A market like no other, Monte Carlo Roundtable highlights

Welcoming participants to the private dining room of Pavyllon by Yannick Alleno on Monday 12 September, Gracita Aoa-De Gracia, Assistant Vice President, Insurance and Reinsurance at DIFC, said that it was exhilarating to be back.

The discussion began by focusing on the many near-term challenges facing brokers, cedants and underwriters, before gazing into the future and considering some of the opportunities and potential solutions that would maintain the industry's relevance.

Against the backdrop of an increasingly volatile risk landscape, it was inevitable that reinsurance prices would continue to harden going forward. The discussion occurred ahead of Hurricane Ian, but it is certain that this catastrophe will further strengthen all the trends that were noted at the time. "Underlying performance has not been meeting cost of capital for the last five to six years and we need to refocus on profitability to ensure that we get the right price for cover," said one participant.

Attendees acknowledged that these were market conditions unlike any other and that all parts of the world were being impacted – to a greater and lesser extent – by a similar set of challenges. Prolonged inflation and a global recession would impact industry players in a number of ways, not least by increasing the value of exposures and resulting in more costly claims.

But there is currently a lag, and it has yet to feed through from the underlying business, which could mean the effects of inflation may not be priced into this upcoming renewal. "We are going to see a spiralling impact as that inflationary effect builds through primary market and into reinsurance," said one attendee. "We are easily going to see double digit rate increases coming through on core primary products, on top of everything else."

For the first time in a long time, brokers and reinsurers were in broad agreement on the direction of the market. The continuing fallout from the global pandemic and country lockdowns, the war in Ukraine, inflation, losses from natural catastrophes and declining reinsurance capital, are some of the factors that will see substantial hardening of rates and tightening of terms and conditions on 1 January 2023

"In Middle East and North Africa (MENA), we expect the insurers to be the last ones to increase their rates, but this is inevitable," said one attendee. "I don't think there is a solution – we are having ongoing discussions and for every client, every case, we are taking a different view. It's going to be challenging and we need to think about solutions every day."

There was a plea from brokers for an orderly renewal and a feeling that there have already been enough shocks. "There is an awareness in the customer base and expectations have been managed well generally," said one. "The expectation is that we are going to go through a significant rating event as we go through 1/1, although there are regional disparities. We need to do this in an orderly and sustainable way, with a measured response that values long-term relationships."

Are we in a hard market?

Whether or not we are currently seeing a truly 'hard market', where cedants are struggling to fulfil their capacity needs, remains to be seen. This had been a factor of the mid-year renewals but was a particularity to the Florida market, thought one broker. And while capacity is proving an issue in distressed pockets – including retrocession and cyber – elsewhere it is available at the right pricing and terms.

"We've not seen any accounts or treaties that have not been placed," said one attendee. "However, some have come back for a second round of pricing. There are a lot of different pockets – definitely property cat and on the retro side we're seeing difficulties in the placements – but that's not the case across most other lines where capacity is still there or where there's more coming in."

In previous hardening markets, such as post Hurricane Katrina in 2005, there had been little impact on reinsurance rates within the MENA market, acknowledged the roundtable participants. One reason is because the region is traditionally considered a non-catastrophe exposed market, certainly from a peak peril point of view, and the other is that plentiful capacity, with frequent new entrants, has not incentivised underwriting discipline.

As a result, rate improvements in the region have not needed to keep pace with the wider reinsurance industry, thought participants. MENA is still considered to be a diversification play for some global reinsurance companies, which are willing to deploy capacity as it has a favourable impact on their capital requirements under Solvency II's ORSA, for instance.

However, this is beginning to change. While the treaty market has remained somewhat soft, the facultative side of the market has been hardening over the last three years – particularly on larger accounts.

One reinsurance executive said there had been a reappraisal of market practices in the underlying market, in particular the lack of risk retention. This is beginning to change with a shift away from surplus treaties to quota shares, bringing a 'greater alignment of interest'.

"We are anticipating a hard market and people are asking the insurance companies to be reasonable," said one reinsurance executive. "Brokers have to educate the market and their clients and make them aware of what's happening and emphasise the importance of doing business with A-rated companies. I have colleagues that have never experienced a hard market before and they hesitate to explain to the client what is happening. All parties have to participate in that process."

But there is a delicate balance to be struck, thought one intermediary. "We have been advising clients to prepare for an increase for a long time, but it hasn't materialised. We don't want to be the broker that says the market is hardening and then it doesn't."

Who pays for ESG?

With an increasing frequency of extreme weather events, including cyclones in Oman and flash floods around the GCC, there is growing awareness of the impact of climate change on the region and how the changing exposures will need to be better priced. There is also the need for collaboration between public and private sector, thought an underwriter, with a role for catastrophe risk pools, for instance.

