Smith: re/insurers need to learn lessons from recent failures
Improving market must not distract from tackling underlying issues, says Liberty Mutual Re’s Head of Specialty.
Despite signs of healthy rate increases at the January 1 renewals, more still needs to be done so the reinsurance market can deal with large emerging risks, Peter Smith, Head of Specialty at Liberty Mutual Re warns in an interview with Reactions.
“It’s starting to move – but it had to," he says. "We will see continued momentum through 1/1, but my worry is whether [the change in the market cycle] will be hard enough for long enough to remain sustainable.”
The risk landscape is changing forever, he notes, with more – and more expensive – natural disasters, climate change, social inflation and now COVID-19. “My concern is whether people are looking forwards,” says Smith. “You can look back at what the models tell you happened in the past, but history isn’t a guide to what will happen in future. I worry whether people are being honest with themselves about how they price the business.”
Specialty lines lagging behind
The specialty market has been the slowest to react, Smith says. Only in aviation has there been a concerted move to return the market to sustainable health. “We took the view that you can argue whether the rate should be x or y on line, but the reality is that if there’s not enough money in the pot to pay claims, then something has to change.” It took the decision to push up its rates. “We came under a lot of pressure early on, but it quickly became apparent we were doing the right thing, and the rest of the aviation market began to follow our lead.”
But, that same process of “resetting the bar” to create “a sustainable market” still hasn’t properly begun in other specialty lines, such as political risk, credit, and mortgage and surety, Smith says.
“People say the impact of COVID-19 might not be as bad as first thought. But, let’s be blunt: we had a global financial crisis 12 years ago; we had an emerging markets crisis five years ago; now, we’re heading into what could be a pretty significant global downturn. I’m concerned about those classes.” He continued: “I think there needs to be a rebasing in how those classes most closely aligned to the economic cycle are priced. Just nudging rates up another couple of percent won’t work.”
The COVID-19 crisis is a threat to the credit market, as firms struggle in the recession, but it also presents an opportunity, according to Smith. “Penetration around the world of some of these specialty products is low. We need to find a way of appealing to a broader base of clients with a better solution, which we can demonstrate is sustainable.”
He adds: “In an environment that is changing almost quicker than we can blink, our clients have made it obvious to us that it is hugely important to them to have trusted, stable capital and proven long-term partnerships. So, I think it’s an opportunity to demonstrate value, stability and longevity, and to create partnerships where both sides feel they’re getting both an input and an output.”
Lloyd’s not for turning
Although Lloyd’s is coming under mounting pressure from its syndicates to allow them to take full advantage of the jump in demand for cover triggered by the pandemic, Smith doesn’t expect it to water down its commitment to improving the market’s underwriting.
Lloyd’s said its syndicates have requested to write £11bn of new business in 2021 – 60% more than in 2020. “I haven’t heard anything from Lloyd’s that says it isn’t supporting business growth where it makes sense, where rate is the driver and where the fundamental underlying book is sound. What they’re trying to stop is [businesses] using rate and a hardening market as a smokescreen to hide the sins – where a class of business that hasn’t performed suddenly falls the right side of 100% [combined ratio] because there’s a bit more rate. That doesn’t solve the problem.”
Smith says: “Lloyd’s is trying to ensure its bedrock portfolio is sound, so they can grow with the confidence of knowing that’s sustainable.” He adds: “I completely agree with them.
It needs to learn the lessons of why it’s performed poorly in recent years. Smith argues: “I think it would be a tragedy if we have a hard market for a couple of years without addressing the fundamentals of what got us into a bad place to begin with.”
Simon Challis is a contributing editor to Reactions
