PARIMA members warned to dig in for long hard market

Risk and insurance managers in the Asia-Pacific region and worldwide need to steel themselves for a prolonged hard market, take a good look at their self-retention strategies and prepare colleagues and bosses for higher insurance costs and tighter capacity during the next two annual renewals at least, according to top insurer CEOs and brokers who took part in Parima’s Resilience Week event that took place on 10-13 November.

Dan Glaser, CEO of Marsh & McLennan, warned risk managers that they will have to work long and hard with their brokers and lean on long-term relationships with insurers to secure the coverage they need at acceptable prices. To help manage costs, risk managers will have to ask serious questions about the levels of self-retention taken, he said during the closing CEO discussion, hosted by Parima chairman Franck Baron.

“I empathise with our clients who are dealing with a tough double challenge on growth and the revenue side as this [insurance] expense is rising. But the market was beginning to tighten pre-Covid because of large levels of catastrophe losses, low interest rates and investment returns, as well as exceptional and unexpected losses such as wildfires in the US,” said Mr Glaser.

“This led to large levels of claims and, by the way, this came on the back of a long soft market. You may have been in the business for a decade and never seen prices go up – this was a one-way market… terms had to change because the actual loss levels and expected loss levels were higher than the premium levels. Do I like the speed of the ascent? No. But you have to recognise that, to have a long-term stable insurance market, this is necessary,” continued Mr Glaser.

The broker said Covid-19 basically acted as an “accelerator” for the hardening market because it will be a large loss for the insurers. It may not be the biggest catastrophic loss faced by the market but it will be a significant loss and one that will be slow in developing, thus adding to the uncertainty faced by insurers, he continued.

Mr Glaser said the pandemic itself was not a true ‘black swan’ event because it had been predicted; and of course Asia in particular has experienced previous large-scale outbreaks such as SARS, H1N1 and bird flu. What did come as shock to all was the rapidity and scale of the governmental response, with lockdowns worldwide that simply could not be insurable, he added.

So, what should the risk and insurance managers do in response to this rapidly hardening market as they prepare for renewals? “I can say you are not alone. Many of you have built good relationships with your brokers and markets. Rely on those relationships, tap into those relationships, lean on your brokers. If you are a client who every year changed brokers, and insurers regularly and often, this will be a tough market,” said Mr Glaser.

“Differentiate yourself. Recognise and be realistic about the market, which will be tough, but you can do better than the competition. Get started early on renewals and recognise what coverage you need to have not necessarily as expiring. Try not to lose sight of the bigger picture; this may go on for a while and don’t go tossing relationships out of the window through anger. Take a step back and work with your broker and markets, and look at ways to retain more risk. Many of you have transferred too much risk, particularly at the bottom end of the placements,” continued the broker.

Thomas Buberl, CEO of AXA, also stressed that the hardening market was not simply caused by Covid-19 but had been underway already and was entirely necessary. Mr Buberl said three core factors demanded a market correction. These were:

  • A significant increase in claims before Covid-19 hit and longer-term claims inflation particularly in US casualty lines
  • The rapidly changing nature of natural catastrophe losses and claims that are increasingly difficult to predict
  • The historically low interest rate environment, which demands premium increases, especially in longer-tail lines.

Mr Baron pointed out that, while in theory those risk managers who took the long-term partnership approach with insurers during the soft market should be better off during such a tough market, the reality is that many Parima members have found this not to be the case.

“What do you say to clients who have been trying to do the right things, sold the quality of their risk management protocols, invested in relationships with brokers and carriers and have decent loss records, but are saying they don’t see a difference? They feel they are being treated the same as opportunistic buyers,” he said.

Mr Buberl said long-term relationships do matter and insurers such as AXA do take good risk management practices into account, despite what many currently think.

“I fully agree with [Dan’s recommendation] to stay in long-term relationships, because the way this market is changing makes it very difficult to have meetings and the like currently. In our portfolio, we are giving a lot more attention to customers who really understand their risk and want to do more to mitigate their risk. It is fruitful to have a review of your self-retention capacity… there is very good new technology available to analyse data on risks in a company and this can be fruitful.

“When looking forward to future risks and what happens next, such as with cyber risk, a digital pandemic… we have to be more proactive in the relationship between broker, insurer and customer… we need to be more aligned in how we address these claims – this is where we all need to invest our energy,” said Mr Buberl.

Mr Glaser added that this is the age of risk and advised Parima members to focus more on risk than insurance, to help cope with the hard market conditions that he believes will be with us for at least two years. “Focus on risk more than insurance, address risk at the front end and prepare for long hard conditions. This will be tougher for at least a year or two. Differentiate yourself from the competition. Enter agreements with your loss adjusters and law firms so you are ready in the event of a large loss, and give an early warning to the c-suite,” he advised.