Discipline holds after ‘all time high’ – Hiscox Re & ILS

He explains that this follows the “phenomenal” market seen last year, which continues to benefit reinsurers, despite the challenges in navigating a complex risk environment impacted by factors such as climate change-linked extreme weather on the property side, to geopolitical volatility, which affects the marine and aviation elements of the book.

Speaking to GR “in the midst of its business planning stage,” Matthew Wilken reveals that the property catastrophe-focused reinsurer’s strategy “presupposes that the market is still in a good place.”

However, Wilkens cautions that unexpected developments could still suddenly transform the marketplace within the coming weeks and months.

He notes that “the market is displaying strong pricing and discipline, particularly in the mid-year renewals, with attachment points and terms and conditions holding firm.”

“While there was some rate softening in the second half of this year, this was coming off generationally high levels. While market capacity has increased, this was offset by a lot of demand. The word ‘equilibrium’ is a good one to describe the current market.

He checks off the mood music that faces the market – first and foremost climate change and extreme weather concerns as the hurricane season enters its usual peak months of activity.

He emphasises the importance of staying up to speed with the climatic situation in the Atlantic, particularly the early forecasts of high frequency and high severity storms, due to record sea surface temperatures.

Discussing the dynamics of capital and demand, Wilken notes “There are significant entities with the capital to satisfy demand, but it is also true that the market’s recent good results were preceded by a prolonged period of challenging returns for the industry.”

Wilken joined Hiscox in January 2022 as CUO for Hiscox Re & ILS. Prior to this, he was head of reinsurance at MS Amlin, after having worked in senior underwriting roles at Kiln, where he began his career, followed by Argo Re and Ariel Re.

Little movement

Wilken agrees for the most part with the big brokers’ mid-year renewal reports citing an overall flat property catastrophe market, with some dips in rate in a few instances.

He notes, “There has been a little bit [of movement] in price, but it’s variable, depending on the cedent, the amount they are purchasing, and the position within the stack,” he says.

As to whether there is movement on attachment points for property cat excess of loss covers, he emphasises the difficulty in assessing this from a carrier’s perspective, not necessarily getting insight into the placed percentage of lower layers or what private layers may have been locked away.

“At Hiscox, we entered the hard market on the front foot, having made early moves to raise our attachment points,” Wilken says. “As a result, Hiscox didn’t have the same pressure on attachment points as others did, benefiting from meaningful line size and scale, and a lead market position that affords early engagement with clients to set terms and conditions.”

He says this scale enables Hiscox “to be a meaningful partner” to cedents in the places we find attractive and where the cedants benefits from our capacity.

Wilken notes that the company is not “immune” from requests of cedents and brokers to write more at lower layers, “but we find that our distribution reflects where we want to play, rather than being driven by external factors,” he says.

“We are focused on being agile and capturing the best opportunities as the market evolves. We want to be a long-term partner to clients, helping them navigate through the complex risk environment. To do that, we need to maintain discipline both on rates and on the terms and conditions we are seeing now,” Wilken says.

Leaning in

There is a desire to grow the book, supported by strong backing from third-party capital and newly raised funds. Wilken explains that “third party capital continues to back Hiscox Re & ILS strongly. We raised new capital again this year to deploy along with freshly allocated capital from within the Group.”

Asked where the opportunities to grow lie, Wilken says Hiscox’s reinsurance arm wants to “continue to grow strategically in the classes where we have expertise and” lean in to” those short-tail businesses the reinsurer focuses on.

“We want to grow the book, there’s no doubt about that, but we’re a short-tail-focused reinsurer. We don’t have any casualty reinsurance on the books, for instance,” he says. “It’s about being that specialist provider with deep knowledge of the lines we’re in. Property cat is what we’re renowned for, but we do write property pro rata, and we have a very mature risk excess portfolio. In addition to these property focused classes, we have deep experience and knowledge of Marine & Aviation reinsurance, Agricultural & Climate resilience portfolios, as well as leading positions in Specialty classes such as Cyber and Wildfire liability.”

Growth will also largely depend on conversations about rate as the season progresses in the coming weeks, he explains.

“If the market maintains discipline and delivers strong results in the next six months, it is likely that major insurance companies will retain additional capital. They will most probably be looking to deploy that capital, which could lead to some slight softening in the market. However, I do not expect this softening to be aggressive. Our forecasts will be adjusted based upon where that market ultimately lands. We will have a clearer picture in the coming months.”

