Insurance news

A recent report from Bloomberg Intelligence (BI) suggests that alternative-reinsurance vehicles are poised to remain the dominant source of new capacity in the reinsurance market for 2024, continuing to exert pressure on pricing within the industry.

This trend emerges in a landscape where traditional balance-sheet reinsurance capacity has seen negligible growth, with the notable exception of a capital increase at Everest Re.

In 2023, the issuance of catastrophe bonds surged to an unprecedented $16.4 billion, with anticipated returns maintaining a position above long-term averages. Matthew Palazola, a senior insurance analyst at BI, highlighted that the reinsurance sector might see continued expansion due to the allure of high returns from alternative capital sources, such as catastrophe bonds, insurance-linked securities (ILS), and sidecars.

“Alternative reinsurance capital dates back to the mid-1990s and has risen to about 16% of the market from 10% in 2014,” Palazola said. “Smoother capital-market transactions have made it easier for funding to enter the industry, which has limited price gains after large catastrophes.”

Despite significant price hikes during the 2023-24 period, there was virtually no addition to balance-sheet reinsurance capacity beyond Everest Re’s capital infusion. Historically, robust markets have seen the establishment of new companies, notably in 2001 and 2005.

Catastrophe bonds experienced a strong inflow in 2023, recording over $16 billion in issuances, a stark increase from the $10 billion in 2022 and $14 billion in 2021. The uptick in issuances could continue as enhanced pricing and rising money-market rates, which secure the collateral, amplify yields, offering more attractive expected returns.

This, coupled with insurers’ higher attachment points and retentions, may further fuel interest in cat bonds.

The BI report also notes the potential for increased capital flows into the ILS market due to reduced capacity in traditional reinsurance and higher premium rates. The public issuance of 144a catastrophe bonds reached $16.4 billion in 2023, with investor demand for property/catastrophe exposure soaring post-Hurricane Ian, as evidenced by a 37% price increase globally at the January 1, 2023, renewals according to Howden.

These higher prices, along with money-market returns, offer significant yield enhancements, providing insurers with capital to cover more risks. However, the ILS market’s structure, which permits cedents to extend maturities, may lead to investor caution. Instances of capital being trapped, such as in 2022 following Hurricane Ian, have occurred when cedents secure collateral post-maturity while assessing potential losses.

Palazola pointed out that the expected returns on catastrophe bonds, net of anticipated losses and excluding money-market fund yields, are at their highest since 2012.

“The current catastrophe-bond multiple, as measured by Artemis.bm, is at around 4.54x, 34% higher than 2022’s 3.38x and 144% better than 2017,” he said. “Multiples compressed in the 2010s as capital entered both the ILS and traditional reinsurance market, creating a supply-demand imbalance and dampening pricing across reinsurance products. Coupon rates in 2023 averaged 8.9%, the highest since 2012, and expected losses fell to 1.8%, the lowest since 2014’s 1.6%.”

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Some insurers are strategically increasing their reinsurance operations in Bermuda, either through subsidiaries or independent ventures, according to a recent analysis in Best’s Review.

This move, AM Best explained, is primarily driven by life and annuity insurers looking for capital efficiency and the opportunity to manage risks associated with products like multi-year guaranteed annuities and spread-based offerings more effectively.

Edward Kohlberg, a director at AM Best, noted that “every company has a different reason” for turning to Bermuda, including capital efficiency, regulatory arbitrage, and favorable tax conditions.

“There is a lot of annuity growth to be had and if you can manage that growth in a more efficient manner, then it benefits the company — they can sell more,” he said.

Bermuda’s long-standing appeal to professional insurers seeking capital efficiency through reinsurance was highlighted by the report. This strategy might involve either an affiliated entity or an independent company backed by different investors, facilitating a diversification of the investor base.

AM Best also points out the significant role of private equity and asset management firms in providing capital to new entrants in the annuity and block reinsurance markets, not just in Bermuda but also in the United States and the Cayman Islands.

