Insurance news

Enhanced scrutiny of financial institutions in the wake of the Silicon Valley Bank (SVB) and Credit Suisse failures could lead to unnecessary regulatory pressure being piled on insurers with consequences for policyholders and industry, the Global Federation of Insurance Associations (GFIA) has warned.

Insurers are wary of a repeat of regulatory actions seen following the 2008 financial crisis, when there was a tendency for the insurance sector to find itself encompassed within banking regulations, one example being efforts to tackle systemic risk under cumbersome G-SII designations.

In the aftermath of the 2008 crash, the Financial Stability Board (FSB) designated several large insurers as G-SIIs, marking them out as globally systemically important. It later rowed back on this in 2019, when the IAIS’ Holistic Framework came into play, recognizing that most insurers do not typically present a systemic risk.

Insurers fear being caught up in banking and NBFI regulation following SVB and Credit Suisse failures

Insurers are now uneasy around the potential for a repeat as regulators once again zoom in on banks following last year’s SVB and Credit Suisse collapses.

Regulators and policymakers have also become increasingly concerned around the growing role of non-bank financial institutions (NBFIs), with parts of the cohort sometimes referred to as ‘shadow banks’. NBFIs have been seen to include a broad swathe of business and initiatives including crypto-currencies, investment and money market funds, private equity (PE) funds, venture capitalists, and micro-loan organizations.

Insurers fear that they may be bundled into actions to tackle regulation and transparency around NBFIs that are less highly regulated, have more limited public reporting requirements and are “highly interlinked” with other areas of the economy and financial systems.

The GFIA, which represents the interests of (re)insurers from 70 countries, has urged policymakers not to include insurance in any broad brush NBFI changes in the wake of the SVB and Credit Suisse failures, and the organization remains “cautious” on the potential for future “additional and unnecessary” regulations, Angus Scorgie, chair of the GFIA’s systemic risk working group, told Insurance Business.

IMF report sees elevated vulnerabilities in corporate and non-bank financial sectors of major economies #economy #GFSR https://t.co/62naWZ1fEY pic.twitter.com/UBXgZhnJXB

— IMF (@IMFNews) October 16, 2019

National and global groups zoom in on banks and non-banks post-SVB and Credit Suisse crises

National and global organizations – including the European Insurance and Occupational Pension Authority (EIOPA), the International Insurance Association of Insurance Associations (IAIS), the Organization for Economic Co-operation and Development (OECD), and the Financial Stability Board (FSB) – have focused in on the interrelation of banks and non-banks in the wake of the SVB and Credit Suisse collapses.

NBFIs have played an increasingly critical role since the 2008 financial crisis and accounted for nearly 50% of global financial assets as of April 2023, according to International Monetary Fund (IMF) figures. With growth has come increased vulnerabilities and enhanced interconnected risk.

Archegos Capital – the banking and Credit Suisse impact

Failings at Credit Suisse, which has since been bought out by UBS, have in part been linked to NBFI business Archegos Capital’s 2021 $20 billion securities fire sale that sent stock prices spiralling downwards.

Credit Suisse took a $5.5 billion loss following the private hedge fund’s default, according to a 2021 Credit Suisse special committee report, even as it grappled with fallout from the failure of Greensill Capital. Morgan Stanley and Goldman Sachs, which also had Archegos Capital exposure, also saw their stock prices tumble.

Given its private status, Archegos Capital was not subject to US Securities and Exchange Committee (SEC) oversight or disclosures.

GFIA calls for “unique” approach to insurance regulation

The GFIA has contended that insurance functions differently to NBFIs such as Archegos Capital as well as banks, and regulators must acknowledge the “unique” way in which it operates and is already regulated, including on solvency and transparency, to avoid any impending action being detrimental not just to insurance companies, but to customers.

“Failing to recognize the important ways in which the insurance sector is unique and applying inappropriate and unnecessary regulation, threatens to undermine the effective functioning of the sector that then impact policyholders who then pay higher costs and offered fewer products,” Scorgie said. “Incorrect regulation not only increases compliance costs and burdens, but also undermines good risk management practices, whilst reducing risk taking and investment capacity.”

Insurers that do engage in banking-like activities may trigger “valid” systemic risk concerns, the GFIA did caveat; however, it pointed to fully funded insurance liabilities, meaning insurers do not rely on borrowed money to pay claims, as setting much of the sector well apart from banks that rely on highly liquid liabilities to provide loans, which it said creates an “inherent mismatch”.