SCS concerns

One area that Wilken says he has been cautious about price adequacy has been in aggregate excess of loss products. In the US, their vulnerability to severe convective storm (SCS) events is clear to see. With a large proportion of the $100bn annual insured cat losses coming from SCS events and with individual SCS events regularly hitting the $3bn range this remains a challenging environment.

“We pulled back from that, very significantly over a year ago. It was a product that the market historically sold quite strongly because it was largely seen as a good return on capital in an area that wasn’t particularly “cat” heavy. However, it was very heavily exposed to sideways events and early signs were that both frequency and severity of these events was on the rise.” he says.

“It wasn’t so much the pricing of the product, per se, but where it was attaching, and the pure attrition around it. The attachment points didn’t reflect where we wanted to be.”

He also expects that these aggregate covers for SCS will be a battle ground for brokers to “re-engage” at upcoming renewals negotiations.

“That’s where I think there will be some pressure,” he says. “It was an efficient and effective tool for cedants to be able to manage their sidewards attritional losses, and that’s where I see the brokers trying to apply more pressure.”

Cyber XoL

In April 2024, Hiscox Re & ILS and Ariel Re launched CyberShock, an industry-first cyber catastrophe consortium, designed to offer up to $50m per-programme capacity, providing tailored event-based protection for cyber insurers worldwide, with Hiscox co-leading the MGA.

Asked about growth potential for cyber cat reinsurance, on an excess of loss (XoL) basis Wilken says there are continued signs that this is starting to grow.

“Yes, we are seeing this, and we called it about two years ago. Our cyber reinsurance book is entirely XoL based, and the vast majority of that is on an aggregate or stop loss basis, so it’s not event based. We were cautious that the early forms of that event definition simply weren’t capturing enough detail in a way that made us comfortable,” he says.

“We spent the last year or two digging deep into the definitions of event-based products, and we recently launched the consortium partnership with Ariel Re to be able to trade on an event based cyber occurrence. I suspect that given events like the recent CrowdStrike outage, the market will likely start seeing more demand for coverage. There’s nothing quite like an event to focus the market’s minds into the scope and value of the products sold, and how they work.”

Three prongs

Insurance linked securities (ILS), and particularly the catastrophe bond market, has enjoyed a bumper year, of record issuance and volume in play. Hiscox ILS assets under management were $1.7 billion as of 30 June 2024 (31 December 2023: $1.8 billion), a result of gross capital inflows of $300 million into their side car and ILS funds from a number of new and existing investors in the first six months of the year. Following a planned return of capital to investors, these reduced to $1.4 billion on 1 July. Pressed on which is the most attractive avenue for capital deployment in the current market, Wilken demurs, but emphasises that Hiscox Re & ILS sees strength in continuing to provide “an integrated model,” as a hybrid reinsurer and asset manager backed by a multi-pronged capital strategy.

“We have a three-pronged capital strategy,” he says. “This includes Hiscox’s own group capital, and traditional reinsurance largely in the form of long-term quota share arrangements. We also have the third-party ILS capital, with a dedicated team to provide the support that our capital providers need.”

Through our model, our capital partners benefit from having a dedicated fund management team, he stresses, alongside the underwriting experience, deep technical expertise, access to broad arrays of business, leading governance, finance & claims teams and deep research and development resources of a global specialist reinsurance company.

“Having the dedicated and experienced ILS team working alongside us, gives us the extra edge to be able to design bespoke products that certain capital providers want. Sometimes they want to closely mirror exactly what Hiscox has; sometimes they have a different appetite, and that takes tailoring,” he says.

“Our model and our performance are a strong differentiator in the market; this has afforded us the ability to attract new capital. And while there is some new capital entering the market, there hasn’t been an abundance of it. Much of the additional market capital has been retained earnings among the large reinsurers,” he continues.

Added to this, Hiscox has cultivated a reputation for quality underwriting on a proprietary basis and for investing alongside investors. That helps when appealing to capital partners who are looking for a successful track record.

“They do like that we have skin in the game. Knowing that we are going to prosper when they prosper seems to be a strong theme,” he adds.

Core component

There has been speculation – long and short term – that Hiscox will be the recipient of a takeover over, like many of its London market peers over the past decade or more. Asked how important Hiscox Re & ILS is to the group, Wilken underlines its enduring importance.

“I’d say it’s a fundamental and critical component of what we do,” he says. “It’s in the DNA, born out of the syndicate at Lloyd’s that was started over 100 years ago, and the evolution of the cat product, where it all began, and we’ve been trading it for generations.”