Asia’s hardening market comes at delicate timeMay 29 2020 by Nick Ferguson
It wouldn’t take a worst-case scenario for 2020 to be the ugliest year for the P&C market for a long time.
More than 10 weeks since the WHO declared a pandemic, much still remains uncertain. It’s difficult to make reliable forecasts given the potential scale of business interruption losses or the likelihood of a second wave of infections, but the data is already painting a bleak picture.
Marsh’s index of commercial insurance prices rose 14% in the first quarter and there is probably much worse to come – especially from an insured’s perspective.
“It’s the worst quarter since we started producing this index in 2012 and I think there’s a real concern that what we’ve seen in quarter one is only the start of a very difficult trading environment in 2020 globally and in Asia,” says Adam Russell, placement leader for Marsh in Asia. “Unfortunately, it’s going to get a lot more difficult throughout 2020.”
Pricing has risen less aggressively across Asia as a whole, but even here there has been four consecutive quarters of price increases.
There are also pricing disparities across the region. Insurance buyers in Korea and China continue to benefit from an abundance of capacity driving pricing to favourable levels, whereas the more regional markets of Hong Kong and Singapore reflect the global trend of hardening prices.
Different client segments are also affected to varying degrees, says Russell. Very large accounts that are seeking significant natural catastrophe limits or have capacity requirements outside their domestic market are seeing the greatest increases in pricing and the most restrictive coverage.
“In the case of Covid-19, we are talking about a global systemic event and there are no reliable estimates yet to what the final outcome might be.” Robert Mazzuoli, Fitch
For these accounts, rates are being driven higher by the global pricing trend as international carriers increasingly take a unified approach to underwriting. At the same time, reinsurers’ underwriting losses across multiple lines are also leading to greater underwriting scrutiny.
And this was all evident even before Covid-19.
Now, the pandemic is weighing on both the asset and liability side of (re)insurers’ balance sheets. For example, Lloyd’s estimates that the investment loss from the pandemic could amount to as much as US$96 billion — almost as much as the claims loss.
The result could be the hardest market since the triple-whammy of Hurricanes Katrina, Wilma and Rita in 2005 — and very possibly much worse than that.
“That was basically the last point in time where we really saw a hard market, but that was a more well-defined event and it was relatively clear who had to pay what,” says Robert Mazzuoli, an insurance analyst at Fitch. “It was tough because it was a very large claim, but it was not complicated to understand, whereas in the case of Covid-19, we are talking about a global systemic event and there are no reliable estimates yet to what the final outcome might be.”
Most analysts are still saying that the pandemic will only hurt earnings, rather than threatening carriers’ or reinsurers’ solvency.
Insurance buyers should expect risk-adjusted prices to continue to rise throughout this year’s renewals and into January, says Mazzuoli.
Most analysts are still saying that the pandemic will only hurt earnings, rather than threatening carriers’ or reinsurers’ solvency. But it is not difficult to imagine a scenario where an active hurricane season adds to the bill from Covid-19 and affects capital.
And forecasters are apparently in agreement that the 2020 hurricane season, which starts on June 1, will be above average.
“Huricanes and Covid-19 are not a good mix,” said Karen Clark & Company in a recent research paper.
Hampered preparation and mitigation activities, more complicated business interruption claims and increased contractor costs all threaten to increase losses in the event of a major hurricane making landfall — and Colorado State University puts the odds of that happening at 69%.
However, assuming the industry can weather the storm, so to speak, the hard market conditions may be a positive in the medium term if prices rise to a point where reinsurers can get back to earning their cost of capital.
“Yes, 2020 will be a very ugly year, but if we try to look through to 2021 and 2022, maybe some reinsurers will have a book that is far more profitable than we’ve seen for many years,” says Mazzuoli.
Here is hoping.
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