Casualty Reinsurers Leap of Faith

According to O’Donnell’s Laws of Cartoon Motion governing the behaviour of cartoon characters, a body suspended in space will remain that way until the character is made aware of its situation. Wile E. Coyote runs off a cliff edge but does not fall – at least not immediately. He remains suspended, legs working furiously, until the moment he looks down and gulps. Then he falls. Cut to the Road Runner. Beep, beep!

Some might say that casualty reinsurers behave as if they are also subject to these laws. Just like Wile E. Coyote, many have run so hard they have sprinted off a cliff edge. Most have yet to look down. But they will. Soon.

Having seen reinsurance rates increase during the early stages of the pandemic, many reinsurers responded by doing what they always do. Business as usual but at a faster pace. Have they already forgotten the hard lessons of the past half decade? Social inflation, climate change, rising property catastrophe costs, low interest rates and a multitude of other factors all converged in 2020 to drive a hard casualty market. Rates currently appear to be keeping up with loss trend, but the economics of the reinsurance transaction remain under intense pressure. Who will be the first to look down?

Our own century’s Roaring ‘20s have gotten off to a news-filled start. Apart from Covid-19 and claims cost inflation, a big story has been the remarkable talent war waged over the past 18 months, with the trade press filled with reports of notable hires and defections. At Liberty Mutual Re, we have met this challenge with many exciting new hires across our ranks at both senior and junior levels. We are supporting our new hires through the global reach of Liberty Mutual Re. We now have 15 offices in 14 countries across the globe, from Singapore to Dubai, from Madrid, Paris and Rome to Cologne, London, and Bermuda, not to mention offices in Latin America, and of course the US.

New business start-ups, either MGAs or companies, have also been a familiar news item. We applaud the ambition, confidence, and creativity at so many of these new ventures and welcome the chance to take part in the development of these opportunities. But make no mistake, there is no way to outrun the past. Simply putting a new sign out front does not guarantee a better tomorrow. A laser-like focus on underwriting the right risks at the right price and coverage terms, along with best-in-class claims service gives both new operations and established carriers alike the best (and only) chance there is to succeed. Without this, we are all like Wile E. Coyote running out into the wild blue yonder.

The insurance industry relies on reinsurers and this requires a strong, healthy, and innovative reinsurance sector as part of the value chain. To fill this role, reinsurers need to make capital-accretive returns over the course of the cycle. Unfortunately for reinsurers, we can’t just close our eyes and write everything. Too many deals are priced at terms that are deficient or only barely adequate. On the back of a strong primary market, many accounts have seen ceding commissions rise over the past year, taking away much of the improved performance of the business after several disappointing years. While buyers may enjoy the short-term benefits of squeezing their markets for a point of commission and “a better deal”, is this sustainable over the long term? While reinsurers may at times appear afraid to “look down”, so too are buyers who are often in denial about the demands they are placing on their long-term partners.

Capital management has become de rigueur across the business. With interest rates at historic lows, buying expectations need to be challenged. Quite simply, reinsurers need to be able to make a fair return, or their capacity and capital will ultimately be deployed elsewhere.

As we look ahead, we see a moderating market across the spectrum of liability products. Pockets remain where major improvement is required, but the heaviest lifting appears behind us. Re-underwriting of the primary books we reinsure has largely been accomplished, and pricing is vastly improved. Still, diligence and discipline will separate the winners and losers as the Roaring 20s play out.

At Liberty Mutual Re, we will continue to expand across product lines while maintaining our conservative vetting process in evaluating new and renewal business prospects. We have a diverse risk appetite and hope to grow with our clients. It is our goal to provide best-in-class service to our broker producers, whether that service is underwriting, claim payment, accounting reconciliations, actuarial feedback, or contract return time. We place integrity and fairness above all else in our business dealings, backed by our parent, Liberty Mutual Insurance Group, which now boasts total equity of $26.8 bn (as of June 30, 2021), and is the sixth largest P&C insurer globally as measured by GWP. Our company demands excellence, and that is what we strive for every day.

While the fundamentals of the reinsurance transaction have not changed, the industry has evolved enormously over the past decade. The Roaring 20s will be no different. New products and technologies will emerge, data capture and utilization techniques will advance, and new sources and quanta of covered loss will arise. Meanwhile, the pressures and demands of capital providers will continue to define our business. Those companies best able to make sense of the macro forces shaping our world, and with the discipline to execute sound judgment in response, will lead us forward. We are committed to serving the market among that group. Leave it to others to run off the cliff’s edge awaiting a trip to the canyon floor.