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Navigating the perfect storm

51.5074O N, 01278O W (River Thames, City of London)

Financial, Executive and Professional Risks (FINEX)
COVID 19 Coronavirus

By Henry Keville | November 18, 2020

How are insurers responding in these market conditions? Here we focus on how to navigate through these uncharted waters.

Once again, the behaviour of insurers is in the headlines. As with many industries, the impact of COVID-19 has not been kind to those insurers who, prior to the pandemic, were not in fighting fit health, notwithstanding the best efforts of its admiralty (including the CEO of Lloyd’s of London (Lloyd’s)1) to crack down on boozy lunches.

Wind against Tide

The low interest rate environment that followed the 2008/9 financial crisis in part led to huge inflows of capital into the global insurance market. This growth in insurer capacity, coupled with unprecedented intense M&A activity amongst insurers2 and new insurer entrants, generated a fiercely competitive global marketplace that drove premiums downwards year after year as insurers fought for market share. In 2017 most global insurers posted large losses (e.g., Lloyd’s of London – first loss in six years; Berkshire Hathaway – first underwriting loss in 15 years3) as a result of Hurricanes Harvey, Irma and Maria along with other natural catastrophes (Californian wildfires, Mexican earthquakes, to name a few). Overall, losses including uninsured losses of US$330bn, meant that 2017 was second only to 2011 (US$354bn –inflation adjusted) and was almost double the 10-year inflation-adjusted average of US$170bn4. The consequence is that the ‘tide had to turn’. This process started with Lloyd’s spending 2018 analysing and addressing underperforming and unprofitable syndicates. The outcome was that Lloyd’s challenged annual business plans of syndicates and introduced more rigour on premium income limits, ordering syndicates to undertake turnaround plans on the worst performing 10% of their business. This in turn forced some organisations to close entirely or put certain business lines such as financial and professional lines into run-off (Neon Underwriting5 and The Channel Syndicate6). The impact caused a ripple effect through the insurance market with a number of non-participating Lloyd’s insurance companies following suit and carrying out their own reviews which resulted in AXA XL also putting certain business lines into run-off7.

No marketplace controlled by trading volumes (tide) and underlying performance (wind) travels solely in one direction. Despite the insurance industry’s best endeavours, the market dislocation was laid bare and insurers had to seek for underwriting profitability. Premium increases, reduction of capacity and more underwriting scrutiny were the new orders on deck for 2019. The introduction of COVID-19 to the mix was like adding a tsunami to a brewing storm, leading insurers to batten down the hatches. One only has to read the papers to understand why: cancelled sporting events, dramatic economic down turn and the resulting opportunistic litigation that historically results (see Breach of Mandate: Past lessons for asset managers), bankruptcy, alleged breach of fiduciary duties and so on.

Uncharted waters

Consequently, insurers across the board have been hiking premiums and retentions whilst also looking to reduce their capacity across programmes. The latter has caused the most significant effect for insureds, because insurers’ appetite to take on the cannon ball holes left by insurers reducing or exiting a programme comes at almost penalising premiums. Some insurers have left their customers almost stranded by “throwing in the towel” even in circumstances where they have not paid a claim. A few insurers have decided to close their operations down; others have given notice of non-renewal to insureds which, although they think is a transparent and helpful approach, isn’t! Others are simply pricing themselves out of the market. Despite the almost unforgivable behaviour by a few insurers, there are a few who have shown their colours by being measured and fair in their approach.

There is no doubt that this storm has and will continue to inflict damage on the flotilla of London’s insurance ships. I hear onlookers asking questions of insurers, “Should insurers not be prepared for such events?”. After all it is in times of need when we call for insurers to stand up and provide a lifeboat to cover unforeseen eventualities. The fact is, an insurance contract is a reactive financial instrument and hindsight will always be the judge in determining the breadth of the contract post event. After all, insurers have a contractual obligation to follow through their side of the contract or face the law of the land. However, it’s not that simple and behaviour and emotions can also play their part in how insurers are perceived by customers and their brokers. It is the conduct of some insurers, both good and bad, that clients and brokers on their behalf will remember when insurers come knocking on the door for opportunities in calmer waters again.

