A new phase in the cycle begins – Howden Re’s Flandro

The reinsurance broker will present a global report at Monte Carlo aiming to “step out of the narrative of the past two years” of the market turn and current pricing picture, to instead ask what may lie around the corner for the industry.

His first point begins with equity markets that were spooked in August due to weaker than expected US employment data.

“What’s next, is, given what we’ve been seeing in the stock market, that there might be implications for lines of business, led by workers’ compensation, as US payroll numbers continue to deteriorate, and because workers’ comp has been the biggest source of reserve redundancies,” he said.

These have helped balance deficiencies elsewhere, something Flandro (pictured) thinks is likely to change. “It all fits together,” he says. Digging into this issue, he expects wide-reaching implications for reinsurers.

“One of them is that bonds have reasserted themselves as a source of ballast. As we’ve watched the equity markets meltdown, you have bonds providing welcome balance in the portfolio, so they haven’t been knocked down as much as they might be,” he said.

“The fixed income securities in insurers’ and reinsurers’ portfolios have gone up on a mark-to-market basis. We can’t see it in the reporting yet, but capital will have risen for insurers and reinsurers. That’s not capital that’s been raised, and it doesn’t create additional capacity, near term, but it does create additional solvency,” Flandro added.

In the past year, reinsurers have seen much higher returns on equity and invested capital (ROEs, ROICs), share price appreciation for reinsurance carriers, and a float on premiums – all things he expects to begin to draw down. The stage of the cycle in which asset values recovered from interest rates rises, and reinsurers have been relatively insulated from catastrophe losses, is all now moving into a new phase, he postulates.

“The Goldilocks period, a golden year of high prices, high yields, recovering capital, reserve redundancy, mostly, high returns on equity, high economic value added for reinsurers cannot last forever. Capital entry has been slower than the supply that normally takes place during this type of period, but things are starting to change,” Flandro said.

“We’re beginning a new phase of the cycle, for which we have different considerations. We’re going to have to have different assumptions about asset values; we’re going to have different assumptions about preserving discount rates; and we’re going have to have different assumptions about investment returns and yields,” he continued.

“This narrative about a finely balanced equilibrium is going to change. It will change. We’re going to have a new cycle. It could be arrested by a big hurricane, but whatever happens, we’re going to go through the cycle, and this is a global cycle, which is something we are going to emphasise in our report at Monte Carlo,” he added.

Moving on to the other pillars of Howden Re’s Monte Carlo briefing, there will be a focus on non-peak perils – manmade, such as strikes, riots and civil commotion (SRCC), and natural, albeit climate linked, such as severe convective storms (SCS), will also be in focus.

“We’re going to look very closely at SRCC, because, sadly, we’re in an era of political violence and war, and we have to analyse that. We’re going to look at the different secondary perils, SCS and tropical cyclones that are emerging and how that’s changing,” said Flandro.

Lastly, he revealed that Howden Re will highlight the potential for major change in the nature of insurance coverage, which could have profound implications for the future of the re/insurance market.

“This is a big one,” he said. “For instance, do people own cars in the same way as they do now in 10 years’ time? Of $4trn of global property and casualty premiums, about third is motor. If that changes dramatically, it’s going to have huge effects on reserving and pricing. It will also have a major effect on other classes of businesses associated with motor, with product liability instead playing a much bigger role.”