“Policymakers should not apply banking regulations to insurers and they should not include insurers in their concerns about other financial sectors,” Scorgie said. “For regulatory and supervisory purposes, insurers should be recognized as a separate and distinct category, and policymakers should refer to insurers, banks and other financial sectors separately when discussing the financial services landscape.”

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The proposed £500 million (approximately $631 million) acquisition of Premier League club Everton FC is facing uncertainty amid regulatory scrutiny involving the potential buyers’ corporate entities, with both the Bermuda Monetary Authority (BMA) and Utah insurance regulators raising concerns about the viability of the deal.

The club’s prospective owners, 777 Partners, are dealing with regulatory issues. According to Josimar, a major funding source for 777 Partners is its Class E Bermuda life reinsurer, 777 Re. This reinsurer, focused on life insurance and annuity business, is now under the administrative control of the Bermuda Monetary Authority (BMA).

As per a report from The Royal Gazette, these developments have cast significant doubt on 777 Partners’ ability to complete the Everton takeover. The BMA’s action reportedly restricts access to approximately £2.4 billion in funds necessary for the acquisition.

Moreover, 777 Partners is facing additional legal challenges and high-interest borrowing rates, as reported by Josimar. The group’s American insurance subsidiary, Haymarket, is also under scrutiny from the Utah Insurance Department.

Everton FC has encountered additional challenges, facing new disciplinary actions from the Premier League while appealing earlier sanctions. The club breached the Premier League’s profit and sustainability rules for the previous year and has reportedly violated these rules again this season, leading to potential further penalties.

The club is in the process of moving from Goodison Park to a new stadium at Bramley-Moore Dock, scheduled to open for the 2025-26 season. However, the cost of this project has escalated from £500 million to an estimated £760 million.

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Bermuda is remembering Audrey Ann DeSilva, a re/insurance professional and a trailblazing figure in its political spheres.

DeSilva passed away on January 1, 2024, at the age of 84, an obituary from The Royal Gazette confirms. DeSilva, recognized as the first president of the Business and Professional Women’s Association of Bermuda and a notable member of the United Bermuda Party, was born on October 5, 1939.

DeSilva’s career was marked by significant contributions to women’s advocacy and business leadership. In 1976, she partnered with cricket legend Alma “Champ” Hunt as the United Bermuda Party’s candidates in Devonshire North, despite the constituency being a stronghold of the Progressive Labour Party. Although the campaign was challenging, DeSilva and Hunt showed commendable effort.

Professionally, DeSilva was an accountant and had been at the helm of the Business and Professional Women’s Association of Bermuda since its inception in 1975. Lauren Hart-Bell, the archivist for BPW Bermuda, commended DeSilva for her tenacity, professionalism, and leadership, acknowledging her as a pioneer for the organization.

DeSilva was also involved in the International Women’s Year in 1975, appointed by the premier to investigate the status of women in Bermuda, which led to the founding of BPW Bermuda. Her efforts were part of a global movement to empower women in business and professional realms.

Reflecting on a reinsurance career

In addition to her advocacy work, DeSilva had a diverse career trajectory, starting with secretarial training and progressing through various roles, including at the Bank of Butterfield and several positions in the burgeoning insurance and reinsurance industry in Bermuda.

Her roles also encompassed positions in the re/insurance industry, including Bellefonte International Insurance, Transcon Insurance, and American International Reinsurance, among others.

She remained actively involved with BPW Bermuda until 1977, organizing talks and seminars on various topics and creating profiles of significant Bermudian women. DeSilva also maintained her political involvement with the United Bermuda Party into the 1980s and served on several governmental boards.

In the mid-1980s, DeSilva, along with her second husband, Leonard, ventured into the beauty industry, expanding Shapers Hair and Beauty Salon. She retired in 2007, leaving behind a legacy of dedication and service in both the professional and political arenas.

DeSilva is survived by her children Michael Benevides, Tammy, Geri, and stepson Leonard DeSilva II, marking the end of a life dedicated to advocacy, business leadership, and public service.

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Chaucer has announced the appointment of Richard Milner as its new group chief executive officer, pending local regulatory approval.

In this new role, Milner will oversee the strategic development and management of the company, which includes Syndicate 1084, specialty nuclear Syndicate 1176, and Chaucer’s insurance company based in Dublin.

As per his LinkedIn, Milner brings a wealth of experience from his previous executive roles at Aspen and Axis Re, where he honed his global re/insurance underwriting expertise.

“I am delighted to be appointed group CEO of Chaucer,” Milner said. “Chaucer’s reputation, which is built on the experience and expertise of its talented people, innovation, and a disciplined approach to risk management, makes it a natural next step for me. I am excited about the opportunities ahead and the chance to be part of something special.”

