Complex risks and the E&S boom

Adrian Cox, CEO of Beazley, featured on a recent episode of the Voice of Insurance podcast, and discussed the re/insurer’s new US E&S carrier, amid a risk in complex risks.

London market re/insurer Beazley has undergone a major restructure in the past year, with the formation of a new US excess and surplus lines (E&S) insurance company, and Adrian Cox, the chief executive of Beazley, was a recent guest of the Voice of Insurance podcast.

US E&S business has enjoyed a “magnificent boom” in recent years, primarily due to the market hardening, Mark Geoghegan noted to Cox, who said he expects the boom to continue for years to come.

“I think there are two reasons for that fundamentally,” he said. One is the traditional reason, and then the other I think is a little bit more structural. When underwriting needs to change quickly for products, it’s very difficult to do that in the admitted market.”

The US system requires changes to gain regulatory approvals, which is a problem for risks that can be far from simple – and this is where Cox spies a trend.

“Fundamentally, I think what’s happening is that certain sorts of risks are getting more complex, and they’re better dealt with in the E&S market than they are in the [US] domestic market, because you have more freedom to adjust to that complexity as it emerges,” he said.

A buyer and seller of reinsurance, Beazley’s balance sheet has grown steadily in recent years, creating efficiency gains from setting up a new E&S carrier, according to Cox. This will entail a shifting of US risks previously underwritten on Lloyd’s paper to its new Connecticut-based entity. If clients still want to go through Lloyd’s, Beazley keeps its existing channels to do this through London, Miami and Singapore.

“What we will be doing over the next three to five years is shifting the business that was on the MGA onto our own E&S paper,” he said. “It has no impact at all on the way that we’re doing business or on where we’ll be doing business, on our distribution strategy, All that’s happening is we’re shifting business from an MGA to our own paper.

“Our commitment to the London market and wholesale markets here is completely unchanged. In fact, in many ways, it simplifies the story. Because if you want Beazley on Lloyd’s paper, you come to the wholesale markets, if you want Beasley on Beazley’s paper, you access us in the US. It actually clarifies an ambiguity that we’ve had for a while,” he said.

Complexity of risks driving business from the US domestic market into E&S is across the property and casualty spectrum, Cox suggested. “Property…is more complicated; if it’s cat exposed, it’s not a static risk anymore. It’s more complicated. Casualty is also more complicated; social inflation has driven a variety of things that you need to think about.”

E&S is better placed to respond to these risks in flux, he emphasised.

“Those are better dealt with in an E&S market where carriers can react more quickly, and be more innovative and entrepreneurial in how they structure and sell insurance,” he said. “While that complexity continues to manifest and to increase, I think the E&S market will continue to grow. I don’t see that slowing down in 2024.”

Dynamic underwriting

Uncertainty over directors’ and officers’ liability (D&O) pricing was a “big talking point” at Monte Carlo, Mark noted. Although casualty pricing has not moved to the degree some reinsurers sought at 1/1, reinsurers have fears about long-tail D&O exposures relative to reserving adequacy for previous years of business that are already deteriorating.

Mark also questioned the dynamism of the re/insurance market, with carriers underwriting set budgeted amounts to underwrite, running into hundreds of millions of dollars, without much change in their allocations despite shifts in prices.

Cox agreed, but suggested the market had evolved since the casualty/liability scandal of the 1990s, when underwriters were complacently underwriting for cashflow, risks which caught up with them.

“Insurance is an industry where the cost of what you’re selling is unknown when you sell it…We estimate it, we use our judgment to assess it, and then we find out how right or wrong we are, depending on the class of business, 10 or 20 years later,” he said.

“The other feature of insurance is that is riddled with inertia. Things don’t change until the proof is in. And because of the lag between when you’ve priced you’re good and you know what the exact cost is, that’s why the prices go up and down. That’s exactly what you’re seeing here,” he added.

Underwriters today do have much better data and analytical tools to take better decisions, such as for selecting and pricing risks, Cox emphasised, making debacles such as the 1990s liability crisis less likely and less severe.

“What is better than 20-30 years ago is the quality of analytics and data that lies behind that judgment,” he said. “Which is why I don’t think it’ll get anywhere near as bad as it did last time, because people learn more quickly. You’ve still got that lag between when you’ve priced you’re good and when you know what it ultimately costs. And that’s the ultimate reason why there is that cyclicality.”

For casualty business, much data is still lacking, such as Covid shutting down US courts for a year, just before social inflation has increased compensation values, adding to uncertainty. “There’s a lot of noise in the data, and there are lots of people who write it – that’s what makes a market,” Cox added.