"In each of the last six years you had a meaningful cat event, relative to the size of the market and totally killing the profitability of that market (with most of it all going to the reinsurer)," he said. "One issue is that people get used to subsidies when what they should be doing is creating market schemes or cat pools. There are schemes already in place in Morocco, Algeria and Turkey and this is something that is good for society and will help prepare for more extreme weather in the future."

Macro trends across the MENA region, such as urbanisation, infrastructure and higher concentrations of population are exacerbating the region's exposures to catastrophe loss. "Some countries are not really preparing themselves properly," said the underwriter. "There is not adequate drainage commensurate with the evolution of their cities so every time it rains, they have a flood, and it becomes a big event."

With its important role in taking on natural catastrophe risk, the industry has already made important strides when it comes to managing, pricing and mitigating the impact of physical climate risks, thought participants. And on the asset side, there has been a pronounced shift towards 'greener' investments.

The need for action around the climate transition is becoming more apparent, particularly against the backdrop of a looming energy crisis in Europe. The industry must nevertheless tread a careful balance where environmental, social and corporate governance (ESG) responsibilities are concerned. There is ultimately the question of who pays for ESG and whether it has the full backing of shareholders at a time when there are so many near term concerns.

For real change to happen, ESG has to be driven by regulation, thought the roundtable attendees. "Societal pressures are very much in favour of ESG positives but the only way it can ultimately succeed is to regulate it," said one attendee. "The insurance industry is capable of coping with the 'E' aspect, but other societal issues are a challenge – the cost is seen as too great a hit to the ROE of those companies."

Behind on innovation?

Historically, the insurance and reinsurance industry has something of a reputation for being a laggard when it comes to transformation, admitted the roundtable participants. But, this is now changing. Of the 600 FinTech and innovation companies that are currently located within DIFC, only around 20 or so have an insurance remit, observed Aoa-de Gracia, highlighting the opportunity for the industry to embrace innovation more.

"The insurance industry is behind on innovation and people from other parts of the financial services realise it's up for disruption," added another participant. "From MENA, the market simply needs to adopt products and distribution channels that are already out there and available – that should make it a lot easier."

Quite often, insurtech has focused on taking cost out of the distribution process and not on actually creating something new, a couple of speakers noted. While cost efficiencies are important, true innovation is about coming up with new solutions and generating useful insights from the industry's rich datasets.

Solutions for intangible assets present a significant and largely untapped opportunity – particularly where cyber is concerned, they thought. However, concerns around the systemic nature of the risk have caused the market to stall in its growth.

"Cyber has had its ups and downs," said a broker. "It's evident that [cyber underwriters] did not fully comprehend the exposures they took on. It's about getting a full understanding, and until that happens, there’s going to be a huge protection gap as capacity has been significantly reduced. Among specialist underwriters, there's a realisation that they've taken on too much exposure."

For cyber insurance to pick up again, underwriters and brokers need to better understand the risks being assumed and insureds must do their part to strengthen cyber security. Until such a time, there will be more emphasis on risk mitigation and advice than indemnification, thought one broker. He pointed out that it was a solution reminiscent of the kidnap and ransom market.

The challenge with cyber is that it is a constantly evolving risk and as such, extremely challenging to model and price. It is also an exposure that does not respect borders, with concern that many businesses could get caught in the crossfire of state-sponsored attacks, with a significant accumulation impact on reinsurers. The lack of transparency around attacks compounds these issues.

"The opportunity is on the intangible side and cyber is one of the most slippery elements of that," thought one participant. "The industry has taken great strides but there is still a long way to go. The industry will find a solution because it's too big a risk and opportunity not to find a solution for."

While they bring 'pain and cost', litigation offers an opportunity to test new wordings in cyber policies to see how exclusions will work in practice, for instance. With greater levels of comfort and clarity, more capacity should be forthcoming from both insurers and reinsurers. One participant noted that there were dedicated cyber start-ups poised to enter the market, suggesting the constraints may be starting to ease.

Remaining relevant

There is no doubt that the reinsurance industry will remain relevant as it looks towards the future, but it will invariably evolve and change, since, as one participant thought, it is at the very essence of everything we do as a society.

"There's literally nothing our industry doesn't touch," he said. "It's the DNA of capitalism, to quote Joe Plumeri, [ex Willis boss]. Our industry is embedded in the core economic fabric, and I can't see how that could change. We have got a duty to enable and aid where there are gaps like cyber, and we need to be solutions-oriented," he added.

Disruption remains an ever-present possibility but should not necessarily be considered a threat. Through disruption, the industry will simply emerge in a different form, thought an attendee. "We'll just adapt to that and become something different, rather than seeing it as a threat we need to consider how it enables us to more efficiently deploy capital to risk."