COVID-crisis accelerates hard market, likely to trap capital: SCOR’s Conoscente

Share

The global pandemic is accelerating the hard reinsurance market, according to Jean-Paul Conoscente, chief executive officer of SCOR Global P&C.

jean-paul-conoscente-scorSpeaking to Artemis ahead of the virtual Monte Carlo renewal discussions, he said that trends which had begun in 2019 were being further fuelled by the expected claims impact of COVID-19.

“Collateral will be trapped as reinsurers and cedants try to grapple with the exposure of their treaties to the COVID-crisis. And that’s been an issue for ILS markets the past two to three years,” he says.

“I believe this is going to happen again. And as a result, I think ILS markets are demanding higher returns for the capital they’re putting out.”

As a result, retro capacity on offer from the ILS market is likely to remain flat.

“Also the required returns seen in 2020 have been much higher than in the past and probably much more in line with what the traditional reinsurance markets are requiring. The cheaper cost of capital and therefore lower expected return competitive advantage the ILS markets had in 2015, 2016 and 2017 is being lost, it’s gone. Therefore with returns now very similar to traditional reinsurance, accessing ILS markets will become just a diversification play rather than a cheaper capacity bet.”

ILS will remain a permanent fixture of the reinsurance market, in particular for property catastrophe reinsurance and retro, but some of the more opportunistic players “have been weeded out” he thinks. “Now we have actors who are seasoned professionals, with capital looking for long-term returns and so it result in a more sustainable market.”

Gone is the disconnect within the reinsurance cycle.

During last year’s renewal season there was much discussion over the fact that commercial insurance rates were hardening dramatically in the underlying market, in addition to retrocession rates. But there was a mismatch, with reinsurance pricing remaining stubbornly resistant to significant movement in rates on line.

However, reinsurance is still catching up, thinks Conoscente. And because pricing is steadily increasing across all reinsurance classes, he expected it to be sustained for some time to come.

“[COVID-19] is accelerating the trend of market hardening across all lines of business and geography seen in 2019 and 2020. I think some geographies are less affected than others, with the US being the most affected. But as we saw in June and July, the hardening is not occurring only across property, which is what we saw previously, but also in casualty and other lines of business such as engineering, aviation, marine. We believe this confirms a continued trend of market firming.”

“If you compare it to prior major market events, one of the big difference here is that the industry is well capitalised. There will therefore not necessarily be a drop in the supply of reinsurance. I think it’s more recognition that the price of reinsurance was insufficient up to now for the volatility of the results; and that market corrections are required regardless of the supply.”

“This is what we saw at the June and July renewals where a number of brokers, anticipating that very few reinsurers would reduce their capacity, were expecting a renewal where that they would be able to place programs fairly easily with minor price increases. What actually happened was that many programs had to be repriced and resubmitted to the market because the proposed price was insufficient. There were just no takers. And we expect the same to happen in January where there will be a minimum price at which programmes will be placed and if the minimum price is not reached, it will be very difficult to place.”

The strongest reaction has been in property catastrophe and there has also been a significant correction within the US casualty re/insurance sector. Conoscente points to social inflation as well as uncertainty surrounding the ultimate impact from COVID-19 and the return to work of employees as key drivers in driving rates on line upwards.

He anticipates the “steady hardening” of the market to continue into 2021 across most lines of business, including Japanese typhoon and Florida wind programmes which already saw some very significant price increases in 2020.

Cedants are reacting in a number of ways, with buyers showing increased risk aversion and the need for capital relief in some cases.

“We see insurance companies buying a little bit more reinsurance. No company is currently retaining less, and several companies are increasing the amount of reinsurance they are buying. What we’ve seen so far has been a more capital-driven purchase, but we expect additional earnings driven covers to come to the market. There’s been a few attempts in 2020 to place such covers, but those have been very expensive and very difficult to place.”

COVID-19 will have a lasting impact on the industry, with a “drive towards more precision” and an acceleration of digitisation and automation as re/insurers and brokers cater to a more remote workforce. Conoscente compares it to the market’s reaction following 9/11 where significant litigation arose from the event definitions in World Trade Center policy documents.

“In many instances, where there is disagreement, it is about going back to the wording that is not precise enough and that will drive more refinement of the wording, not just as it relates to pandemics but as it relates to all exposures, including cyber, property and casualty.”

———————————————————————
Artemis Live - ILS and reinsurance video interviews and podcastView all of our Artemis Live video interviews and subscribe to our podcast.

All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.

Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.

Read previous post:
Swiss Re expects hardening at renewals, positive reinsurance growth trends

Global reinsurance giant Swiss Re is forecasting more rate hardening across all lines of business at the upcoming renewal season,...

Close