Insurance market changes drive risk syndication
The switch back to a shared, layered market is a return to previous conditions, but this time it is different.
Throughout 2021 and long into the foreseeable future, we will all exist in an insurance market which is increasingly shared and layered. As insurance prices continue to rise across the board, buyers will naturally focus on the ultimate percentage increase in the cost of their renewal. However, that aggregated figure masks big changes in the subscription-market’s approach to insurance pricing, when multiple insurers participate together to accumulate the underwriting capital necessary to protect a specific risk. Today, each risk carrier charges their own rate for their portion of the risk.
The number of markets needed to complete large risks has already increased, reversing an earlier trend towards concentration. Over recent years, major insurers have marched towards scale. The most obvious evidence of this drive for size has been mega-mergers between carriers to create gargantuan balance sheets — think of Chubb’s combination with Ace, and Axa’s acquisition of XL following the latter’s purchase of Catlin (to name only two of many examples).
This upsizing through acquisition, in turn, brought about a reduction in the number of carriers participating on each risk transfer program. Sometimes a single insurer was willing to underwrite entire risks, deploying lines of $100 million or more to guarantee their exclusivity. Those markets often wrote their 100% lines at prices lower than open-market rates, which added fuel to the risk concentration fire.
Not all risks were underwritten by a lone insurer, of course. More commonly, as enlarged carriers competed to write ever-bigger lines to feed their capital through a smaller number of transactions, programs evolved to be underwritten by fewer, bigger players — two or three — who put down larger limits on shorter slips. This was sometimes referred to as a ‘flight to quality,’ although those larger carriers were not necessarily more financially secure or otherwise differentiated from smaller competitors.
Times have changed dramatically in recent months. Battered after three years of market-wide losses, insurers have opted to ‘de-risk,’ which they can achieve in part by assuming a greater number of smaller risks. As a direct result, carriers that once deployed $50 million with the stroke of a pen may now wish to risk only $5 million. As has been widely reported, many specialty carriers have withdrawn from specific risk classes altogether, according to their loss experience. De-risking has driven greater risk sharing and increased layering of coverage, an approach which won’t go away any time soon.
‘A shared, layered market’
The switch back to a shared, layered market is a return to previous conditions, but this time it is different. In the past, the last insurer to subscribe, the one which completed the coverage, set the price charged by all the participants, but the principle of adopting the best terms the entire market has to offer has fallen away. Now we see a range of prices, such that a program with 25 subscribers could have 25 prices. The client sees and pays the weighted average. Some followers might ask the broker to reveal the price set by the leader, to ensure they do not undercut it but often following underwriters do not even see the leader’s price.
The retreat from large lines written cheaply also means that the risk premiums the shared and layered open market demands are often multiples higher than clients had paid to the single carrier. Some of the increase is the result of the market’s general hardening, but another factor is the reduced risk familiarity that multiple carriers will proclaim relative to a small group of markets or individual underwriter with a 100% share. Confidence in the client’s risk management and risk engineering performance is necessarily eroded through a broader subscription approach.
Fragmentation of policy wordings is another side-effect of the extension of subscriptions. Everybody aims for consistency of cover and a single wording, but larger or more difficult placements will no doubt see differentials. For example, around mid-year 2020 some leading property carriers began to exclude cover for strike, riot & civil commotion, particularly for clients in sectors such as retail and auto dealerships. One solution is to find coverage in the specialist market. As the climate of risk aversion spreads among insures, will see more such carve-outs, requiring even more insurers to be engaged to complete a program.
From a practical perspective, line-shrinking, carve-outs, and the resulting multiplication of subscribers creates the need for a lot more risk marketing on the part of brokers. It may also complicate the claims process, especially with non-concurrent policy wordings. Clients may be required to work with multiple loss adjusters, and possibly directly with some Bermuda insurers. Similarly, some of the services that may have been provided by a lead insurer may have to be unbundled and secured separately. Broking skill is more important than ever.
Insurance buyers that have built and maintained multiple carrier relationships over the years are much more likely to be able to fall back on the wider market. Others may find their previous retreat to one, two, or three insurers makes a successful return to multiple underwriters somewhat more difficult. Buyers and producing brokers seeking a billion of limit made up of $20 million lines need the service of a wholesaler with the skills to construct such a program and the global market access to get it completed. Brokers’ relationships are more important than ever.
These negative impacts are offset, in part at least, by one big advantage: the broad spreading of risks. This has always been argued in favor of the subscription market, since it creates stability: with dozens of insurers behind them, losing one or two will not collapse an entire risk transfer program. Clients that build broad-based relationships across the U.S., Bermuda, London, European, and Asian insurance markets will enjoy a resilient risk transfer program. That of course demands a broker with real access to distribution through wholesale brokers.
Nothing is forever (in insurance, at least). In time the market will drift back to where it was. We can only guess how long before the pendulum swings, and how fast will it swing when it does. In the interim, we should be prepared to adjust to the emerging shared, layered market, and lean on strong relationships.
John Plummer is chairman, specialty at Ed Broking. The opinions expressed here are the author’s own.
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