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Summer 2020
Take
cover
Insurers seek constitutional shelter
against the Covid BI rain
12 PROFILE
Scor’s Jean-Paul Conoscente on
14 ILS
Post-Covid volatility poses both
18 COVID CLAIMS
Will loss expectations match
positioning the firm for 2021 opportunities and challenges outcomes in exposed classes?
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Comment New tricks Insider Quarterly is still a a mere stripling alongside some more in line with how you prefer to teenager. It may be mature, but of the world’s longest-established consume media. the publication that began life in news organisations and features We also heard you when said you 2001 as the features offshoot of publications. wanted us to expand the breadth of Insurance Insider has yet to reach In this relatively short time, our coverage – as well as covering its 20th anniversary. it has evolved from a slightly existing topics in greater depth. The precise transition point from disorderly catch-all for all of Insider In line with Insider Publishing teenage to adulthood is a difficult Publishing Group’s long-form Group’s other print titles, the move one to pinpoint. Many teenagers journalism and sponsored content towards a digital platform seems (and children also) display more into a respected forum for thought inevitable, therefore. adult sensibilities than many leadership, strategic and historical IQ has always been a print so-called adults. perspectives, and a more considered publication at heart, but as we And yet, if I recall my twenties, view on the (re)insurance world. transition away from traditional I can’t necessarily claim to have However, having entered its print media towards a more thought of myself as a ‘grown up’ at 20th year, IQ is about to undergo compelling digital offering, IQ will that age – even if I was officially an a further transformation – one also have to change. adult. that preserves our commitment From September we will be Equally, plenty of adults to providing you with engaging evolving the publication into a more (including pensioners) can behave features content and that we trust interactive and comprehensive in a childlike fashion at times. will also reaffirm your commitment digital solution. It won’t be quite There is something joyful, to reading. the same as the IQ of old, but we however, in knowing that the The core proposition of IQ are confident that it will continue child we once were lives on in all remains strong. There is both an to satisfy your interest in long-form of us – just as an adult dog, with appetite and a need for thoughtful, content and that, at the same time, its puppyish exuberance behind it, long-form editorial in the insurance you will find it an exciting and can still be tempted to chase after a B2B space and we intend to engaging alternative. thrown stick. continue delivering that to our We’re looking forward to telling I would like to think, therefore, readers. you more about these changes in that IQ has not only ‘come of age’ However, having listened to the coming weeks. but has also matured beyond you, we have come to understand Until then, enjoy the read and see its years. In the relatively young that a quarterly print title is not you in the digital future! world of business-to-business necessarily the format and the publications, it may appear to be frequency that best serves your Gavin Bradshaw a venerable institution, but it is needs – and that a digital product is Editor, Insider Quarterly IQ Summer 2020 03
Contents
Summer 2020
MANAGING DIRECTOR
Tim Wakefield twakefield@euromoneyplc.com
EDITOR-IN-CHIEF
Adam McNestrie adam@insuranceinsider.com
IQ/FEATURES EDITOR
Gavin Bradshaw gavin.bradshaw@insuranceinsider.com
CONTENT DIRECTOR
Charlie Thomas charlie.thomas@insuranceinsider.com
MANAGING EDITOR
Catrin Shi catrin.shi@insuranceinsider.com
EDITOR
Laura Board laura.board@insuranceinsider.com
DIRECTOR OF RESEARCH
Gavin Davis gavin.davis@insuranceinsider.com
SENIOR REPORTERS
Fiona Robertson fiona@insuranceinsider.com
Rachel Dalton rachel.dalton@insuranceinsider.com
Lucy Jones lucy.jones@insuranceinsider.com
Bernard Goyder bernard.goyder@insuranceinsider.com
John Hewitt Jones john.hewittjones@insuranceinsider.com
REPORTERS
Anna Sagar anna.sagar@insuranceinsider.com
Samuel Casey sam.casey@insuranceinsider.com
Suliman Mulhem suliman.mulhem@insuranceinsider.com
HEAD OF MARKETING SERVICES
Benjamin Bracken ben.bracken@insuranceinsider.com
06
HEAD OF STRATEGIC PARTNERSHIPS
Oliver Nevill oliver.nevill@insuranceinsider.com
HEAD OF MARKETING & ANALYTICS TAKE COVER
Lynette Stewart lynette.stewart@insuranceinsider.com Insurers invoke the constitution in the coronavirus
BRAND MARKETING & ANALYTICS MANAGER stand-off, writes John Hewitt Jones
Aimee Fuller aimee@insuranceinsider.com
SUBSCRIPTIONS DIRECTOR
Tom Fletcher tom.fletcher@insuranceinsider.com 03 Comment 18 Behind the mask
EVENTS DIRECTOR New tricks Anna Sagar and Samuel Casey
Sara Donaldson sara.donaldson@insuranceinsider.com
assess expectations of coronavirus-
PRODUCTION EDITOR FEATURES related losses against outcomes in
Ewan Harwood ewan@insuranceinsider.com
06 Take cover some of the most exposed classes
SUB-EDITORS As lawmakers propose sweeping 24 A remote possibility
Steve Godson steve.godson@insuranceinsider.com
Simeon Pickup simeon.pickup@insuranceinsider.com measures to rewrite pandemic Covid-19 has propelled the
COPY EDITOR
exclusions, insurers are relying on (re)insurance world into the 21st
Jamie Gallagher jamie.gallagher@insuranceinsider.com constitutional protections to resist century, writes Suliman Mulhem,
an onslaught of BI claims, writes with remote working likely to
SENIOR DESIGNER
Mike Orodan mike.orodan@insuranceinsider.com
John Hewitt Jones persist for some and a five-day week
12 Sellers’ market becoming history for others
Scor’s Jean-Paul Conoscente tells
Rachel Dalton that the company is INSIGHT
well-positioned to take advantage of 28 On the front foot
further reinsurance price rises and Dave Ovenden explores the
Level 1, 29 Ludgate Hill, London, EC4M 7NX, UK increased M&A activity next year advantages of being an ‘analytical
Tel main: +44 (0)20 7397 0615
Editorial: +44 (0)20 7397 0618 14 Smooth sailing? insurer’ in a post-Covid-19
Subscriptions: +44 (0)20 7397 0619
Annual subscription to Insurance Insider – £2,995 + VAT/ In an environment of global financial environment
$4,695 volatility, the coronavirus has afforded 30 What’s love got to do with it?