“I am delighted Richard has accepted the role and I look forward to working with him,” said group chairman Paul Jardine. “Over the course of his career Richard has distinguished himself as an exceptional leader, earning the respect of his peers and across the industry. I am confident that we will all benefit from his tremendous leadership skills, strong underwriting background, and deep understanding of international markets as we continue our development as a leading global underwriting group.”

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Swiss Re’s projections for 2024-2028 suggest that total insurance premiums in India will increase by 7.1% in real terms annually, significantly outpacing the global average of 2.4%, as well as the averages for emerging (5.1%) and advanced (1.7%) markets and positioning the country as the fastest-growing insurance sector among G20 countries.

India’s economy stood out in 2023 despite its challenges, with an estimated growth rate of 6.7%, surpassing that of other major economies. The country’s growth trajectory is primarily fueled by private consumption and fixed investment.

Despite these positive trends, the country faces potential economic risks. These include the impact of interest rate hikes, the possible effects of El Nino, rainfall deficits, and geopolitical tensions, particularly in the Middle East, which could affect oil prices.

In the realm of insurance, India shows a promising outlook. Boosted by economic growth, an expanding middle class, innovative approaches, and regulatory support, the insurance market in India is expected to witness substantial growth. In 2023, insurance premium growth in India slowed slightly compared to the previous year. This moderation reflects ongoing adjustments in the post-COVID-19 era.

Life insurance premium growth is estimated to have decreased to 4.1% from 5.9% in 2022. This slowdown is attributed to diminishing pandemic-related risk awareness and recent changes in tax norms affecting high-value policies. However, robust growth is expected in the life insurance segment for 2024-2028, with a forecast 6.7% increase in premiums. This growth will be supported by the middle class’s rising demand for term life coverage and the country’s young demographic, coupled with the increasing adoption of insurtech within the industry.

Non-life insurance premium growth also saw a slight decline from 9.0% in 2022 to an estimated 7.7% in 2023. Factors such as high interest rates and rising retail and medical inflation presented challenges to growth in this sector.

Nevertheless, non-life premiums are expected to grow at an annual average of 8.3% during 2024-2028, driven by factors including economic expansion, improvements in distribution channels, governmental support, and a favorable regulatory environment.

The Indian government and insurance regulator have implemented several initiatives to foster growth in the insurance industry. Notably, the mission “Insurance for all by 2047”, launched in November 2022, aims to ensure that every citizen and enterprise in India has adequate insurance coverage.

Additionally, efforts are underway to attract foreign investment into the market. These reforms, coupled with India’s robust economic growth, are anticipated to further propel the development and expansion of the insurance sector.

India’s rapidly growing economy and insurance market, however, also increases its exposure to natural catastrophes. The country is prone to various natural disasters, including earthquakes, floods, tropical cyclones, droughts, and wildfires.

Despite this high exposure, insurance protection against natural catastrophe risks remains low. Swiss Re’s resilience analysis reveals that a staggering 93% of these exposures are uninsured. The economic losses from natural disasters in India have been escalating, largely driven by economic growth and rapid urbanization. Major Indian cities, which are densely populated and have high asset values, face heightened vulnerability to multiple natural hazards.

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Reinsurers have started incorporating cancelation provisions into their policies in response to escalating tensions in the Middle East.

The move is primarily aimed at mitigating potential risks associated with the ongoing conflict between Israel and Hamas that began in October.

These cancelation clauses, introduced during turn-of-the-year policy renegotiations, allow reinsurers to withdraw coverage in the event of a full-scale Middle East conflict. This development, confirmed by four market participants to the Financial Times, introduces a new dynamic in reinsurance contracts, as such clauses were not previously employed.

The clauses note that in the event of activation, insurers would lose reinsurance coverage for new policies or assets, such as a commercial building damaged in a conflict. This increased risk is expected to be passed on to clients, potentially resulting in higher premiums or reduced coverage options.

The global insurance sector’s exposure to Israel through political violence and terrorism policies is estimated to be around $10 billion.

Definition and implications of an “escalation”

The acceptance of these clauses by some insurers has raised concerns within the industry, particularly regarding the definition and implications of an “escalation” in the conflict. Furthermore, reinsurers have been pushing for higher prices and limitations on coverage amounts for clients in Israel and neighboring countries like Lebanon and Jordan. There have been discussions about excluding these countries from framework contracts, although these have seen limited success.

According to a report by Aon, reinsurers are seeking to increase prices and reduce coverage in Israel and the surrounding region. This has led to significantly higher costs for both international and local groups seeking to insure infrastructure and property. In some cases, businesses are opting to renew their insurance policies without coverage for assets in Israel, relying instead on state compensation funds.

