The impact of the COVID-19 pandemic has been felt across the insurance industry and has altered perceptions of risk throughout the sector. Now, global risk specialist Guy Carpenter & Company, a risk and reinsurance specialist that is part of Marsh & McLennan Companies, has delved deeper into the issue as part of the Changing Nature of Risk panel.
Led by David Priebe, the chairman of Guy Carpenter, the panel also involved Lara Mowery, global head of distribution; Christopher Ross, managing director; North America Cyber Center of Excellence leader Erica Davis; Jessica Turner, senior vice president of catastrophe advisory; and president of GC Securities, Shiv Kumar.
“Fortunately, the sector has a strong track record of responding to periods of change,” said Priebe in his opening address. “Putting capital to work to create new coverages and meet evolving demands will be crucial in securing the reinsurance sector’s long-term relevance. It is important to remember that transformative events have led to product innovation many times before. We expect a similar playbook this time round. Reinsurance will be crucial in supporting insurers in this endeavor, by supporting capital positions and reducing volatility.”
Looking at the property reinsurance sector, Mowery noted that current levels of economic uncertainty were prompting a cautiousness with the deployment of capacity.
“As we look ahead to the January 01, 2021 renewals,” she said, “there is an expectation that renewals will be more complicated and that negotiations will take longer than the norm. One aspect of this that contributes to the duration of the process is the increased differentiation we have seen in renewal outcomes. We, as an industry, have continued to become more sophisticated in this respect.”
Other focus areas included the casualty sector, with Ross highlighting heightened claims frequency and severity over recent years, prompting corrective actions from carriers. As for the current market, he said: “We expect pricing to continue to increase and with limit and attachment point strategies currently in place, further hardening in the overall casualty market will take place. To adjust to these conditions, finding the proper capital management strategy is critical. The market will need to find the balance between allocating capital to potential past losses, versus deploying it now to support business growth in a hard market.”
On cyber risk, Davis noted that the industry’s growth had “tapered off.”
“This flattening market trend is directly at odds with a heightened threat environment and the increased valuation of intangible assets,” she said. “And it is creating a widening protection gap for businesses that will only expand.”
Meanwhile, on climate change, Turner noted that insurers needed to apply greater weighting in their portfolio considerations.
“We can no longer be backward looking when considering cat risk,” she said. “There will need to be greater consideration around risk selection and aggregation, for example, in regions where wildfire is becoming an increasingly prominent peril. Pricing of policies should also be examined closely. An individual firm’s risk appetite and exposure will dictate decisions around tolerance for volatility and capital requirements in a changing climate.”
Finally, Kumar looked at capital market developments and referred to strong momentum in the catastrophe bond market.
“A meaningful part of these has come in the form of equity,” he said. “This capital has come into various subsectors ranging from P&C and life to mortgage and title insurance.
“We believe strongly that alternative capital will continue to grow over the long term. The reinsurance sector provides diversification and yield, and both are in great demand by pension and sovereign wealth funds. We are already seeing the formation of new funds by highly credible management teams.”