For subscription enquiries, email:
subscriptions@insuranceinsider.com the ILS market both opportunities Andrew Schütte offers some
All rights reserved ©2020
and challenges, says Fiona Robertson relationship counselling for insurers
and coverholders
04 IQ Summer 2020
Contents
12 SELLERS’ MARKET
14 SMOOTH SAILING?
Fiona Robertson on the opportunities
Scor’s Jean-Paul Conoscente updates Rachel Dalton on the firm’s 2021 strategy
and challenges facing the ILS market
32 Toxic torts 42 Written in the stars
Adam Grossman relays some lessons The Gemini Phase II delay comes at
for risk management from the a good time for (re)insurance, says
glyphosate, opioid and talc litigations Anthony Freeman
34 London Matters 44 The new normal
London’s strong fundamentals have If London wants to compete for high-
provided support in challenging volume business it must embrace
times, writes Clare Lebecq technology that puts its capacity at
36 Loose talk…can lead to litigation the distribution network’s fingertips,
The cost of “greenwashing” could says Tim Rayner
be very high for businesses that 46 Storm warning
misrepresent their environmental Businesses need to anticipate
credentials, warns Simon Konsta crises beyond the current economic
situation, as Covid-19 places
TECHNICAL BRIEFINGS additional stress on other underlying
38 Building resilience issues, says Travelers
The construction markets are 48 Sparking growth post-Covid-19
adapting to emerging risks and new Simon Burtwell assesses what
24
needs, according to Travelers insurers can do across the business
40 No market is an island to seize the post-coronavirus
A REMOTE POSSIBILITY
The London market risks irrelevance transformational opportunity
Covid-19 has propelled the industry into
if it doesn’t keep pace with industry-
the 21st century, says Suliman Mulhem
wide innovations, says Ian Gibbard 50 Executive moves
IQ Summer 2020 05
Business interruption
Take
cover
As lawmakers propose sweeping Chris Alviggi, an environmental Insider Quarterly. “They were
measures to rewrite pandemic liability broker at NFP in New really nervous about the legislation
exclusions, insurers are relying Jersey, began receiving calls from being proposed by state officials.”
on protections enshrined in concerned clients in late April, as New Jersey was the first US state
the US Constitution to resist an the daily coronavirus death toll in to introduce business interruption
onslaught of BI claims, writes the state breached the 350 mark. (BI) legislation for consideration
John Hewitt Jones “They wanted to know how by the state’s assembly. The
exposed they would be to liability proposed law, Bill 3844, has since
lawsuits, and how they might need been withdrawn, but if passed
to adjust their coverage,” he tells it would have retrospectively
06 IQ Summer 2020
Business interruption
time for state legislation to pass, The bill, sponsored by Mike
and funds are needed right now. Thompson, a Democrat from
BI insurance – and the question California, has been assigned to the
of whether or not such cover is US House Committee on Financial
explicitly excluded from all-risks Services, where sources tell Insider
property policies – has received Quarterly it is likely to remain.
widespread attention from the “It is essentially dead,” a
mainstream American media, Washington source tells this
spurred by support from celebrities publication.
including triple-Michelin-starred The legislative proposal did,
chef Thomas Keller, of the French however, spark a debate about
Laundry fame, and highlighting whether or not such a move would
the desperate plight of small violate the US Constitution, and
businesses across the United also spurred the insurance industry
States. into action.
Museums, charities and arts One after another, senior
organisations are among the executives lined up to challenge
entities fighting for survival as the legitimacy of such a bill and to
the real economic fallout of the defend the industry.
pandemic becomes apparent. In a statement at the time,
New projections from the US five US insurance trade bodies,
Congressional Budget Office in including the American
early June suggest Covid-19 will Property and Casualty Insurance
reduce economic input across the Association and the National
country by 3 percent through to Association of Mutual Insurance
2030, which equates to a loss of Companies, slammed the proposed
about $7.9tn. bill as “unconstitutional”.
The insurance industry is caught
in a double bind; it’s in a difficult The bipartisan bill
spot that has strained relationships Subsequently, in late April, a
with a range of stakeholders. Either bipartisan BI bill was introduced
markets pay up and pay now – and in Congress that has a higher
face the shareholder wrath that likelihood of passing into law.
will accompany a sudden, titanic The legislation, which is
hit to the balance sheet – or they known as the Never Again Small
will have to challenge lawmakers Business Protection Act 2020,
head-on and, in doing so, face the was introduced by Republican
potentially disastrous public policy Congressman Brian Fitzpatrick
consequences. of Pennsylvania, and has since
It is generally the impulse of been referred to the Committee
the (re)insurer to offer support on Financial Services for
from behind the scenes. But as the consideration.
events of this year have unfolded, If passed, it would mandate
the market finds itself at the center insurers to provide BI cover for
of a conflict that strikes at the heart businesses and nonprofits for
of the American political project. future losses arising from any
federal, state, or local government-
compelled insurers to pay all The Thompson bill ordered shutdown during a
claims arising from the virus – even On 14 March, politicians in national emergency. It would
where a policy contains pandemic Washington DC introduced also require the government to
exclusions. legislation in the House of establish a backstop scheme that
Some policyholders, notably small Representatives, Bill 6494, which if has since been formally proposed
business owners whose livelihoods passed would compel (re)insurance as the Pandemic Risk Insurance
have been destroyed by the companies to retrospectively Act (Pria).
pandemic, regard such legislation rewrite pandemic exclusion within In an attempt at compromise,
as a potential saving grace. Others in-force policies, to ensure that the Fitzpatrick bill stops short
are frustrated because it will take they pay out. Continued on page 08
IQ Summer 2020 07
Business interruption
of requiring coverage of historic that such laws “will never survive Insider Quarterly raised concerns
losses, but would effectively neuter the Supreme Court”. about the implementation of such
the ability of insurers to deny However, if, or when, such a scheme, warning that it could
claims unless they have a written legislation does pass and a case seriously distort the market.