The global reinsurance industry, with approximately $600 billion in capital, has been increasing prices following years of inflation, natural disasters, and the impact of Russia’s invasion of Ukraine. These factors have contributed to a general rise in business insurance costs globally.

Similar measures were taken by reinsurers in response to the war in Ukraine, including the exclusion of certain countries from contracts. The recent introduction of cancelation provisions has caused frustration among underwriters, reflecting the industry’s growing concern over geopolitical risks.

Major global reinsurers, including Munich Re, Swiss Re, and SCOR, declined to comment on the developments. However, Hannover Re issued a statement outlining its approach, which varies by insurance client and is based on specific portfolios.

The company stated that for existing business in Israel and neighboring countries, it prefers to limit accumulations rather than seeking full or partial exclusions.

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The recent Houthi attacks on commercial ships in the Red Sea have caused notable disruptions in global shipping, leading to longer routes and increased costs, as reported by Allianz Trade.

The Red Sea plays a crucial role in global trade, with one-third of worldwide container traffic and 40% of Asia-Europe trade passing through this route. Moreover, 12% of the world’s seaborne oil and 8% of liquefied natural gas (LNG) traverse the Suez Canal.

In the 10 days leading up to Jan. 7, shipping volume in the Suez Canal experienced a year-on-year decline of 15%. The Bab-el-Mandeb Strait, which leads into the Red Sea, saw a more dramatic drop of 53%. The number of cargo ships and tankers passing through the Suez Canal decreased by 30% and 19%, respectively. Concurrently, shipping activity around the Cape of Good Hope nearly doubled, with a 66% increase in cargo ships and a 65% increase in tankers.

Despite the significant rise in shipping prices since November 2023, which saw a 240% increase as of early January, they remain at a quarter of the peak seen in 2021. The current demand backdrop, higher inventories in consumer goods segments, and increased capacities with new containerships suggest a lower risk of price hikes compared to 2021. However, if the crisis persists beyond the first half of the year, the impact on global supply chains could intensify.

Situation remains contained if disruptions are brief

The short-term impact of rising logistic costs on inflation, GDP, and trade is expected to remain contained if disruptions are brief. The effect of doubling shipping costs on inflation is notably higher in Europe and the US, potentially leading to a 0.7 percentage point increase, compared to 0.3 percentage points in China. For global inflation, this could mean an increase to 5.1% in 2024.

In terms of GDP growth, Europe could see a reduction of 0.9 percentage points, and the US a decrease of 0.6 percentage points. This could lead to a global GDP growth reduction to 2%. However, longer-term disruptions could reduce global trade growth in volume by 1.1 percentage points to 1.9%, raising the risk of a delayed rebound from the 2023 recession.

European energy prices remain highly volatile in light of the crisis. Following the Houthi rebels’ initial attacks, the Brent oil price, a European benchmark, increased by nearly 2%, while the US WTI price stayed relatively stable. In the same period, natural gas prices in Europe rose by 3.6%.

Despite these fluctuations and continued attacks, oil prices have been declining due to factors such as higher-than-expected supply, global demand concerns, and the continued passage of tankers through the Red Sea. For European natural gas prices, short-term supply tensions are not expected to majorly impact prices, given the high reserves and the nearing end of the heating season, despite a recent cold snap.

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Moody’s RMS has estimated that the total insured losses from the Mw7.5 earthquake on the Noto Peninsula, Japan, which occurred on January 1, are likely to be between JPY435 billion and JPY870 billion (US$3 billion to US$6 billion).

This loss estimate by Moody’s RMS is derived from an analysis using its Japan Earthquake and Tsunami high-definition (HD) Model. The estimate accounts for property damage, contents, and business interruption across residential, commercial, and industrial lines. It includes coverage from both private and mutual (Kyosai) insurance markets.

Included in the estimate are losses due to various impacts such as strong ground shaking, earthquake-induced fires, tsunami inundation, land sliding, and liquefaction-induced ground deformation. The calculation also factors in post-event loss amplification (PLA) and inflationary trends. However, it does not encompass losses related to non-modeled exposures like transport and utility infrastructure, government, or automobile lines.

The earthquake, with a moment magnitude of Mw7.5, struck near Anamizu, a town in Ishikawa Prefecture, at a depth of 10 kilometers, as reported by the United States Geological Survey (USGS). The Japan Meteorological Agency (JMA), which categorizes local ground shaking intensity on a scale of zero to seven, reported a moment magnitude of Mw7.6 and a maximum seismic intensity of seven in the Shika Town Municipality of Ishikawa Prefecture.

