dynamics, but the direction of travel will be the same. As an industry, we need to take stock of the past six months, re-evaluate our positions and exposures, and invest in solutions that will help our clients to find success in these testing times. We should remember that we are the world experts in risk, with the resources and talent to help companies, governments and communities navigate through this unprecedented period.
We should also remember that now is the time to build the future world we want to see; to change what needed to be changed, and to move forwards towards a more robust and sustainable environment. We have been given an opportunity to better position ourselves to help those that need our assistance, and in so doing ensure that COVID-19 leaves as positive a legacy as possible.