statement from a policyholder that is filed at the Supreme Court, the “If you are a life insurer, for
authorises the exclusion of national judicial decision-making process example, with no exposure to BI
emergencies. Insurers would is more complex, and it is as yet claims, it’s possible to imagine a
also be able to avert a payout if impossible to determine what situation where you’re being forced
an insured stops paying premiums. conclusion will be reached. to contribute to claims that you
It will be several months before a As well as navigating a strong didn’t write,” says one source.
decision becomes clear on whether legislative response to Covid-19 Sources described this as
the bill will be taken forward – claims at the federal level, insurers particularly problematic for
or if it will be left to gather dust have been forced to confront BI US auto insurers, which could
at the committee stage. In the legislation proposed in states be compelled to contribute to
meantime, industry representatives – leading the market into new property and casualty claims –
on Capitol Hill work around the territory. classes of business they have never
clock, lobbying for the introduction New Jersey was the first to intended to write.
of amendments that would water put forward such a bill, on 16 The risk of moral hazard
down the bill and reduce current March, followed by Louisiana, in this scenario seems high,
demands. Massachusetts, New York, Ohio, because a company with a poorly
As the devastating economic Pennsylvania, South Carolina, underwritten BI portfolio could
effects of Covid-19 have unfurled Michigan and Rhode Island. stand to benefit from contributions
amid rising BI claims, the concerns The bill filed in New Jersey has made by other carriers.
of the insurance industry have since been withdrawn. However,
become inextricably intertwined legislation continues to progress in (Re)insurance resistance
with the response of lawmakers to the eight remaining states. (Re)insurers have pushed back
the pandemic. While procedural details – and hard in response, but it remains
the scope of legislation – differ uncertain, if a law passes in one
State legislature scramble between the bills, they broadly state, whether a verdict from the
While the fight between the replicate the effects of federal US Supreme Court would be likely
industry and lawmakers has so legislation, compelling insurers to overturn it.
far been most pronounced at the to pay all pandemic BI claims, Industry leaders, notably Chubb
federal level, insurers face an regardless of whether or not CEO Evan Greenberg, have been
increasingly torrid fight outside insurance contracts specifically clear that the industry must resist
the confines of the Washington DC exclude the peril. attempts to push through state
policymaking bubble. In addition, the proposed bills legislation wholesale, which would
Nine states have so far proposed give insurance regulators sweeping essentially rewrite contracts.
their own measures to curtail the new powers that would allow them Carriers have the US Constitution
ability of insurers to adjudicate to impose an additional levy on on their side – specifically, Article
claims arising from the pandemic. carriers operating within their I, Section 10, which makes it
A common refrain among jurisdiction and redistribute funds very clear that no state should be
coverage lawyers working to collected to pay claims. able to pass a law that impairs
defend the industry in BI cases is Multiple legal sources speaking to contractual obligations between
two parties.
“No state shall enter into any
BI bills proposed at state legislatures treaty, alliance, or confederation…
State Bill Number Chamber
[or] pass any bill of attainder, ex
Michigan 5739 House
post facto law, or law impairing
Louisiana 477 Senate the obligation of contracts,” the
Massachusetts 2888 Senate Constitution states.
New Jersey 3844 Assembly However, any such legislation
New York 10226 Assembly would undoubtedly be challenged
Ohio 589 House
by insurers in the US Supreme
Court, and according to
Pennsylvania 1114 Senate
constitutional law experts, the
South Carolina 1188 Senate
outcome is far from certain.
Rhode Island 8064 House
Continued on page 10
08 IQ Summer 2020
The future of insurance technology. www.sequel.com
Business interruption
Speaking to Insider Quarterly, BI bills under The current structure of the bill
Daniel Schwarcz, a professor of would create a federal backstop
consideration in US Congress
constitutional law at the University with a trigger of $250mn and an
Bill Sponsor Effect
of Minnesota, says any such annual cap of $750bn.
Business Mike Thompson (D) Wide-ranging bill that would
decision to reverse this protection Interruption compel insurers to make
Following this, three industry
would involve a high degree of Insurance retrospective and prospective trade groups have put forward
Coverage Act payments. It would also nullify
nuance, and involve a three- 2020 contracts beginning on the date an alternative proposal in the
pronged test previously established the bill is enacted form of the Business Continuity
in a 1983 case – Energy Reserves Never Again Brian Fitzpatrick (R) Legislation is prospective, but Protection Program – essentially a
Small Business would mandate insurers to
Group, Inc v Kansas Power & Act 2020 provide BI cover for future losses.
government stimulus scheme that
Light Co. It also establishes Pandemic Risk would create a legal requirement
Insurance Act
“The Supreme Court has adopted for federal government to replace
a broad-ranging test, which will companies’ revenue for three
seek to determine whether or Risk Insurance Act (Tria). months, with up to 80 percent of
not state law has substantially Marsh CEO John Doyle sent payroll, benefits and expenses.
impaired a commercial a letter to congressional leaders Chubb is understood also to
relationship, but also whether and the Trump administration in have put forward a third proposal,
or not the law is supported by a support of the legislation, which which would provide a “middle
public purpose,” Schwarcz says. has divided opinion in the market. ground” alternative to the two
In assessing the legality of In early June, CEO of The schemes.
such laws, judges will make an Hartford, Christopher Swift, said However, Pria has served a
assessment of three elements. plans to force the insurance market dual purpose in also giving the
Firstly, whether the state insurance industry access to the
legislation has substantially ears of the political establishment
impaired a contractual “Insurers are in the unusual – to show it can and will work
relationship. Secondly, whether closely with governments in a time
the law is supported by a
position of relying on the of international crisis.