Data from the industry group LIMRA revealed that annuity sales in the first nine months of 2023 reached $269.6 billion, a 21% increase from the same period in 2022. LIMRA projects that total sales for the year could surpass $350 billion, setting a record.

A trend has emerged where carriers are reinsuring existing business blocks with Bermuda-based companies. A notable instance is the Lincoln Financial Group’s recent arrangement with Fortitude Reinsurance Co Ltd, where Lincoln National Life Insurance Corp reinsured a substantial portion of its universal life and fixed annuity business, amounting to a $28 billion agreement.

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The property and casualty (P&C) insurance and insurtech sectors are poised for significant shifts in 2024, fuelled by technological advancements and evolving global dynamics, according to intelligent solutions provider Duck Creek Technologies’ report.

The report underscored the transformative changes expected across the industry, highlighting the integration of generative AI, cloud platforms, digital innovations, and the expansion of API interactions.

Amidst these advancements, the industry faces the dual challenges of adapting to climate change and evolving consumer expectations. The insurance sector is increasingly becoming a proponent of sustainable and ethical business practices, with a focus on enhancing risk modelling and improving transparency in customer communications.

The global economic landscape, marked by potential recessions and geopolitical uncertainties, prompts insurers to reassess their market strategies and adapt to changing regulatory environments.

Furthermore, the rise of hybrid work models and the emphasis on environmental, social, and governance (ESG) factors necessitate advancements in digital technologies and a recommitment to sustainable practices.

The report delves into the specifics of these trends, including the impact of natural catastrophes on insured losses, the continued hard market conditions, and the evolving landscape of insurtechs, which face both financing challenges and opportunities for innovation.

Insurtech trends

Consolidation through mergers and acquisitions (M&As) is anticipated to reshape the insurtech sector, with a focus on proven technologies and strategic partnerships. Insurance business models are also undergoing significant transformations, with shifts towards embedded insurance, growth in the managing general agent (MGA) market, and expansion of distribution channels.

Operational efficiencies and talent management are central to navigating the current economic conditions and evolving consumer expectations. The industry is leveraging AI and other technologies to streamline operations, enhance customer service, and address talent shortages.

The report also highlighted the increasing role of AI in underwriting and customer service, emphasising the need for robust privacy measures in light of growing cybersecurity concerns. The adoption of generative AI and the integration of digital technologies are key to staying competitive and meeting the changing needs of the marketplace.

Duck Creek Technologies calls on insurers to adapt to a rapidly changing environment, marked by heightened consumer expectations, cybersecurity risks, and the need for modern infrastructure.

QBE Insurance Group is “much more” stable now, according to group chief executive Andrew Horton (pictured), who recently sat down with Insurance Business to talk about what sits at the top of the agenda for the global insurer.

Replicating success

Being an international business has its advantages, including learning from different markets and potentially replicating a division’s success. This is something the company is keen to benefit from, as part of its “bring the enterprise together” strategic priority – QBE has six, the other five being portfolio optimisation, sustainable growth, business modernisation, and the respective focus on its people and culture.

“I’d like to get the cyber business running everywhere across the world,” Horton told Insurance Business. “We have very little of it in Asia and here in Australia and New Zealand, so I’d like to do that. We’re just trying to utilise the skills we have on a combined basis.

“A simple example is getting the financial lines underwriters together and talking about what financial lines underwriting is like in Australia versus the UK, Europe versus the US – historically we haven’t done that well – and they just learn so much from each other because, not surprisingly, they’re seeing similar things. And that can be across financial lines, or property, or casualty.”

For its cyber offering in the US, QBE has rolled out a new technology-driven process. If successful, the plan is to deploy the same automated underwriting assistant for other markets and business lines.

Leveraging tech

QBE, which wants to accelerate its data-centric capabilities, has turned to artificial intelligence in line with the insurer’s modernisation strategy.

