There are several things that keep SCOR’s Jean-Paul Conoscente awake at night. Climate change is one of them; cyber risk is another. Only time will tell whether these risks are actually insurable, cautions Conoscente, who became the CEO of SCOR Global P&C in February 2019.
Then there is a less talked-about challenge facing the industry: Conoscente sees the world increasingly breaking apart and separating.
“It’s fragmented from a regulatory point of view, where more and more countries are taking protectionist policies, both from a trading, economic point of view as well as from an insurance point of view,” he noted. [See related article on Conoscente’s leadership lessons, titled “Good Leaders Challenge the Status Quo—and Themselves.”‘
“Many more countries than in the past are requiring mandatory cessions to local reinsurers before going to outside markets and forcing reinsurers who want to do business in that country to put capital there,” Conoscente said. “It goes against the diversification model of reinsurers to write risk globally to be able to better face individual risks that occur.”
Conoscente said that regulation, protectionism, a worldwide economic downturn, trade wars between the U.S. and China and the European Union as well as the effects of Brexit all are areas of growing concern for the industry.
“Insurance and reinsurance do well when the world economy does well. I think right now the world economy has a cold, and it’s a question of whether the cold turns into a flu or is healed soon. The pessimist in me thinks that it’s more likely to turn into a flu than to be cured in the short term.”
But it’s not all doom and gloom. Conoscente said that over the course of 2019 the industry has been making some sensible rate increases, which do help assure long-term viability.
Insurers Drive Market
While some thought the re/insurance cycle was dead, Conoscente said a firming insurance market is now being driven by insurers. Contrary to the past when reinsurers pushed higher rates on to ceding companies, the market pressure is now coming from insurers that face depressed financial returns caused by low interest rates and technical results that are not producing enough profit for companies to meet their ROE targets, he said. “This cycle is being driven by the insurance companies that want to start making a profit. Reinsurers, on the other hand, are reacting to a lesser extent than insurers,” he added.
“We see this across both property and casualty,…and of course the non-proportional reinsurance programs tend to react more than the proportional. On the proportional side, we are seeing probably more movement on the casualty side than on the property side right now.”
The largest rate increases are being seen in lines with capacity constraints that have experienced losses, Conoscente affirmed.
For catastrophe excess-of-loss rates, he said, the question is whether rates are moving enough to make a difference. “But it’s also a question of how long these rate movements occur for. If it’s a one-time event, I think there’s definitely not enough rate movement for a one-time correction. If it’s a correction that takes two, three, four years to correct itself, then maybe it’s adequate as a first step.”
Medical malpractice is seeing significant reinsurance rate increases, as are some excess casualty risks, he said.
“The big question as always is whether the rate increases are keeping up with loss inflation. If these rate increases occur in a similar fashion next year and the year after, then I think we’ll definitely be in a much better position,” he said.
Another loss-making line that is seeing some capacity constraints is construction engineering, especially around mining dams (such as the losses experienced in Brazil and Colombia over the past few years).
These losses have largely exceeded the probable maximum losses or expected losses for the industry as a whole. “As a result,” he said, “there has been a shrinkage of the available capacity worldwide, which I see as a good sign. I think the market is being disciplined.”
SCOR, which operates as both an insurer and reinsurer, has always taken a prudent approach to some of these big mining projects, especially with larger dams. “As an insurance company, we really haven’t had many of these losses,” he said. “As a reinsurer, we’re now taking a closer look at our clients’ portfolios and then asking them how they’re physically managing these risks. We’re doing a much deeper dive into clients’ underwriting guidelines than we have in the past.”
Conoscente confirmed that syndicate performance reviews undertaken by Lloyd’s over the past several years have been a big driver of the overall pricing improvement within the marketplace. “In addition to Lloyd’s, a number of other insurance companies have reduced the amount of capacity they deploy,” he said.
Insurers are reviewing their PML loss assumptions, which is leading to a hardening or an improvement of pricing and of terms and conditions, he continued. (Lloyd’s conducted the performance review when it was found that between 2015 and 2017 unprofitable syndicates eroded 87 percent of the market’s profit. Syndicates are pulling back or exiting unprofitable lines.)
Conoscente said SCOR remains cautious about marine lines, which have seen poor results. Cargo is still a bit soft or flat, while hull is dominated by one or two large international reinsurers based in Europe, which have a “very expansive view of that market” despite a number of recent losses.
“We remain very cautious about the marine market overall…, which actually has been a loss-making segment for a number of years.”
On the other hand, SCOR said profit can be made in marine subsegments, he said. “The art of underwriting is identifying subsegments that are performing better than the rest and focusing on those. That’s what we’ve been able to do in marine, but at the expense of growth basically.”
Navigating a Harder Market
Speaking of the art of underwriting, Conoscente said it’s important to guide young underwriters in how to navigate a firming market.
“We’re lucky at SCOR because we have a good mixture of very experienced people who have lived through hard and soft market cycles, so they understand how to play the game. The younger underwriters and the younger brokers have only been in this marketplace in a prolonged soft cycle,” he noted.
As a result, some of the younger brokers are not used to reinsurers saying “no” and sometimes react very poorly. “At the same time, I think a number of young underwriters also are afraid to push back at brokers and say, ‘This isn’t something we’re willing to write,’ and be willing to walk away from the business.”
To solve this problem, SCOR has a system of “delegation based on the deviation from expected profitability.” In other words, if the profitability is not there, underwriters have to refer to their managers or their manager’s manager.
“And typically these are people who have more experience and have lived through different cycles. And that’s how we make sure the book is being steered appropriately,” Conoscente continued.