“significant and legitimate public American Constitution to protect Marsh & McLennan Companies
purpose”. And finally, whether the enforceability of contracts” CEO Dan Glaser and Amerisure
the adjustment of the rights and CEO Greg Crabb have established
responsibilities of contracting a workstream to examine how
parties is based upon reasonable to accept pandemic risk “wouldn’t public-private partnerships like
conditions and is of a character be prudent in any way, shape or Pria could be used to close the
appropriate to the public purpose form”. protection gap. Working with the
justifying its adoption. Speaking alongside him on a US Treasury, this will generate
Industry executives like panel, Rob Berkley, president goodwill on behalf of the industry
Greenberg are right to highlight and CEO of WR Berkley, agreed, and demonstrate it is serious
the challenges such laws pose saying: “It would be acting in about contributing to a response
to the sanctity of commercial an unjustifiable way if we were to the economic crisis that has
contracts enshrined in the to take a risk that would be accompanied Covid-19.
Constitution, but this also unquantifiable.” It remains uncertain whether
discounts the public policy The proposal, which was or not Pria will be implemented,
concerns that judges and legal introduced on 26 May by but in getting there it represents
scholars will weigh as they reach a Representative Carolyn Maloney, an opportunity for the industry to
verdict on such measures. is a partisan bill. It has been boost its political capital.
Insurers are in the unusual supported by over 30 companies The industry has made significant
position of relying on the American and trade organisations from progress in making its voice heard
Constitution to protect the across different sectors of the US as governments respond to Covid-
enforceability of contracts. economy. 19 – ensuring it walks the tightrope
The Pandemic Risk Insurance between inspiring loyalty from
Pria: A necessary Act is controversial because it policyholders and paying only the
compromise would have a significant impact on claims for which it is liable.
In early April, US lawmakers the private market for pandemic There remains, however, a long
began to circulate legislative risk – incentivising carriers road ahead, and more than ever
proposals for a pandemic risk to write policies for risks that the fortunes of (re)insurers are
backstop scheme that would were previously deemed to be yoked to the fast-changing US
function akin to the Terrorism uninsurable. political landscape.
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e: hello@bareska.comThe big interview Sellers’ market Jean-Paul Conoscente says Scor’s capital strength and flexibility put it in a good position to take advantage of further reinsurance price rises and increased M&A activity next year. Rachel Dalton reports There are a number of uncertainties For Scor Global P&C CEO Jean- (re)insurance side and the retro around the Covid-19 pandemic for Paul Conoscente, however, there side, and that’s going to be a driver the reinsurance industry. One key is one certainty: that the rate for improvements.” unknown is how long the crisis will momentum that has been building last, with individual states moving since 1 January will continue Gathering momentum towards recovery at different rates throughout the year, rather than Conoscente says there were rate and imposing varying restrictions fizzling out once the immediate improvements at 1 January, but on movement. crisis has passed. because this renewal is dominated Another uncertainty is around “We think this hard market is by European treaty business – the scale of potential business going to carry on into 1.1 for several where prices have not hardened as interruption claims, with several reasons,” says Conoscente. “First much as in parts of the US – the lawsuits underway in the UK and of all, the world economy is likely impact was muted. US over whether policies respond entering into a global recession, However, Covid-19 has so far to pandemic or not. with financial income severely revealed “lots of issues with All of this is overshadowed by depressed. wordings” in (re)insurance, and the potential for governments to “Insurers and reinsurers need losses on European accounts are intervene in disputes and demand more technical margin, and expected, meaning there is likely that carriers pay out or at least that will drive longer-term to be a push for tighter terms and compromise on claims for Covid-19 improvements. We’ve also had conditions as well as price hikes at losses they would otherwise reject. a capital depletion, both on the the end of this year, he adds. 12 IQ Summer 2020
The big interview
The 1 April renewals had already of the reinsurance to consumers,
been underway for a number of Japan – key points putting additional strain on their
weeks before Covid-19 lockdowns ●● Deals get home on initial firm-order terms, as financials.
were ordered in several major continental reinsurers led by Munich Re increase
economies in late March, and for share More M&A ahead
this reason the pandemic had a ●● Reinsurers achieved mixed success on inserting Conoscente believes that the
limited impact on the negotiations, eleventh-hour Covid-19 exclusions pandemic and the market
Conoscente says. Rate hardening ●● Some reinsurers have kept shares based on the conditions resulting from it will
assumption that re-rating wind exposures is a
at this date was primarily driven lead to more consolidation in the
“multi-year journey”
by the loss experience of Japanese ●● Wind occurrence layers renewed with increases of insurance sector next year.
cedants, which had booked tens of 35-55 percent, with quake effectively flat, in the “The industry is still
billions of typhoon losses in 2018 last round of “pre-coronavirus” pricing overcapitalised and stakeholder
and 2019. ●● Aggregate cat deals have paid 60-70 percent requirements, for example, from
“We saw an acceleration of the increases to get home rating agencies or regulators, are
hardening at 1 May, which is getting higher and higher, which
a small US renewal, with a big that are really struggling.” drives the need for scale,” he says.
difference between 1 April and 1 Rate rises aside, there is the “In addition, as we enter a
May; and June confirmed that this potential for carriers to see demand hard market, M&A becomes
is now a hard market,” he adds. for certain (re)insurance lines drop more attractive. There are
At the 1 June renewal Floridian while businesses are in lockdown, opportunities to draw the most
carriers paid aggregate price or as businesses in financial distress from the hardening market, by
increases of 30 percent, although have a reduced ability to pay providing larger capacities and
with some significant outliers. premiums. [an] increasing global footprint,”
Conoscente also describes “I think you’ll see reductions in he adds.
a squeeze on terms and premium levels in certain lines On the flipside, companies hit
conditions: “At 1 June we saw of business that are driven by by Covid-19 on the loss or liability
differential terms, the removal economic activity,” Conoscente side (or both) may need to sell to a
of cascading structures and, on concedes. larger entity to survive.
loss-free programmes, a drop in However, he adds: “Business The crisis has led ratings agencies
commissions on property and segments with a high cost of to put reinsurers under increased
casualty proportional treaties, reinsurance as a percentage of their scrutiny as they assess carriers’
whereas in the past renewals, we total premium income are very vulnerability to losses. In May,
saw improvements on proportional limited.” Moody’s downgraded Scor’s outlook
casualty treaties and less so on Overall, the executive believes from stable to negative, noting the
property. Now, it’s across both.” most cedants will be able to absorb reinsurer’s vulnerability to higher
an increase in the cost of their mortality claims arising from the
Power shifts to sellers reinsurance. One exception is the pandemic.
