The traditional pendulum swing of hard and soft markets are a thing of the past, says one industry expert, and that can be attributed to a quantum leap in available data.
“It was probably seven to 10 years ago now since we had some significant rate,” says Rohan Dixon, chief brokering officer at
Aon Risk Services. “The ultimate question is how long is it going to continue? I think the market has changed. I don’t think we are going to see the hard and soft markets anymore. Not until there is a significant change in the financial and economic conditions – and even then I’m not certain that they will come back.”
Citing the data from the recent Aon Insurance Market Report which predicts a continued soft market cycle to extend through 2014, Dixon told Insurance Business that the extended soft market isn’t just particular to Canada.
“It isn’t just a Canadian phenomenon,” he says, “if we talk globally, historically there would be a CAT event – like a 9/11 or a Katrina – that would drive some losses for the insurers and drive some losses into the reinsurance market. The market would respond with a couple of years of hardening to recoup those losses.
“What we are seeing post-Sandy – and even to an extent New Zealand and Thailand – is that it isn’t happening,” says Dixon. “We’ve seen a small blip, where we’ve had some rate come through, but nothing like what we’ve experienced in the past.”
Dixon gives credit to both the insurers and the reinsurers for the current soft market, with a big tip of the hat going to the increased access to data. (continued.)
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“The access to data today is phenomenal,” he says, “and the investments that we’re all making in analyzing the data, is changing the way that we underwrite and the way that we manage risk.”
With data, companies now are able to underwrite risk that is very location-specific, says Dixon, and are able to minimize certain exposures and aggregations that they weren’t in the past.
“Data is one. The second contributing factor is there is such an influx of capital into the marketplace due to the economic conditions globally,” he says, “and new products coming into the marketplace: CAT bonds, etc., that are fuelling a greater amount of capacity, particularly in the insurance space, which has a knock-on effect to the insurers.”
In the past, when insurers were able to rely on their investment results, they were less concerned about the data.
“An insurer could be running at a plus 100 COR (combined operating ratio) and still be taking home a healthy profit,” he says. “Where we are at the moment in the market, it is hard for those insurers to do that.”
Now insurers have to be running at a COR of 90 to 95, says Dixon, in order to deliver an underwriting result; and that has driven a lot of the changes in the way that the underwriting and the data they require, and the quality of the underwriting they require on those risks, he adds.
“The insurance companies have been pretty good at driving new actuarial models – it’s the risk managers, particularly on the complex risk, that have had to change over a very quick period of time,” he says, “to properly understand their property locations, and understanding their own exposures on a aggregation point of view.”