“I think it’s a great opportunity for the insurance industry at large because we’re dealing with a lot of unstructured data coming in on both the submissions and claims,” Horton said. “This tool looks like a great tool to be able to do something relatively quickly that humans take quite a long time to do – reading 10s of pages of information and trying to distil what is important for the underwriting and claims decision.

“We’ve just started, and we’ve launched it with our cyber team in the US. It’s looking at all cyber submissions and summarising the key points of a submission. When the underwriter comes in, in the morning, they can look at the various submissions, see what’s actually come in, look at the ones we’ve got most chances of success at, and it just speeds up the whole process.”

Horton noted a 65% improvement speed-wise, with the process spanning from the initial submission to getting the quote out.

“It’s a really good position to be in, and then it’s scalable,” he said. “So, if it works for cyber in the US, there’s no reason why it can’t work for cyber in the UK. And if it works for cyber, why can’t it work for property, liability, and so on.

“We’re really excited about it. I’m sure eventually everyone will have it and it’ll just make insurance companies more efficient, which, in many people’s views, it’s about time that they are. So, I’m looking forward to being more efficient going forward.”

Remediation and stability

As reported last week, QBE’s combined operating ratio (COR) for 2023 stood at 95.2%. Broken down per division, COR in North America (NA) was 103.7%; in Australia Pacific, 93.6%; and for international, 89.5%.

The international division, which includes QBE’s UK and European operations, had a “really good year,” Horton said.

“Almost everything went right for it. It’s been a very stable team over there. So, it just shows [how important it is to have] stability, which we haven’t really had in the US as much and is something we’re focussing on – getting to the same level of stability in the US that we have here in Australia and also with our team running out of London.”

Speaking about the NA operations, Horton told Insurance Business: “North America had a combined ratio close to 104%, and that had quite a large drag from some of our discontinued businesses… Actually, the [NA] businesses, which we break into commercial, specialty, and crop, all had combined ratios under 100% once you take out those discontinued businesses, so they’re definitely improving.

“We have a large crop business, and it was still quite tough in the crop world last year with a number of weather events; mainly drought impacting a number of states. The crop performance was worse than it has been in years gone by, so we continue to focus on that. North America is still a drag for us, and we need to get that down. We’ve said our aim is to get it down to 95% by 2025. We expect it to come into profitability in ‘24 and then march down to the 95% for ‘25.”

For the CEO, who came on board in 2021, what’s crucial is finishing what’s been started in the US in terms of remediating the business.

“We’ve made the business a lot simpler than it was, and it’s having this consistency and continuity,” he said. “We’ve talked about adding cyber expertise in the US, and we’re adding healthcare expertise there and complementary things we can do. So, it’s coming out of a remediation cycle, then into more growth mode, and then ensure we show our broker partners and our clients more consistency than we have done historically.”

Similarly, to some extent, QBE’s business in Asia has undergone some form of remediation.

“Now that work has been done, and we’d like to look at our Asian business as to how we can grow it,” said Horton, who is happy to have internal hire Rob Kosova taking charge of QBE Asia from April.

“I think one of the things [I want to highlight] is the stability of leadership – broader leadership and not just the top 10 people. We’ve got much more stability in the company.”

In 2023, QBE’s net profit after income tax grew from US$587 million to US$1.36 billion. 

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Swiss Re has reported an increase in its net income – reaching US$3.2 billion for the year 2023, with the fourth quarter contributing US$748 million to this total.

The firm also noted a robust return on equity (ROE) of 22.3% for the same period. In light of these positive financial outcomes, the board of directors intends to propose a dividend increase to US$6.80 per share. Looking forward, Swiss Re has set a target net income of over US$3.6 billion for 2024 under IFRS accounting standards.

The reinsurer’s financial results represent a significant improvement from the previous year’s figures of US$472 million net income and a 2.6% ROE. This turnaround, Swiss Re explained, was driven by better underwriting margins and a rise in investment income due to increased interest rates.