How best to navigate

Purchasers of insurance need to genuinely view brokers as an extension of their risk management function. They are valuable members of crew to have on board and act solely in your interest. If you don’t like and trust your crew, change them. At Willis Towers Watsons (WTW) the scale and depth of our organisation makes for an impressive crew to take on the challenges any organisation faces. A battle hardened armada of experience and expertise is what you want!

Every mariner will tell you that you should always prepare for the worst: this is why the London Market has survived for 334 years. It has survived previous ferocious storms from which some said it would never recover. Like all storms, they pass and this one will do just that, but before it does, ensure that you have your most experienced crew to hand to navigate your business through unpredictable waters. Ensure your broker has the claims advocacy expertise they say they have and who understand your industry sector. It is in these times, when insurers may vigorously challenge the scope of coverage afforded by certain insurance policies and thus the quick payment of claims, that it is essential that you are equipped with specialist crew. Help them by understanding your obligations under the insurance too. For example, don’t blow up your ship by failing to correctly notify claims and circumstances in accordance with the terms of the insurance policy. Finally, engage your broker early in the renewal process as this will allow for better informed decisions to be made.

Views from the admiralty

Firstly, London’s insurers need to get back on deck, grasp the ropes and seize the moment! London’s insurance community, especially with the realities of Brexit and London’s standing as the global centre for insurance, needs to stand up and learn from this perfect storm. Insurers must learn to be less inward thinking and more outward thinking: this requires them to put their customers at the forefront of everything they do. Sustainability is a focus in all our lives, workplaces and the planet these days. Insurers would be wise to learn from past behaviours and have their books in sustainable health in order to meet the challenges of businesses when the next storm strikes. Individuals and firms expect insurers to be sustainable, after all it is in their hour of need, and exactly why insureds pay the premiums charged by insurers. This alone will improve their perception in the eyes of the public and clients.

To be truly valued at the board level of companies around the world, the insurance community also needs to bring innovative solutions to meet the challenges faced by an ever-changing environment. Risks reside with everything individuals and companies do, and an insurance contract is only part of the solution. Brokers need to become even more analytical in their approach, by using the data they have to start to piece together the ecosystem of risks which companies and/or industry sectors face to help them navigate the future, whether it be around environmental social governance, demographics, climate change, predicting future pandemics, etc. This is what admirals of their fleets want when steering their companies forward. To do this, the insurance community must reinvent itself from being a reactive community focused on transferring risk via insurance contracts to being visionaries. At Willis Towers Watson, we are well under way on this voyage to having a seat at the captain’s table.

Footnotes

1 https://www.standard.co.uk/business/business-interview-lloyds-of-london-boss-who-s-declared-war-on-boozy-old-guard-of-insurance-a4199161.html

2 M&A activity in the sector; Chubb/Ace, XL/Catlin and then XLCatlin/Axa, Hartford/Navigators, Arch/Barbican, plus acquisition of Lloyd’s entities by Japanese insurers: Sompo/Endurance, TokioMarine/Kiln.

3 https://insuranceinsider.com/articles/112649/berkshire-has-first-annual-underwriting-loss-in-15-years

4 https://www.munichre.com/topics-online/en/climate-change-and-natural-disasters/natural-disasters/2017-year-in-figures.html

5 https://www.insuranceage.co.uk/insurer/4379351/neon-underwriting-placed-into-run-off

6 https://www.spglobal.com/marketintelligence/en/newsinsights/trending
/xhvsolh3_nqslmxwnsg4yw2

7 https://insuranceinsider.com/articles/136200/axa-xl-places-london-exec-liabs-and-fi-book-into-run-off

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