From this point onwards, in Floridian carriers, which will be “Rating agencies and regulators
Conoscente’s view, the market unable to pass on the increased cost are putting a lot of pressure on
will favour sellers rather than individual companies, demanding
buyers of reinsurance, exemplified more information and more clarity
in the widespread imposition of Florida – key points on what the crisis means for them,”
contagious disease exclusions on says Conoscente.
●● In aggregate, Florida carriers paid rate increases of
property treaties. around 30 percent, although with some significant “But we’re all going through this
“The June and July 2020 outliers at the same pace and trying to
renewals have confronted client ●● Majority of programmes placed successfully, better understand the implications
expectations with the realities of despite some last-minute negotiations, and with across different lines of business
the market, and not all clients and some small gaps and geographies as we gradually
brokers have accepted the fact that ●● Reinstatement premium protections rates on line collect additional information.”
we’re in a hard market now,” says reached a loading of 1.3x to 1.5x the premium on He adds: “From Scor’s perspective,
Conoscente. the underlying layer in some cases, above previous based on the information we have
“So we’re seeing different estimates of a 1.2x loading today, we are comfortable with the
●● Hardening market conditions forced many
behaviours from different brokers measures we have taken to date.
Floridian carriers to seek private deals and shortfall
and clients who are still trying to “We believe our capital shield and
covers to secure maximum possible protection
push aggressive terms relative to ●● Cascading features on programmes all but flexibility put us in a good position
what the market is now willing to vanished to meet our client obligations and
accept. Those are the programmes maintain our ratings.”
IQ Summer 2020 13ILS Smooth sailing? In an environment of global financial volatility, the coronavirus has brought both opportunities and challenges to the ILS market, writes Fiona Robertson The 2008 global financial market undercurrents. IQ looks at how the multi-strategy fund investors facing crisis was a turning point for the alternative reinsurance market has cash calls from their management, ILS industry. Initially it resulted navigated the coronavirus challenge or demands from retail investors to in a sweeping cut to capacity as so far. cash out. investors used ILS funds like ATMs However, the resulting price hit to withdraw cash. Calm after the storm to the outstanding bond market But over the long term, the crisis As the pandemic’s spread became was 1.09 percent in the steepest drove more investors into adopting apparent in March and as countries loss week from 20 to 27 March. a sector that had shown its began locking down their borders And in the first quarter, ILS returns diversification power by holding its and streets, an initial panic hit the remained positive while other value as mortgage-backed securities markets as investors fled to the benchmarks experienced losses and other structured finance deals security of cash. of up to 20 percent (see chart plummeted in value. This “flight to cash” showed up opposite). Fast forward 12 years and the to some extent on the liquid side And in terms of the demands markets are again being roiled by of the ILS market – the cat bond on liquidity at the specialist ILS events that we thought had been sector – although the impact on managers, the experience was much consigned to the history books. pricing was subdued compared more manageable than the “ATM Will this crisis be another turning with the kind of writedowns being effect” they had suffered back in point for the industry – and can it recorded in traditional markets. 2008. turn the situation to its advantage As sister publication Trading Fermat Capital co-founder John again? Risk reported at the time, around Seo recalled that, back then, the In some ways, this crisis looks to $400mn of cat bond holdings were US cat bond specialist had to sell have been much smoother sailing offered in bulk auctions on the off a quarter of its assets to meet for the ILS sector, but in others the secondary market in March. This redemptions, but only had to sell pandemic has stirred up difficult was said to be largely driven by off around 2 percent in the worst 14 IQ Summer 2020
ILS
month this time around. the virus spread is a lesson that outcome of the first set of precedent
Meanwhile, another leading ILS allocators won’t forget,” Millette cases.
pioneer, Nephila Capital, also said. If judges rule against insurers
testified to the relatively modest Meanwhile, the fact that the ILS and unleash a torrent of claims,
impact on its capacity in the first market held value throughout the many fear that losses from this
half of 2020. Co-CEO Greg Hagood initial crisis will be used as further unmodelled, highly correlated peril
said the $10.4bn firm expected a 7 proof of its non-correlating or could push investors out of the
percent drop in its asset base after diversifying performance, and could ILS market as the unexpected loss
receiving $400mn of last-minute lay the grounds for future growth follows back-to-back losses in 2017
Covid-related redemptions in late to help rebuild from the losses of and 2018, including significant
March. 2017-2018. model miss events.
Though the Covid-related However, other experts emphasise
shrinkage compounded a year of Charting a new course that the huge Covid-19 insured loss
retractions for ILS capacity as a However, there are still choppy numbers being projected by some
whole, following the major loss waters ahead for the ILS market – in the market incorporate large
years of 2017-2018, the direct and the first challenge is proving claims from segments with no ILS
impact was minor compared to the that it can steer clear of the threat involvement at all.
scale of investment markdowns at of pandemic-related business HSCM’s Millette suggested during
rated carriers. interruption (BI) claims. a recent Trading Risk webinar
The main exposure here is from that trade credit losses could
Steadier hands at the tiller commercial property insurance represent around $20bn, with a
Why has the ILS industry and reinsurance risks, since there further $10bn-$15bn from liability
responded so differently and is little ILS participation in event lines, $10bn from the contingency
avoided the ATM effect this time cancellation, trade credit, workers’ market, and additional workers’
around? compensation or any of the other compensation losses.
