On the back of several years of unsatisfactory returns and the added challenges of COVID-19, Willis Re’s James Vickers has said that the reinsurance market finds itself “in a state of flux.”
Vickers, who is Chair of Willis Re International, recently spoke to Reinsurance News about the state of the reinsurance industry, alongside several other Willis Re execs.
After failing to meet its cost of capital in recent years, he noted that the market has entered into a hardening phase generally, although many “mini-cycles” still exist within this broader trend.
Reinsurers have also taken serious remedial action in some areas, Vickers added, but this has not been a blanket movement and action has been avoided in areas that have not needed it.
“On the whole, however, they simply need to earn a better underwriting margin to provide an acceptable return on capital relative to the volatility they assume,” he told Reinsurance News.
“Reinsurance is in a state of flux. Reinsurers had lagged behind other areas of the market in remediation of their prices and terms and conditions, particularly compared to US excess and surplus lines, and in some speciality business,” Vickers went on.
“Current improvements might not match the increases effected by primary carriers and retro markets, but at least they are now responding, driven by historical low rates, the need to earn a reasonable return on capital, and in some lines, the lingering need for reserve strengthening.”
The need for remedial improvements was clearly heightened by the impacts of the COVID-19 pandemic this year, which hurt the re/insurance industry on both its liability and investment side earlier in the year.
And this impact has only been compounded further by the ongoing uncertainty that has arisen on the underwriting side of COVID-19.
“At this point it is far from clear how big the losses will be, and how much of the total will fall on reinsurers,” Vickers acknowledged. “More time is needed for that to work its way through, especially in casualty lines.”
But Andrew Newman, President and Global Head of Casualty of Willis Re, added that the industry has handled itself well over the course of the crisis and looks ready to absorb any further losses that may emerge from the pandemic.
“With the caveat that there are relevant regional and line of business nuances, the global reinsurance market has demonstrated structural resilience, and remains both rational and inherently stable,” he told Reinsurance News.
“We expect it will remain so, notwithstanding volatility in the broader financial-market outlook indicating limited supply-side impact.
This resilience has helped by an increase in demand for reinsurance protection, Newman noted, as primary carriers have been looking to reduce their appetite after performing poorly in previous years and then seeing a collapse in investment returns.
“Not unsurprisingly, certain market segments are adjusting risk pricing to reflect adverse results, changes in loss trends, and the impact of lower investment rates – and in some segments, all three,” Newman continued.
In some segments, such as US Casualty classes, Willis Re has observed significant increases in nominal terms.
However, the broker feels that even those pricing changes reflect technical requirements in the primary market, rather than any reinsurance supply/demand imbalance.
Also speaking to Reinsurance News was Paddy Jago, Global Chair of Willis Re, who agreed with the comments made by his colleagues but also remarked on how the abundance of capital in the market is adding a new dynamic to pricing and remedial actions.
“The market is a little confused, but not chaotic; determined and mostly resolute. It is firm, but flexible for the right client. Above all, it is differentiating,” said Jago.
“We are not in a genuine hard market where cover cannot be bought, and coverage holes cannot be filled. We might never go back to that situation, given the amount of capital available globally.”