Swiss Re’s net premiums earned and fee income also saw growth of 4.4% to US$45.0 billion in 2023, up from US$43.1 billion the previous year. Adjusted for constant foreign exchange rates, this represents a 4.9% increase.

The company’s investment return for the year jumped to 3.4% from 2.0% in 2022, with recurring income yield rising to 3.6% from 2.6% the previous year, benefitting from the higher interest rate environment. By the fourth quarter, the recurring income yield had increased to 3.9%, with the reinvestment yield reaching 5.0%.

Swiss Re maintained a strong capital position throughout the year, supported by robust earnings and the positive effects of higher interest rates, with the Group Swiss Solvency Test (SST) ratio comfortably exceeding its 200–250% target range as of January 1, 2024.

Swiss Re segment results

The property and casualty reinsurance (P&C Re) division reported a net income of US$1.9 billion for 2023, up from US$312 million in the previous year, thanks to what the firm described as resilient underwriting and disciplined renewals. The division managed to keep large natural catastrophe claims at US$1.3 billion, below the budgeted US$1.7 billion, despite significant events such as the earthquake in Turkey and Syria, Hurricane Otis in Mexico, and various storms and floods in Europe.

P&C Re’s net premiums earned rose by 3.9% to US$22.9 billion, and its combined ratio for the year was 94.8%, achieving the target of less than 95%.

During the January renewals, P&C Re successfully increased its premium volume by 9% to US$13.1 billion, with a price increase of 9% and updated loss assumptions due to inflation and model adjustments.

The life and health reinsurance (L&H Re) segment also surpassed its net income target, reporting US$976 million for 2023, up from US$416 million in the previous year. This result was supported by strategic portfolio management and strong investment performance, the company said, despite higher mortality claims in the US. The segment’s net premiums earned and fee income rose by 4.4% to US$15.6 billion.

Corporate Solutions continued its strong performance streak with a net income of US$678 million in 2023, up from US$486 million in the previous year, attributed to improved portfolio resilience and a higher investment result.

Net premiums earned remained steady at US$5.5 billion, with an adjusted increase of 7.3% when excluding the sold elipsLife business. The division’s combined ratio was 91.7%, surpassing the target of less than 94%.

“Swiss Re can look back on a successful 2023. We achieved all our financial targets in a year that was characterized by geopolitical turbulence and continued economic uncertainty,” CEO Christian Mumenthaler said.

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The January reinsurance renewal season saw reinsurers maintaining sufficient capacity for casualty programs amid concerns over social inflation and the need for reserve strengthening, as revealed from the latest AM Best commentary.

The report, titled “Despite Heightened Risks, Casualty Reinsurance Renewals See Modest Price Changes,” highlights that reinsurers have kept a disciplined approach to underwriting, particularly in comparison to more volatile property covers. This discipline is also evident in the stability of attachment points and terms and conditions, which are not expected to ease in the near future.

While property catastrophe reinsurance has experienced several price hikes due to an increase in the frequency and severity of weather-related events, reinsurers have shown reluctance to increase capital allocations to these risks until they see more evidence of rate adequacy.

This cautious stance contrasts with the dynamics observed in casualty reinsurance, where reinsurers are carefully balancing their portfolios amid the challenges posed by long-tail risks such as general and commercial auto liability.

Impact of social inflation

The commentary points out that economic and social inflation trends, fueled in part by third-party litigation funding and sophisticated plaintiff attorney tactics, are driving up judgments and affecting lines like commercial auto, general liability, and directors & officers (D&O) liability insurance.

These factors contribute to a landscape where social inflation continues to exert upward pressure on loss costs, with third-party litigation funding delivering high returns uncorrelated to other financial assets.

The commentary also took note of the impact of social inflation on the insurance industry, particularly in sectors like commercial auto, where loss experience remains challenging. Despite consistent rate increases over the past decade, pricing has struggled to keep pace with escalating loss trends, further straining reinsurance pricing.