Hudson Structured Capital lines of business that are expected “Those numbers are not really
Management (HSCM) co-founder to take a hit from Covid-19 claims. part of the capital market segment
Michael Millette argues that the The BI issue has a far-reaching of reinsurance,” he pointed out.
shift in the ILS investor base since scope, beyond the ILS market’s “For the sector to see losses creep
2008 has been one decisive factor involvement. Underwriting up into cat towers, we would have
in the differing reactions. companies have insisted that their to see a thoroughgoing judicial
Back in 2008, more of the market policies do not cover the systemic refutation of language, which I do
was supported by funds of funds threat of viral pandemics, but not expect.”
investors and hedge funds seeking business owners struggling to In the US, many property
the higher-return strategies that make it through lockdowns have insurance policies have standard
were available at that time. But taken cases to the courts, where the ISO wordings including virus
after that crisis, those investors industry is anxiously awaiting the Continued on page 16
did not return in the same way
and were replaced with more ILS teturns vs traditional benchmarks
institutional investors and pension
ILS returns vs traditional benchmarks
Year-to-date returns as of 31 March 2020
funds, which saw the sector as a 10.0%
long-term bet (see chart on page
16).
5.0%
Institutional investors that now
Percentage gain/loss
back ILS managers have made
strategic allocations to the sector to 0.0%
diversify and are unlikely to “bolt
fast”, Millette remarked earlier this -5.0% Aon All Bonds Index
year. Aon US Hurricane Bonds
However, most pension funds will -10.0% 3-5 year US Treasury Notes
not face an immediate pressure 3-5 year BB US High-Yield Index
to realise cash and could find the
-15.0% S&P 500
diversification provided by ILS ABS 3-5 year, Fixed Rate
reassuring. CMBS 3-5 year, Fixed Rate
“The terrifying correlation of -20.0%
every other market on earth that Source: Aon Securities
we witnessed unfold quickly as
IQ Summer 2020 15ILS
exclusions alongside physical
damage requirements to trigger BI
Cat investor
Cat bond bond investor
base base
shiftsshifts towards
towards ILS ILS specialists
specialists
losses. Investor by category (year ending 30 June)
“This [wording] isn’t as dubious
3% 2%
as some lawyers would want you to
believe,” said Millette. 7% Cat fund Cat fund
11%
Certain segments of the ILS
Institutional 5% Institutional
market are better reinforced than investor investor
21% 36%
others against BI claims “leakage”, 7%
Reinsurer Mutual fund
as it is known in industry jargon. 59%
Hedge fund Hedge fund
Cat bonds, for example, employ 16%
Mutual fund Reinsurer
named peril coverages rather than
33% Other
all-peril language, and most also
cover residential exposures rather
than commercial lines. 2008 2019
Source: Aon Benfield Securities, Inc.
Rebuilding and repricing
Regardless of the ultimate level of
Covid-19 losses, the ILS industry years after they have released ILS For reinsurers and ILS writers,
will undoubtedly see further change reinsurance capital. one positive side-effect of the
and evolution in the wake of the Taken in tandem, these issues are concern over pandemic losses
pandemic. likely to drive further evolution in is that it has amplified property
After all, even if claims are the ILS market’s use of rated paper, catastrophe rate increases – a trend
overturned, there could be whether from fronting providers which was particularly evident at
disruption from trapped capital if or in-house, as well as contract the Florida June renewals.
cedants are able to lock collateral negotiations on commutation and Capital has already started
at the end of a contract while they clawback terms. flowing back in to the market,
allow time for losses to evolve. Terms and conditions are also with $4bn to $5bn raised through
This is a source of frustration for increasingly under the spotlight major equity issuances from
investors as in some segments, in the ILS and broader markets as Bermuda and London players such
such as retro, this will be the fourth underwriters seek to capitalise on as RenaissanceRe, Fidelis and
year impacted by some degree of the hardening market to tighten Lancashire.
trapped capital. up coverage. Within the alternative New start-ups are also on the
This “investor fatigue” as a result reinsurance sector, it remains to horizon – but while there are
of trapped capital is also matched be seen how far underwriters will some signs of green shoots in the
by caution from cedants dealing move towards use of named perils ILS market as well, the industry
with a long-tailed catastrophe beyond the cat bond space – with has had little success in mid-year
event, wary of whether property sources suggesting this shift is fundraising overall.
BI losses could pop up in future occurring in retro as well. A major obstacle has been the
difficulty in bringing on new
investors without being able to do
World Bank bond pays out but critics remain in-person due diligence – while
existing investors are also distracted
The World Bank will receive $132.5mn The earliest the bond could have paid out
from cat bond investors after a pandemic was 9 April, as the deal specifies that an by more immediate opportunistic
transaction that it sponsored in 2017 was 84-day minimum period has to pass from the plays elsewhere.
triggered by the coronavirus epidemic. start of a pandemic, plus a fortnight for the But with rate momentum building,
This represented a 41 percent loss of the modelling agent to be able to calculate the the ILS sector will be pushing
$320mn cat bond – the maximum recovery growth rate. the potential growth story out to
possible for a coronavirus event, as some However, the growth rate wasn’t high investors ahead of the next major
parts of the transaction did not cover or had enough for a payout on 9 April, as countries pre-January fundraising round.
limits on coverage for this kind of virus. that have been hit hardest by the pandemic, And just as it is expected to take
The bank will also recover another such as the US and a handful of Western months and years for (re)insurers
significant but undisclosed sum on top of European nations, aren’t on the covered
to get a clear grasp on their Covid-
this from private reinsurance swaps that were territories list.
19 losses, so too it will take time to
signed at the same time as the pandemic The structural protections built into the deal
bond and provide similar coverage. meant that the bond drew flak from some understand how the ILS market will
The payout triggered in mid-April. critics for not paying out sooner. be changed and reshaped by the
pandemic.
