TOP 5 THEMES
When will the hard market end?
There is a range of views; some argue ‘this time it is different’ because underwriters’ new discipline and need for profitability will create a long-term floor for terms. The alternative, or ‘piranha view’, is underwriter greed will return in 2021 due to profitable underwriting triggering heightened competition and a softening, as in past cycles. Our view is that this cycle is different, not least because rate change is being driven more by direct carriers than reinsurers, and the London P&C market will probably develop to reflect the following:
- A long-term low-interest-rate environment coupled with the greater focus on underwriting discipline (forced on some), and profitability will translate into harder or stable pricing for longer than in past market cycles.
- The international property sector will show signs of market share competition first, led from Asia Pacific, the Middle East, and Latin America followed by Europe, probably by the end of 2020.
- Heavily natural-catastrophe-exposed countries such as the US and Japan will experience more caution from carriers, reflecting (re)insurer concerns about pricing adequacy based on historical loss data relevance due to climate change.
- The capacity constrained parts of the US casualty market are very hard, and we expect this to continue to attract new capacity. Carriers will remain cautious because of London’s history in this area, and it could take longer to change sentiment, probably no earlier than 2022.
- The international casualty market is the most difficult to forecast because it was historically the least volatile and the level of change is patchy. Nevertheless, capacity withdrawals and cutbacks, together with what seems to be real appetite change in the Australian and Canadian primary markets for the sector, would indicate it will remain harder for longer than 2021.
- Capital raises of approximately USD 23 billion (see Appendix III for details), while significant, are not material enough to change the capacity supply side balance and move terms.
One further point to note is that this hard market, unlike most preceding it, is not driven by a shortage of capital in the industry. New capital is also entering – evidenced through recent start-ups and re-financing in Bermuda, London, the US, and elsewhere. As such, some argue that when the market does begin to turn, it could do so more quickly than we have seen in previous cycles. Forecasts are often wrong, and events will play their part; with these caveats, the above forms our best estimate. It should be noted many of our most experienced brokers were on the side of the piranha view because carriers’ 2021 growth targets will drive behaviour, and FOMO (Fear of Missing Out) will re-enter the emotional side of trading more quickly than generally thought.
"Our view is that this cycle is different, not least because rate change is being driven more by direct carriers than reinsurers."