Navigating changing risks, reinsurance markets for US P&C

The latest guest of the Voice of Insurance podcast has just become the CEO of a business writing over $7bn in gross premium a year, which if it were a standalone company, would make her one of the most powerful female CEOs in the global insurance industry.

The insurance industry has always relied on historical variance to predict the future, but it is struggling to price many of its perils based on these foundations. This was a takeaway from Julie Wood, Chief Executive of QBE North America, who was Mark Geoghegan’s latest  guest on the Voice of Insurance podcast.

This is hitting traditional perils, such as property business, because of emerging risks associated with climate change, she emphasised, at the same time as  inflation-caused claims shifts for casualty business, as well as emerging products, such as the cyber insurance market, marked by a fast-changing threat environment, and for which there has never been a reliable back catalogue of relevant loss frequency or severity, to guide rate adequacy.

“The market is challenging. I’ve seen a lot of fluctuation on rate, depending on the line of business,” she said. “It’s hard to rely on the old historical actuarial modelling price. The insured is experiencing a lot of fluctuation around rate, as challenges and profitability and capacity are being balanced.”

The US market is challenging for property and casualty insurers to navigate, she suggested, in the context of previous rate hikes, but balanced with reinsurers’ own round of dramatic pricing increases at recent renewals.

Pricing spasms in US primary business have previously involved a few lines of business, in the wake of a disaster event, whereas the current pricing turn – powered by the hard market turn for reinsurance, dramatically increasing insurers’ costs across the board – is more whole-hearted and across most if not all classes of business.

Wood suggested that some US primary market pricing was still weak for the risks being run by insurers, namechecking directors’ and officers’ liability (D&O) as one line of concern for both frequency and severity of claims activity.

“We continue to see challenges in the market on pricing adequacy and coverage challenges, which stem from inflationary issues, whether because everyone values are different than what they were a few years ago, wage inflation, social inflation, the general propensity for claimed to be litigated has gone way up, and awards have become much, much more severe,” she said.

Claims concerns are not restricted to D&O, Wood emphasised, with cyber risks an emerging risk, subject to “tremendous fluctuation,” with rate, coverage and limits being revisited and restricted.

Mark suggested that insurers can find themselves squeezed between reinsurers’ recent rate rises, and pressure from stretched clients and their brokers, already coping with previous price increases. The answer, she responded, is that it depends.

For larger clients, balance sheets are strong enough to take risks, while for middle market firms, there is still sufficient insurance capacity and some competitive pricing, depending on the products, they’re buying, she suggested.

“It’s a very political, diplomatic answer. There are times that we’re able to justify the rate, whether that’s because of loss experience, or sheer lack of capacity, such as in a cat prone areas, there’s a lack of insurance supply. Overall, every insurance company is restricting how much capacity they’re putting out, so building a programme has become more challenging.”

Wood observed that with renewals in process, particularly for reinsurance, but with underlying loss trends and primary pricing dynamics still taking shape, prices are very much in flux, and underwriters are in a discovery process to find out where their expectations sit within the wider market.

“It’s in the last few weeks of the year that we really find out where we all are, whether we’re aligning or challenged in regards to what we think is the appropriate amount of rate there,” she said. “We agree there are trends demanding different areas of rate, whether or not that’s already been corrected. There was a fair amount of pressure on reinsurance a year ago. We’re hoping to see some of that start to flatten across the spectrum, but we need trends to flatten too – so, we’ll see.”