Why you can expect to be in the hard market a year from now

Inflationary pressure will prolong the hard market for at least another year if not longer, 90% of more than 200 respondents predicted in a Canadian Underwriter webinar poll.

Only 10% of respondents were optimistic the hard market would not be exacerbated by inflation, which rose to 6.8% in April — one of the highest rates seen since 1991.

Geopolitical impacts from Russia’s invasion of Ukraine, rising interest rates and a looming recession also complicate matters for the industry.

These pressures often mount one after another, one industry executive on the webinar panel observed.

“One thing we learned post-pandemic is that the risks that we’re seeing globally and here in Canada don’t just come in isolation,” says Colette Taylor, chief operating officer at Sovereign Insurance. “We’re not dealing with [one at] a time, or we just have to deal with inflation, or we just have to deal with cyber risk. It’s all kind of converges and there’s a knock-on effect that that happens.”

These pressures change quickly, she notes, making them difficult to predict.

“We don’t exactly know where this is going to take us, or even if what we’re saying here today about inflation is going to be relevant in one to two months’ time,” Taylor says. “What we were saying about inflation two to three months ago was quite different from a lot of the commentary that we’re seeing today.”

What impact will inflationary pressure have on insurers’ capacity?

Governments have raised interest rates in an effort to cool down economic growth, and hence inflation. Although long-term, this may improve insurers’ investment returns, in the short-term, reinsurers will likely feel the squeeze of inflation on their capital.

“I suspect that the first quarter and the second quarter of this year is going to be particularly unpleasant for the reinsurers, just in terms of the way their asset-liability matching is going to hurt them,” says Alister Campbell, president and CEO at Property and Casualty Insurance Compensation Corporation. “Their long-tail liabilities mean they have long bonds, which have been particularly damaged in terms of valuations.” 

Capacity doesn’t generally become more “free-flowing” in an inflationary world, Campbell suggests. “People get more careful about picking their spots.”

“Capacity hasn’t been charging back into the market, like we might have expected it would have if we weren’t having to navigate all these very complex geopolitical and conditions that we are right now,” says Taylor. “That in itself is a fairly good indicator that insurers and reinsurers are going to continue to be measured and mindful about how they’re managing their capacity and the costs associated.”

There is a temptation for the industry to use its positive financial results in 2021 as a springboard to lower rates and offer more capacity. But in the medium term, Campbell predicts much lower returns on equity (ROE) for the industry, following an industry ROE of 18% in the first three quarters of 2021.

“We do have a history that, when we have [financial] results this good, we revert to the mean promptly,” he says. “The competitive industry that we are, we rapidly return to much lower average returns on equity, because we just can’t help ourselves.”

Looking forward to 2023, 56% of webinar poll respondents predict an economic recession will be at the top of their Global Risks list at the start of the new year. Supply chain finished second at 21%, followed by national catastrophes (16%), cyber (5%) and pandemic (1%).

These many risks, and the possibility of an ongoing hard market, highlight the need for companies to prioritize risk prevention and be proactive, rather than reactive, says Sonia Kundi, chief risk officer at Zurich Canada.

“Insurance really has to look more at how we can work with our customers to prevent the claims, across all lines of business, whether it’s commercial or personal,” she says. “Working with the customers to ensure that they’re doing everything they can to reduce the impact if they have to make a claim due to an event, or to actually not have to make a claim at all.

“Let’s not be reactive. Let’s try being a little bit more proactive and work with the customers to ensure that they’re doing the best they can.”

Feature image by iStock.com/Yuri_Arcurs