Podcast

COVID-19 and its Impact on the (Re)insurance Industry

In this podcast (recorded on June 3, 2020) Ken Brandt, Co-President of Global Underwriting discusses the impact today and tomorrow:

  • Potential ‘Good’ and ‘Bad’ outcomes
  • The limits and risks of using insurance for social aims
  • How technology has changed the work-from-home experience
  • The likely impact on the face-to-face nature of doing business


Can’t listen now? Read the edited transcript

Ken started his reinsurance career at Employers Reinsurance Corporation in 1993 as a facultative underwriter and held a number of management positions in the U.S. and Europe, rising to President of the Americas and Asia Pacific before he joined TransRe in 2006 to launch and lead the US Direct team. Since then he has led the America’s team and now runs underwriting globally with Paul Bonny.

This podcast is being recorded at a time of significant turmoil in the United States during the COVID-19 epidemic lockdown, and with rioting across the country. There is a wide range of possible outcomes for society and for our industry.

What is the best realistic market scenario for TransRe over the next couple of years?

That we get paid appropriately for the exposures we’re taking on. That hasn’t really been happening over the last few years. The reinsurance markets (and insurance markets) had become soft across almost all business lines. Reinsurance returns were particularly weak and it’s reasonable to say that in a ‘normal’ cat year (whatever that is) reinsurance is or was a low to mid-single digit ROE business. That’s not adequate for the exposures we’re taking on and it’s certainly not sustainable for a long period of time.

Over the next couple of years (while I can’t predict cat activity) I’m pretty optimistic that there will be solid reinsurance opportunities that will allow us to actually price for the exposures we’re taking on. I think there will be good reinsurance pricing momentum in the market and the opportunity to provide our customers with quality solutions at a fair price.

Why?

That’s a good question. It’s not like someone woke up and announced, ‘let’s all turn the market together.’ It’s coming from pain and anticipated pain. If you look at what was happening pre-pandemic, the market was already moving, particularly in the U.S. (casualty and public D&O lines) and original rates were going up 20% to 30% according to our customers. Reinsurance terms weren’t improving but the insurance market was rapidly improving due to a couple of dynamics;

  • investment yields are historically low and now post pandemic they’re going to get even lower;
  • the ability to recognize positive lost development was diminishing; and
  • there’s a tremendous amount of loss, particularly casualty loss in the pipeline that was coming through and will continue to come through. If you look at accident years from 2013 to 2018 there’s a lot of loss to be recognized and when you listen to different earnings calls and articles social inflation is mentioned or you can say it has lost development or good old fashioned under reserving. I think there’s a lot of loss to recognize in the system.

Property had been moving even in reinsurance but not as much as we’d like. All of these things were already in motion. In my opinion, COVID-19 creates a market that experts told me would never happen again. They said ‘there will never be another broad-based hard market’ and that’s no longer true. COVID-19 shows that the world is connected in a lot of ways and COVID-19 losses will hit a number of product lines, not just property. And it’s global.

I think the response to the unknowns on how this will resolve is going to push what was already going to be a harder market and it’s going to likely sustain it longer.

Does price firming pay for all the losses that have come in?

The saying ‘your mileage may vary’ comes to mind. I think it’s going to be insurance and reinsurance company specific. If you are a casualty carrier who ramped up your writings of large or excess casualty over the last five years, and you set your loss ratio picks at optimistic levels, you’re in for a lot of pain. On the other hand, if you participated but chose to shrink your exposure over that same time period and you were a little more conservative on loss ratio you’re still going to have pain, but a bit different. From pain comes future pleasure. There is going to be a lot of pain but it’s not going to be distributed consistently across the market.

Why did experts believe there would be no more hard markets?

I think the market has a cycle and will always have a cycle. I remember articles declaring ‘the cycle is dead’. The cycle is never dead, but it can seem to be interminably long. Property cat has been frustrating, challenging, interesting and fascinating all wrapped up into one. We don’t think property cat rate levels were adequate six months ago. That was in part due to the entry of capital markets, a 10-year run of unbelievable profitability and a dependence on those profits by some. Property cat is viewed as a global commodity where you fill your aggregate worldwide and benefit from diversification. A cat in Florida will be offset by a good year in Japan, or vice versa. However, that global market was breaking down. European insurers didn’t want to hear about Florida cat losses. If Japan had loss problems, the U.S. didn’t want to pay for it. It became very regional. That’s not how you run a property cat portfolio. There is an argument the retro market has seized up right now, with trapped capital. These are all connected and it feels like it’s going to return to a global commodity and a global cycle where rates have to go up again (in my opinion) across the board on cat, whether you’re continental European, a Japanese market or the U.S. market.