16 IQ Summer 2020MAXIMUM
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www.manchesterunderwriting.comCovid-19 and claims Behind the mask Anna Sagar and Samuel Casey assess whether expectations of coronavirus-related losses are likely to match outcomes in what were tipped to be some of the most exposed classes With claims related to the with myriad different wordings and mass gatherings across the globe, coronavirus pandemic widely regulatory and judicial approaches. including sporting fixtures, music expected to represent the biggest However, some industry sectors festivals and business conferences. industry insured loss of all time, the particularly affected by the The word has become a cliché, focus in coming quarters is likely outbreak have had the dubious but for the contingency market, to be on how closely the impact on distinction of being able to estimate perhaps more than any other line (re)insurers’ 2020 annual results the magnitude of their exposure of insurance business, the impact of – and any resulting loss creep into relatively quickly. We cover the Covid-19 has been unprecedented. 2021 – matches the range of loss likely impact on some of the key It is impossible to put a precise estimates made to date. lines affected by major Covid-19 figure on the scale of the losses, Back in May, Lloyd’s estimated claims below. but extrapolation from a Swiss industry-wide 2020 underwriting Re disclosure in March suggests losses from Covid-19 at $107bn, Contingency the potential industry-wide event with the Lloyd’s market itself set to In the middle of February, weeks cancellation loss could stretch to as absorb $3bn-$4.3bn of the total. before the sheer scale of Covid- much as $6.3bn. Lloyd’s also predicted an industry 19’s impact had been realised, The reinsurer said on an analyst combined investment loss of contingency market practitioners call that it had a 15 percent $96bn, bringing the total projected warned Insurance Insider that the market share in the global event loss to the (re)insurance industry to pandemic could be “catastrophic” cancellation market and that its $203bn. for the sector if event cancellations losses could come in at between As sister publication Insurance spread beyond China to affect the $550mn and $950mn, suggesting Insider reflected in April in the wider Asian continent. an industry-wide loss of between article ‘Coronavirus: The biggest Since then, coronavirus has $3.7bn and $6.3bn. insured loss in history?’, the caused a near total cessation of Lloyd’s has said that event pandemic is a highly complex cancellation losses are expected to event, which is playing out across be the biggest source of claims for multiple lines of business and many countries, is poorly modelled, and has impacted insurance coverage 18 IQ Summer 2020
Covid-19 and claims the marketplace, accounting for 31 The International Olympic increased by up to 50 percent on percent of its total loss estimate. Committee is believed to buy stressed business, whilst market All this, despite the fact that around $800mn of cover, and insiders have reported privately the contingency market has a there are other policies connected that the rises can be above 100 relatively small level of premium with the event, such as those for percent. income compared to classes such as broadcasters and contractors Meanwhile, carriers not currently property, which are also expected working on the Olympics. participating in the small market to suffer significant payouts. Some insurers have detailed are weighing up the potential The extent of the market’s their potential exposure to the opportunities. woes stems from the fact that it cancellation, including Allianz, Stephen Catlin and Paul Brand’s has offered pandemic cover as a which said that its postponement start-up (re)insurer Convex has buyback for a number of years, exposure was $40mn, and Munich been the first to act, hiring Axa XL meaning the sort of cancellations Re, which has said it has an underwriter Luke Killeya to build a that have occurred due to Covid-19 exposure in the triple-digit millions book of business. have been specifically covered. of euros. Cancellation as a result of The Wimbledon tennis A&H and travel communicable diseases is a tournament also had pandemic By contrast, the London accident standard exclusion on contingency cover in place, and is reportedly and health (A&H) market is contracts, but it was possible expecting a payout of £100mn not expected to be impacted as to purchase the cover for an ($125mn). dramatically as the contingency additional premium. Its policy is believed to have sector. The market had a heightened cost £1.5mn per year, with the The majority of personal accident awareness of the threats potentially All England Club, which hosts contracts written in the London posed by pandemics after the the tournament, having opted to market are unlikely to be affected, outbreaks of Sars in 2003, swine take out pandemic cover after the as it does not appear that Covid-19 flu in 2009 and the Zika virus in outbreak of Sars in 2003. causes permanent or temporary 2015. Less high profile events such as disability. Underwriters escaped damaging business conferences have also been The lack of exposure relates both losses amid the previous outbreaks, cancelled in their thousands, and to the nature of the contract that which provoked little in the way the aggregation of costs is expected the market typically writes and the of government response compared to be significant. demographic of those insured. with Covid-19. The impact for the contingency The market typically provides To trigger a payout under a policy sector has been twofold. Not only insurance for either temporary or covered for communicable disease, has it suffered devastating losses, total disablement, with a schedule an insured typically needs to prove but there is now a drought of of benefits paid out once the policy that it was necessary to cancel the premium as the volume of business is triggered. event and it had not been called off has reduced. With little clear The medical impact of the disease due to disinclination or a possible guidance from legislators on when does not appear to induce either lack of attendees. mass gatherings will be able to take form of disability, with patients Since governments across the place again and the added fact that either recovering or dying. globe implemented the widespread much of the contingency market’s All evidence suggests that young cancellation of mass gatherings, business tends to be written around people without underlying health there has been a slew of claims. six months before an event takes conditions are at a comparatively AmWins said at the beginning of place, the outlook for the sector is low risk from the disease compared April that contingency claims were uncertain at present. to the elderly. flooding into the London market at For business passing through the That is not to say that the class an “alarming rate”. market, pandemic exclusions have of business will escape unscathed, One of the most damaging become the norm, despite it now however. losses is believed to be the Tokyo being one of the most concerning PwC said in a recent report that Olympics, one of the biggest risks for clients. the A&H market is nonetheless insured events for the market. All indications suggest that the expected to sustain a number of It was announced in March that market will undergo a significant losses. the games had been postponed hardening once business picks up, Carriers including Axis and until 2021, which will still trigger as underwriters attempt to recoup Beazley have already flagged that a large loss, albeit a less significant some of their losses. they expect to suffer A&H losses one than from an outright A report from Miller in April from the pandemic. cancellation. said that contingency rates had Continued on page 20 IQ Summer 2020 19
Covid-19 and claims
However, a number of A&H wordings around denial of access Wimbledon from the pandemic would bankrupt
underwriters also write books of and contagious diseases meant they Tennis the sector, adding that Covid-19
Championships
travel insurance – especially for would have grounds for a viable could be largest insured event in
2019. The
business travel – which could claim. payout for this the industry’s history.
sustain large losses. The business However, some insurers have year’s cancelled A report by the American Property
tends to be written on behalf of disputed claims, citing that any tournament is and Casualty Insurance Association
MGAs. ambiguity in the wordings around said to be around said that losses to small businesses
£100mn
On top of that, there is concern these areas of coverage were not from BI caused by coronavirus
in the long term that a downturn intended to extend to a systemic could range from $255bn to $431bn
in economic activity could lead to a risk like a pandemic. per month, compared to annual
reduction in premium income. Insurers have also noted that, in insurance premiums of $71bn.
