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2021 outlook for
insurers - glass half full or half empty?

Our viewpoint

As we sit here in the middle of an active hurricane season, it’s hard to predict what the next few weeks will bring, let alone the prospects for 2021.

At this time of year, insurers’ thoughts would normally be turning to the glitz and glamour of Monaco for the Rendez-Vous as they meet with reinsurers and brokers to discuss the upcoming renewals for 2021. Of course, this year will be different, with both the Rendez-Vous and Baden-Baden Reinsurance meetings cancelled.

How will insurers and reinsurers be assessing prospects for 2021? Will the glass be half full for insurers as they talk up prospects, but half empty for reinsurers as they reflect on increasing uncertainty, and brokers’ positions depending on who they are talking to?

Glass half full?

Insurers will point to encouraging signs in the market with widespread talking up of rates and plans for growth, including pre-emption plans for a number of Lloyd’s syndicates for 2021. With low levels of investment income generally available, there is more focus on underwriting discipline with evidence of tighter contract wordings in the market already emerging.

For the first time in a number of years, we’ve seen the withdrawal of significant capacity in certain lines from the larger insurers driving prices up. Examples of better trading conditions, where capacity has reduced and/or prices are expected to rise, include D&O in the US and Australia, US and International General Liability and Mergers & Acquisitions insurance.

Also, the extent to which collateral will be trapped in the retro market to cover loss creep from previous cats could be a significant factor in driving higher retro and therefore reinsurance and insurance rates.

Glass half empty?

Of course, Covid-19 is a key uncertainty. The primary impacts are now fairly well understood, eg on event cancellation and business interruption, notwithstanding the uncertainty around the current legislation and arbitration efforts on behalf of SME businesses.

However, the secondary impacts of the ensuing recession, whether it be “v”, “u”, “w”, “l” or some other shape, are still massively uncertain, especially with a Covid-19 second wave arguably more likely now, given the evidence emerging as lockdown restrictions are eased.

A further uncertainty is the impact of climate change on weather events such as windstorms, fires, flooding, drought and just recently a derecho (for the benefit of those who, like me, need to look this up, these are widespread and sustained straight-line windstorms, the strength of which rivals hurricanes and tornadoes, and which recently decimated crops in Iowa.). Only a minority now dispute the evidence that climate change is real and will lead to increasingly extreme weather events.

More litigation, a wider interpretation of liability, verdicts favouring plaintiffs and larger jury awards are leading to social inflation and increasing claim costs. This is particularly the case in the US. Recent examples include glyphosate, talc and opioids with possible future issues including diesel pollution, 5G and nano-technology.

Conclusion

The next few months will certainly be interesting and insurers will be keeping an eye on activity in the Atlantic Basin until the end of the official hurricane season on 30 November. On the political front, the result of the US election will have a major influence on events whoever wins and there is additional uncertainty for the UK and Europe in 2021 after the end of the transition period following Brexit.

There is a divergence of opinion as to the future hardness of market. Weak investment returns and historical adverse trends in losses are certainly contributing to increased rates – but will this be sufficient to restore profitability?

As actuaries, we are well placed to keep an eye on loss trends and to help make sure these are built into technical pricing. What the underwriter then charges is a different matter!