The USGS attributes the earthquake to shallow reverse faulting on Japan’s west coast, a region where crustal deformation is accommodated in shallow crustal faults. The earthquake’s focal mechanism solutions suggest faulting occurred on a moderately dipping reverse fault extending from southwest to northeast.

“This event highlights the importance of evaluating shallow crustal earthquakes within a comprehensive view of seismic risk – in Japan and around the world. While the seismic risk in Japan is driven by subduction zone events, there have been several damaging shallow crustal events in recent decades including the 1995 Great Hanshin Earthquake, the 2016 Kumamoto Earthquakes, and now the 2024 Noto Peninsula Earthquake,” Moody’s RMs senior director Chesley Williams said.

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Reinsurance tech firm Supercede has unveiled data highlighting trends in the reinsurance industry, particularly regarding the adoption of digital solutions, all of which are particularly relevant during the January 2024 reinsurance renewal period, a crucial time for the industry.

The pace of digital transformation within the reinsurance industry has been steady, albeit slower than the ambitious digital strategies many insurance companies have outlined. According to the latest data, the transition to digital platforms is underway but progressing at a moderate pace.

From October 2023 to January 1, 2024, Supercede processed $60.935 billion in underlying premium, marking a 154% increase from the $24.016 billion processed in the same period in 2022-2023. This volume represents approximately 1% of the global reinsurance market, indicating an increasing acceptance of digital platforms.

The total number of users on Supercede’s platform has seen 43% growth, and the number of distinct reinsurance markets on the platform has risen from 145 last year to 194 this year. There was a notable 214% increase in the use of Supercede’s digital submission packs compared to the previous year.

The data underscores a growing recognition in the reinsurance industry of the benefits of digital platform for enhanced efficiency, improved data accuracy, and better collaboration among stakeholders.

Despite the insurance sector’s reliance on traditional methods, there is recognition of the necessity for innovation to remain competitive. Supercede’s statistics demonstrate that traditional players in the industry are increasingly integrating technology into their operations.

“The insurance industry, especially in the reinsurance segment, is traditionally cautious in adopting new technologies. However, our latest figures suggest a gradual but definite shift towards digital solutions, albeit at a pace that reflects the industry’s need for reliability and trust in new systems,” Supercede CEO and co-founder Jerad Leigh said.

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The prolonged downturn in China’s real estate market since February 2022 has sparked concerns about a potential financial crisis with global repercussions. However, as the industry enters the new year, Swiss Re forecasts that such a crisis appears unlikely.

Analysts point to several factors mitigating the risk, including peaking real estate debt levels, government policies to deleverage, and fiscal spending on key projects. These measures are expected to stabilize the property market and, in turn, bolster consumer and investor confidence, leading to economic growth at a new, albeit lower, norm. This stability could also positively impact China’s property and casualty (P&C) insurance sector.

The property market’s decline has been attributed to a combination of cyclical factors like slowed income growth during the pandemic and structural issues such as the shrinking working-age population and diminishing returns on investments. This slump has dented household and business confidence, curbing domestic growth and raising the risk of a liquidity trap.

The real estate sector’s troubles have since rippled through the economy, impacting investment and consumption and affecting approximately 24% of real estate-related value chains that contribute to GDP.

China’s GDP forecasts

The forecast for China’s GDP growth in 2024 is 4.5%, with reduced real estate investment expected to shave off 0.5-0.7 percentage points. The global interest rate hikes in 2022-23 led to defaults in China, especially on USD-denominated debt. However, the risk of systemic default is considered limited due to the nature of the property sector’s debt and government efforts to manage deleveraging.

The outstanding debt in the sector is estimated at CNY60 trillion, or nearly 50% of 2022 GDP, with home mortgage loans and corporate debt constituting significant portions. The relatively high down payments required for mortgages and most of the corporate debt being in the form of bank loans suggest a containment of large-scale defaults.

The government’s policies to stabilize the property market, including ensuring completion of pre-sold residential properties, lowering mortgage rates and down-payment ratios, and extending corporate loan repayment terms, have been instrumental. The government’s priority on economic growth for 2024 indicates more fiscal spending, alongside monetary policy easing. Plans include significant investment in affordable housing, urban village renovation, and emergency public facilities, aimed at supporting lower-income households and easing pressure on the commercial market.

This fiscal spending and policy support are expected to restore confidence in the market and underpin economic growth. In the insurance industry, these developments present new premium opportunities, particularly in engineering, commercial property, and liability business, within the P&C sector.

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