“I think we are all going to be some cases, contagious diseases are This was echoed in the UK by
facing the problem of people not specifically excluded from coverage, the Association of British Insurers
working,” said one market source. meaning that Covid-19-related BI (ABI), with director general Huw
“We are in the business of insuring claims are not valid. Evans saying in April that forcing
people. Business will dry up.” In April, a BI coverage bill was insurers to pay Covid-19 BI cover
circulated in the US Congress by was a “shortcut for insolvency”.
Business interruption California Democrat Congressman He added that Covid-19 losses in
Business interruption (BI) Mike Thompson that intended the UK could exceed £1bn, with BI
insurance has become one of the to compel insurers to make making up a significant portion of
most prominent battlegrounds retrospective and prospective that.
to emerge from the pandemic, as payments for BI. The bill was Some companies have honoured
coverage disputes have begun to widely opposed by US insurance claims, with Axa making payments
mount. industry associations, which to around 200 of its restaurant
The cover is typically triggered argued it would result in the clients. Axa said it has identified
by property damage, but many “unconstitutional” violation of 1,700 restaurant polices in which
insureds who have had to shutter insurance contracts. unclear wordings may make the
businesses due to the pandemic and Separately, Chubb chairman and carrier vulnerable to BI claims
the associated lockdown measures CEO Evan Greenberg suggested in stemming from the lockdown,
had anticipated that certain policy April that the forced payment of BI adding that there is “some debate”
20 IQ Summer 2020Covid-19 and claims over BI coverage. The carrier has nuclear Syndicate 1176 and Pool Re buyer of the invoiced goods or begun talks with the restaurant director, will chair the initiative’s services. owners concerned. project committee. With a recent report from Hiscox, meanwhile, is reported Meanwhile, in the US, a bill French trade credit insurer to have denied claims to many proposing a $750bn pandemic Coface suggesting that global of its customers, having offered backstop was introduced in business insolvencies could rise compensation to a selection of Congress in May. The Pandemic by 33 percent by the end of 2021, policyholders for making assurances Risk Insurance Act would see the compared to 2019, it is clear just about Covid-19-related BI claims state act as insurer of last resort, how big a problem pandemic- that it later withdrew. paying a proportion of the losses related losses could be for this class The company is also the subject from future pandemics. of business. of a lawsuit brought by Mishcon An alternative bill, the Business The highest increases are de Reya on behalf of the recently Continuity Protection Program, predicted in Hong Kong, Poland formed Hiscox Action Group, which previously put forward by three and Australia, where Coface is seeking £52mn in BI claims US (re)insurance trade bodies, was estimated a business percentage related to the Covid-19 lockdown. intended to create a legal obligation change from 2019 to 2021 of 76 Separately, Markel has stated that for the federal government to make percent, 66 percent and 53 percent, it will settle UK BI claims with direct payments to small businesses respectively. $325mn of the net virus reserves if another pandemic strikes. In addition, insolvencies in the US it set aside in the first quarter, In the UK, meanwhile, the are expected to rise by 43 percent, primarily for UK BI claims and Financial Conduct Authority with increases in UK insolvencies global contingency losses. is pursuing an expedited High pegged at 37 percent. There have been widespread calls Court test case to bring clarity to The Coface report added that the for BI cover to be backed by the policyholders and insurers over BI worst affected sectors would be state in both the US and the UK – insurance wordings. the energy, textile/clothing, retail, or for the coverage to be reformed Arch, Argenta, Ecclesiastical, automotive, metals and transport so that it will respond better to Hiscox, MS Amlin, QBE, RSA and sectors, as lockdown is expected to pandemic risk. Zurich are all set to participate in have impacted 50 percent or more In the UK in March, the ABI’s the case, which has identified 17 of turnover in these industries. Evans noted that any expansion of policy wordings that could be in With coronavirus having BI cover to encompass pandemics dispute. affected supply chains around the would need “very significant state Despite the hope that this will world and forced governments support”. set a precedent both for settling to enforce lockdown measures, There have been suggestions, claims and future policy wordings multiple industry sectors have notably by the ABI, that UK around pandemic-related BI claims, been simultaneously impacted, terrorism mutual Pool Re could there are concerns that there will amplifying the potential for heavy supply around £1bn of its £6.6bn be prolonged legal battles over losses. surplus to help foot the BI bill, by wordings as multiple individuals It is also widely accepted that the creating a relief fund for distressed and groups bring legal actions disruption caused by coronavirus SMEs that lack pandemic insurance aimed at getting a BI payout. will trigger a recession, leading cover. Sources also fear that the disputes more businesses to become The notion was rejected by over BI losses have done and will insolvent or bankrupt, and leading the board of Pool Re, which is do untold reputational damage in turn to more trade credit understood to have stressed that its to insurers if they are viewed by insurance claims further down the first duty is to preserve its surplus insureds as having shirked their line. to ensure resilience in the face of a responsibilities – even where the Potential losses are also very major terrorist attack. coverage does not explicitly include dependent on the occurrence of a However, the creation of a pandemics. “second wave” of Covid-19 infection, steering committee to discuss with the Coface report stating that proposals for a Pandemic Re Trade credit and surety global GDP could rebound by 5.1 solution, led by Stephen Catlin, Trade credit insurance has been percent – but only if there is no has seen representatives from singled out as one of the lines second wave. Pool Re come on board as the most impacted by coronavirus. Lloyd’s coronavirus loss estimate group works on an industry- The coverage typically pays a from May said the proportion of led proposal to address future percentage of a receivable or invoice losses likely to stem from credit pandemic risk. Michael Dawson, that is unpaid due to insolvency, lines was around 11 percent. active underwriter of specialist bankruptcy or defaulting by the Continued on page 22 IQ Summer 2020 21
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