We are now in a hard market, Beazley Head of Reinsurance Patrick Hartigan believes, with “little doubt” that pricing will increase during 2021. Discussing the current state of the reinsurance market in view of the annual 1.1 renewals date, Hartigan tells the Rendez-vous Reporter that each of the preceding "hard markets" were initiated by an event or events that were considered unprecedented at the time.
“Since we started writing reinsurance property business in 1986 we have experienced many turning points in the cycle resulting from Andrew in 1992, the World Trade Center in 2001, hurricanes Katrina Rita & Wilma in 2005 and the Japan and New Zealand quakes in 2011, up to the present day,” he says. “The market factored in these circumstances into the respective rating algorithms, but we are constantly tested by new and unexpected events – a black swan around every corner.”
From the rating environment in Q2 this year, he says it was evident that pricing levels were responding to a capital outflow or depletion following losses from 2017 to 2019 and reduction in investor confidence.
Hartigan says this resulted in pricing at levels seen last in 2014. While an improvement following the slide in pricing seen between 2015 and 2018, he said it was still not at levels seen in 2002, 2006 or 2012.
However, based on both past and future potential losses, he is confident prices will continue rising into next year.
“Even with the influx of new capital, there remains the expectation that demand for natural perils coverage will increase and with it a commensurate pricing,” he says. “So, I think that we are now in a hard market, but one that is underpinned by the continuing presence of reliable long-term capital partners that can provide appropriate terms and clarity in coverage.
“This will enable our clients to maximise their own business opportunities, knowing they have protection from volatile future natural-perils events.”
Hartigan says Beazley has a history of product diversification and cycle management, looking to grow classes of business where there is strong rate momentum and adequacy and contract where necessary in areas showing weak rating.
“Having a diversified business mix enables us to continue to achieve growth as our various business areas operate on different cycles,” he adds.
Having maintained a “bearish view” of its property reinsurance book over the last cycle from 2013 to 2019, contracting its overall catastrophe risk appetite in areas where rates continued to reduce, he identifies now as a time for that to change at Beazley.
“We now see natural catastrophe rates at a level that are sufficient to achieve an attractive return for our stakeholders and we are looking to increase our appetite for cat risk in 2021,” Hartigan says. “The advance of the hard market terms became evident during the June/July renewals and we were able to reach our business targets assisted by rate momentum.”
Alongside this appetite for growth, Hartigan expects an increase in demand from clients.
Driving this increase in demand he says will be the depressed investment environment, resulting in weaker balance sheets.
“The depressed investment outlook combined with the potential for future losses linked to more extreme weather and natural peril catastrophes will require a greater need to offset peak losses,” Hartigan says.
“In addition, underwriting returns will be the predominant contributor to profits in the forthcoming year and that will be reflected in the pricing algorithm. Ultimately, we believe in aligning ourselves with good quality counterparties and we have insurer partners that we have supported for over 20 years.”
The London market as a whole has reacted in recent years to the down cycle and pricing deterioration, Hartigan adds, following five years of strong profits from 2012 to 2016.
This was a response to the soft market conditions in both primary and reinsurance markets.
“A contraction in offering natural catastrophe reinsurance coverage is part of cycle management applied by Lloyd’s and the majority of managing agents as well as other practitioners in the London market,” he explains.
But as the market turns, he thinks London will successfully attract more talent and business to the market.
He highlights the impact that technology and a more diverse workforce with new ideas have had to help ease the deployment of capital and enable a more seamless contract and placement journey in the market.
“This adds to the capital efficiency and unique personal connections that have long been and should remain a hallmark of the London market,” he adds. “The COVID-19 lockdown has shown the benefit of these strong connections, which have ensured a smooth continuity in business dealings while we are working remotely.
“The new era of innovation in product, placement and capital provision should supercharge Lloyd’s and the London market encouraging new business flow, helping it to remain the foremost global insurance and reinsurance market.”