Scor: Firm Footing Needed When Uncertainty is the Only Constant

The current market dynamics will result in further hardening throughout 2022. The fundamentals we saw in 2021 – low interest rates, elevated catastrophe activity, social inflation, a difficult economic environment, and an uncertain risk environment generally – will all persist in 2022.

The significant cat events witnessed in Europe this year, as well as a very active hurricane season in the US, will add to upward pressure on pricing.

Programmes were renewed in January 2021 without any consideration for potential claims from COVID-19. At January 1 2022, as additional information becomes available, there will be room for further price increases.

A mitigating factor is that capacity is plentiful, especially in the US, although the overall market remains disciplined.

Therefore, we expect a stronger correction in Europe and continued hardening in the US.

Clients recognise that many losses have been ceded in 2021. On Covid-19, it is widely recognised that treaty wordings were never really designed for this type of claim and the original pricing didn’t reflect these perils.

During the 2021 renewals, there was initial resistance to incorporating exclusions for infectious diseases, but most of the market now accepts them.

Capacity isn’t a problem, although there has been a flight to quality to better rated reinsurance. This is logical because having better rated reinsurance in an uncertain period like this allows for increased certainty on outcomes.

I also believe that recent claims experience will play a role in how clients determine who they want to do more business with. This is a positive for SCOR.

Third party capital will remain a permanent source of capital for insurers and reinsurers, but its influence today is not as strong as it was a decade ago when it disrupted the cat market. ILS continues to be important, and every reinsurer now includes it in their capital management strategy. It’s a part of how we diversify our growth funding and a way of leveraging our global underwriting platform.

There was an adjustment in capital during Covid, as well as some trapped capital issues. This weeded out certain participants, making the ILS market likely more resilient going forward.

US casualty is the most challenging class of business for us, both general liability and financial lines. There have been significant price increases but, from a reinsurer’s point of view, those increases alone fail to reflect the intrinsic profitability issues around social inflation, which we expect to return after a pause during the pandemic.

There’s also pandemic–driven litigation uncertainty that hasn’t yet materialised. This should result in further tightening of treaty wording going forward.

In a few cases, insurers have also obtained increases in their ceding commissions on proportional treaties, which is problematic and negates part of the risk-adjusted price increases on the business. We remain positive on the insurance side as the dynamic of the insurance market is positive.

It’s a huge growth opportunity, but it’s still a maturing segment. All market participants have been cleaning up the treaty and policy wordings and exclude cyber from general P&C treaties to make them specific from a reinsurance perspective. We saw large losses initially and now ransomware is eroding a lot of the business’s margin.

At SCOR, we take a prudent approach and have a well-defined risk appetite for cyber. We monitor our accumulations on a client-by-client basis and for the overall portfolio, using externally licenced and internally developed models. I’d describe SCOR as an active but prudent cyber player.

We believe the increased activity we have seen in the past five years is a direct effect of climate change. Therefore, we have invested a lot of time and resources to investigate the impact that it will have on perils and portfolios, to adapt our pricing models and our underwriting approach.

We are taking a tougher stance on low cat layers, not simply on pricing but also on the number of reinstatements. We will look to move clients with free reinstatements over to paid reinstatements.

We have also reduced our aggregate XL portfolio because of pricing concerns. For example, in Japan, after the active cat seasons of 2018 and 2019, we de-risked our portfolio by maintaining the same amount of available capacity but deploying it across the programmes.

One of the main lessons is better wording clarity. This has been incorporated in 2021, with a particular focus on Contagious Disease and Cyber risks.

We see the Covid claims effect lingering into 2022 and perhaps beyond as the litigation makes its way through courts around the world. We’re taking a conservative view as it evolves.

Covid has forced us to work remotely and switch from in-person meetings to virtual meetings. I think that part of this will be here to stay, which will be a good opportunity to reinvent ourselves and attract new talent.

The war for talent in the broker and (re)insurance market is fierce. The Covid lockdown created an environment in which it’s become easier for people to move around, as there’s less emotional attachment to companies. It’s permeated the whole market and challenges us all to reinvent how we work together.

The Covea transaction will help us accelerate our portfolio changes towards attractive segments that we currently see in the P&C marketplace. In 2021 we will have grown 15% year on year and anticipate a similar or stronger rate in 2022.

We feel that the most attractive segment in the market remains specialty insurance and we plan to grow this segment faster than reinsurance, notably large corporate insurance, and segments such as political risk.

On the reinsurance side, our growth in 2021 was focused on European and fast growth markets in Asia, Latin America, the Middle East, and Africa. In 2022, we expect to see more growth in Europe and in global lines like marine and energy, cyber, agriculture, credit and surety, where significant remediation has been undertaken by the market and so conditions should be attractive in 2022.

The Covea transaction doesn’t fundamentally change our view of the market: it gives us the opportunity to accelerate our strategy in these areas and to maximise our return in 2022.

Before 2018 when we saw the first market hardening, we had kept our specialty insurance portfolio flat, focusing mainly on technical lines. Since then, we have been riding the hardening market, effectively doubling the size of the portfolio on the back of rate increases and expanded our portfolio. Despite the slowdown in rate increases, we still see rate on rate compounding effects which should produce attractive returns.

We have also transformed underperforming parts of the business, notably SCOR’s Lloyd’s syndicate Channel, for which we pruned our book by a quarter, closed a RiTC, and aligned appetite and organization with the broader SCOR. In 2020, the benefits were clear and SCOR Channel is now in Lloyd’s top quartile for performance.

Finally, if Specialty Insurance performs well as a standalone unit within P&C, it is also a strong asset for our treaties business, as it enables us to provide the necessary infrastructure for new and innovative deals, such as combining the offer of insurance underwriting or fronting in exchange for a private reinsurance transaction.