The analysis also touches on deteriorating driving behaviors since the onset of the COVID-19 pandemic, including increased road fatalities despite fewer miles driven, and the rise in distracted and impaired driving. These trends have led to more severe injuries and litigated claims, amplifying loss severity through punitive damages awarded by sympathetic juries.

This environment has resulted in higher costs for excess of loss reinsurance on individual claims and has challenged the commercial auto sector, which saw underwriting losses in 2022 reminiscent of the 2016-2019 period, with third-quarter 2023 results showing a continued decline.

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Insurtech managing general agent (MGA) Loadsure has unveiled Columbia, a new insurance product designed for the logistics industry, emphasising the use of data to enhance coverage for small and medium-sized enterprises (SMEs).

Columbia offers comprehensive insurance solutions, specifically catering to motor carriers, freight brokers, and freight forwarders, with a focus on covering potential damage to cargo.

The coverage provided by Columbia extends beyond the primary insurance agreement to include various supplemental protections. These additional coverages encompass business personal property, contingent coverage for unforeseen liabilities, contractual penalties, debris removal following an incident, extra expenses incurred during the claims process, freight charges, and shipping containers.

The new proposition leverages advanced data analytics and digital technology to streamline the insurance process for wholesale brokers. This approach enables brokers to quickly and efficiently quote and secure coverage, featuring an automated system for quote generation, policy binding, and document management.

Johnny McCord, CEO and founder of Loadsure, commented on the launch, highlighting the significance of data-driven solutions in advancing the insurance industry and addressing the coverage needs of SMEs within the cargo and freight sector.

“Backed by our industry leading expertise, Columbia will empower brokers to better serve cargo outfits seeking long-term partnerships and the solutions needed to support their businesses,” McCord said.

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Brookfield Reinsurance has outlined its financial results for the quarter and fiscal year ending December 31, 2023.

Key achievements for 2023 included generating $8 billion in annuity sales, with significant contributions from the retail annuity platform, flow reinsurance premiums, and pension risk transfer (PRT) premiums on the North American PRT platform.

The acquisition of Argo Group for approximately $1.1 billion also marked a significant expansion of Brookfield’s US property and casualty (P&C) operations. Additionally, the impending acquisition of American Equity Life is expected to add over $50 billion in insurance assets to the company’s portfolio.

Investment strategies deployed throughout the year yielded returns above 9%, enhancing the gross yield across the portfolio to 5.6%. The company also noted a substantial increase in its equity base and market capitalization, achieved through a successful public exchange offer that did not dilute the holdings of Brookfield Corporation or Brookfield Reinsurance.

Brookfield Reinsurance financial results

Financial performance for the year showed distributable operating earnings (DOE) of $745 million, up from $388 million in the previous year, driven by increased net investment income and the impact of new annuity business. Net income also saw growth, with figures reaching $797 million for the year, compared to $501 million in the prior year, bolstered by DOE contributions and favorable market movements.

Brookfield Reinsurance also reported a strong liquidity position, with approximately $27 billion available across corporate and subsidiary investment portfolios. The forthcoming acquisition of American Equity Life is expected to further enhance liquidity, supporting the transition to higher-yielding investment strategies.

In a strategic move to bolster its balance sheet and market presence, Brookfield Reinsurance also completed a successful exchange offer in November 2023, increasing its publicly traded share base significantly. This initiative enhanced the company’s equity base and market capitalization.

The board has declared a quarterly distribution of $0.08 per share across various classes, aligning with the distribution schedule and amount of Brookfield Corporation. This distribution is slated for March 28, 2024, to shareholders on record as of March 13, 2024.

“Our strong results for 2023 reflect the continued growth of our annuity sales platform, our broadening credit origination capabilities, and the repositioning of recently acquired assets that have contributed to increased investment returns. As we enter 2024, we continue to focus on scaling our business in a disciplined manner, focusing on our competitive advantages to grow our core business lines and delivering strong risk-adjusted returns,” Brookfield Reinsurance CEO Sachin Shah said.

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