Adjusting to hard market conditions

The insurance industry is currently in a hard market – an unchartered territory for many people. Exactly how long these conditions will prevail is difficult to tell, particularly considering the COVID-19 pandemic which is only exacerbating the situation.

But to assess the present properly, it is important to consider first how we got here. We saw initial significant signs of change in the London Wholesale market towards the end of 2018. This accelerated into 2019 as markets responded to deteriorating results. The consequent action taken by Lloyd’s led to a reduction of capacity in the marketplace as the business planning process tightened and syndicates started to withdraw from certain lines of business.

During 2020 we have also seen market dislocation in the retail space with the pace of change accelerating through the year compounded by pandemic and natural catastrophe losses, a low interest rate environment and a firming reinsurance market. 

To add some perspective, we have just seen an especially active quarter for catastrophes with more than 40 separate events – including Atlantic hurricanes and US wildfires – set to cost the global insurance industry up to US$40billion. The 2020 Atlantic hurricane season has produced a record number of named storms – 28 already by early November.

If you look at the decade and a half since we were last in a hard market, we have seen successive years of price reduction and broadening terms and conditions.

You cannot defy gravity. You cannot cut rate and broaden coverage every year and expect to continue to make money forever. Rising loss costs eventually catch up with you.

True underwriting companies are prepared to exercise underwriting discipline, shed revenue where necessary and, in doing so, protect their balance sheets.

During this period, we concluded that conditions weren’t conducive for growth and consequently reduced our wholesale business. No one likes to shrink but if the market prevents you from getting paid for taking risk it’s the right thing to do, however painful.

Contrary to our position, the London Market expanded. Absent of catastrophe losses this approach was at best marginal but, when such losses did hit, it was quickly evident the underlying business was losing money.

As a result of the discipline Chubb exercised, we have been able to step up to the plate and, during the last 18 months, take more risk. We are doing that because fundamentally we are now getting paid for it. Throughout the soft market our appetite has been consistent but our ability to deploy capacity was hampered by underwriting conditions. That has now changed and we are deploying more capacity as the market improves.

Having reached that inflection point, we are expanding our London Market Wholesale business. Areas such as property, marine, sectors of professional indemnity and aviation have all been able to grow again. At one stage we had the largest aviation franchise in Lloyd’s but we shrank that back to around a quarter of what it was over a 12 to 15 year period. We are now in a position where we can start growing again and have strengthened our team accordingly.

Similarly, we are also growing in our retail business throughout Europe especially in the upper middle market and major account segments.

We are in an interesting market and I see these favourable trading conditions continuing for some time. “Favourable”, in this context, means getting a fair risk-adjusted return on the capital that we deploy and no more than that. And this is the basis upon which we are going after business – both wholesale and retail.

Between the asset and liability side of the balance sheet, the pandemic is likely to amount to the largest event the industry has ever faced. However, the fundamental changes we see hardening the market were years in the making: ill-disciplined underwriting by the market and a lack of attention to detail led to a significant deterioration of results which eventually caught up with some carriers.

Flight to quality

We see some signs of a flight to quality taking place, gravitating towards companies who have managed their business well through the cycle and policed their balance sheet.

The flight to quality happens because of the perceived stability of one market versus another. You want to be seen as a long-term trading partner with a strong balance sheet but also one providing solutions consistently over time. This is a noble concept, but unfortunately cyclical market dynamics can disrupt that objective. However, as we trade through the next few years it is worth considering how differentiated terms for individual carriers might play a part in facilitating longer term continuity.

What should brokers and their clients expect of a carrier in the current hard market?

From our point of view, it is important to remind brokers we’re here to help them and their clients. Whether they are dealing with small enterprises, middle market companies or large corporations, they need the support of carriers to provide solutions.

We have an obligation to ensure that brokers have a clear understanding of our appetite, our service proposition and our financial strength to meet their client’s needs.

Brokers need carriers who can lead - a company they can go to in a market where everyone is running for the hills and say “I need you to put a price on this” and be creative in terms of structuring coverage.

Many clients are experiencing financial challenges due to the current economic environment, but they still need protection, perhaps now more than ever. We see risk managers and insurance buyers that are open to different ways of thinking about structuring their programmes – it could be higher deductibles, broader use of captives and more tailored coverage - while still preserving the fundamental protection they need.

Leading underwriting companies distinguish themselves in this respect and can provide these solutions, where others, who merely supply capacity are often forced to make blunt decisions.

Change management

Of course, the fact that we haven’t seen a market like this for 15 years, means there is a community of brokers and underwriters for whom this is a completely novel environment. We think it is important to provide training and education on the changing conditions and this is something we have done a lot both prior to and during lockdown.

Even those of us who have previous experience of a hard market recognise we all have plenty to learn from the current situation. This is why continuing to demonstrate leadership is so important.

David Furby is Senior Vice President, Chubb Group and Regional President, Chubb European Group