He admitted that senior managers have had some difficult discussions this year during renewals where underwriters were told to walk away from business that is not within certain boundaries of profitability.
That’s a hard message to convey, for example, in the U.S., where SCOR has been rebuilding its position over the past few years. “To walk away from business that has taken three, four or five years to build is not an easy decision.”
Younger underwriters at SCOR are given the message that their No. 1 target is profitability, while top-line growth comes in at No. 2, he said.
Some companies take a localized approach to portfolio steering, but SCOR takes a centralized approach. “We’ve had a global process in place for a long time. So, we have one accounting system globally, one pricing system globally, one cat modeling system globally,” he said.
During the main renewal periods, SCOR on a daily basis runs dashboards for the underwriters so they know where they stand compared to last year and where they stand compared to the business plan in terms of top-line profitability, underwriting ratio, combined ratio, ROE and catastrophe PMLs.
This information is available daily to the underwriters and to the chief underwriting officers, while top management receives the reports on a weekly basis. Around the Jan. 1 renewals, which represent close to 60 percent of SCOR’s yearly premium, a meeting is held once a week where all these dashboards are reviewed at an aggregated level.
“We make decisions, in real time, during a renewal in terms of asking one country to let go of some business in one segment if it’s underperforming. Then, perhaps we will ask another team to increase their portfolio if it’s possible because it’s performing a bit better.”
This is the advantage, he affirmed, of having one global P&L to manage.
“If it makes better sense to write the business in one location versus the other, it won’t be based on pricing. It will be based on what SCOR wants to do, assuming the client is okay with that decision,” Conoscente went on to say. “But we try to make it our decision rather than the broker’s decision where the business goes.”
SCOR’s real-time global management systems help the company steer the portfolio to a very granular level of detail, he added. “We have a target net combined ratio of 95 to 96 globally. And every year we are able to steer our portfolio very carefully to achieve or beat that combined ratio.”
It starts with SCOR’s underwriters, who know exactly what is expected of them and what their targets are, Conoscente explained. “Then it’s really for them to decide how they get there. If there’s market movement that is beyond their control, then that gets escalated to the management level.”
Speaking of things beyond normal controls, Conoscente worries about climate change and cyber risk.
“Whether we want to accept it or not, climate change is happening. It’s undeniable,” he said.
“If you look at the average temperatures, regardless of what the measure is, they’ve been rising. If you look at the rainfall in different parts of the world, it has been changing compared to historical means,” he added.
The first very politically charged question is whether humans are causing climate change, while the second question (for reinsurers) is whether the change will be gradual or sudden.
“If it’s a gradual change, I think, from an insurance and reinsurance point of view, we can probably cope with it. But if it’s a sudden change and we start seeing frequency and severity that are different from the past, it will be very difficult for the industry to face this,” he said in an interview with Carrier Management.
“We’re seeing some changes already, which are more gradual. But if these accentuate, it then becomes a real problem of insurability for the industry.”
Conoscente cited the example of some parts of the world that receive, in one day, the historical average rainfall of the year. “You wonder, is it a freak event or is it something that we’re going to start seeing more often. When you start seeing 100-year events, based on historical average, occurring every two years, it means that the 100-year event is no longer a 100-year occurrence.”
As insurance is based on probability and expected loss, the industry needs to know how often a certain type of loss can be expected. “If loss expectancy is going up, it directly will affect insurance pricing,” he said.
That’s why SCOR is concerned about climate trends. “We have models for insurance and reinsurance pricing based on historical averages and based on exposure that use models that also are typically based on historical experience,” Conoscente emphasized. “But if the historical experience is no longer representative of the future, then it causes a real problem.”
He recalled an increase in the frequency of hailstorms in the Midwest in the U.S. in 2008 and 2009, “and there was a lot of discussion on the reinsurance side about [insurance] companies that wanted to buy an aggregate protection.”
The question that reinsurers had to consider was whether to use a five-year return period as the average, 10 years as the average or 15 years as the average. “You got very different answers according to the assumptions used,” he explained.
“I think this is representative of the issues with climate change: It is possible that the 15- or 20-year average we’re using is no longer representative of the next five years in the future, as the risk increases dramatically.”
Turning to the cyber marketplace, Conoscente sees cyber as a mature example of an emerging risk. Just a few years ago, he said, only a few companies were able to provide cover with very little knowledge of the risk or how the risk would evolve. Today, however, the offering has greatly expanded.
“Today, we have a better understanding of past losses and past emergence of similar types of events. But the problem with cyber is that the risk continues to morph; it keeps evolving,” he continued. “The coverage we’re providing today and the loss scenarios that we’re anticipating today when we offer this coverage could be very different than the losses seen in the future.”
How does a carrier price a risk that really isn’t very well controlled? “I think as long as the exposure remains small, then it’s manageable,” affirmed Conoscente.
But in the case of cyber, which has the potential to be a systemic risk that could have worldwide effects, it becomes an issue of making sure that “we understand all the correlations between the different risks that we’re underwriting and making sure that the price we are charging is at least reflective of the risk we’re taking.”
Indeed, SCOR takes a lot of small chunks of cyber risks and runs scenarios that provide underwriters with a worst-case scenario accumulation potential. “I think the difficulty is that we’re not really sure today how good our worst-case scenarios are,” he said. “We can only base them on what we’ve seen so far.”
With the interconnections of cyber risk, it could potentially end up with much worse loss scenarios than what SCOR has anticipated, “but we just haven’t thought of them yet,” he continued.
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