What signals are those rates now sending?

Rates are recognizing that the capital associated with the property cat market is global. You’re not raising German capital to cover German cat risk. It’s global capital. When that global capital spreads around the world to diversify, and there are large events that affect returns on that capital, then everyone has to pay.

I remember visiting Florida a couple of years ago, after the 2017/2018 losses. I asked a customer about their reinsurance rate expectations, and the customer (with all genuineness) said 5% and he was probably right (unfortunately). I then asked, ‘well what about this loss and what about that loss?’ and he said ‘I don’t think that affects my book. I want to be treated independently on my book.’ He was obviously putting his best foot forward to get a successful renewal, but that’s not how you can price a cat portfolio. I don’t think that answers your question, but I do think cat is a very global market and needs to stop reacting regionally and start reacting globally.

Is it fair to charge more because we lost money, when nothing changed for that customer?

We did not get it right nor will we get it right. When an actuary provides a loss projection, the only thing they can say with certainty is that it is incorrect. If the property cat market remained regional, my next meeting with that same Florida client (after Florida loss) would be ‘bad news for you. You have to bear the brunt of the loss.’

The other thing is that every cat seems to be a new surprise. That is hard to price in. If you do price it in, then it is hard for the market to pay that price for unknowns. I see three buckets of property cat losses:

  • the ones we expect and have experience/are comfortable with. These we try to price to the best of our abilities (wind, quake and fire).
  • a group of coverages that we know exist, but we haven’t been paying much attention to (wildfire, flood and riot/civil commotion). The coverages are there but have we been modeling them correctly?
  • a group of stuff (I will call it ‘coverages’ but they’re not) that we never intended to cover. The exposure existed but it was never our intention to cover it, so we didn’t price it and didn’t factor it into our overall portfolio exposures (cyber and pandemic).

It depends on where the loss is coming. An earthquake or hurricane bigger than model expectations gets a rational response, or at least a more confident response in the pricing. Wildfire losses and towns burning down gets a more vigorous pricing response. Losses from silent cyber or now potentially global pandemics, where you weren’t expecting to provide coverage? You are going to get a yet stronger response to that.

So COVID-19 triggers a hard market because we don’t really know where those losses are going to come, so we’re just going to pad our prices for a while?

I’m not sure you are padding because if you don’t know how it will all settle, it is very hard to assess and price. Everyone will draw their own conclusions from their own portfolios. I don’t know how the overall market will respond in each line of business (maybe it’s price or coverage). The biggest unknown/danger for us that I have been worrying about is the business interruption on property. That’s going to have a lot of ramifications that must be resolved before we even know what the business interruption losses are. It will be a key ingredient to getting the economies back.

Should the government commandeer insurers and use them to make business interruption payments?

Without a doubt it has happened in history. There is an intellectual nicety to the idea that says ‘for all these businesses that have some type of property insurance, some have business interruption, some don’t, but we will funnel business loss payments through insurers because there’s a policy’. However, the problem is the extent of the losses, the number of businesses involved, the massive hit to GDP and the ongoing need to make these types of payments. There’s only one entity in the U.S. set up with an infrastructure that can make that many payments that frequently. It is the Federal government. Travelers can call and yell at me later, but even one of the most sophisticated, largest commercial insurance companies in the country (Travelers) would admit they have a difficult time fulfilling expectations to pay everyone’s business interruption losses (even with government financial support) through their infrastructure. The government is designed to be able to make massive payments to the public as frequently as needed, or at least they’re supposed to. I still think that’s the infrastructure to lean on if you’re going to go for that type of solution. It’s a social solution.

What is the worst market outcome in the next few years?

That governments or legislatures retroactively insert business interruption coverage where none was intended. Our industry is not capitalized for that. It will never be capitalized to take on a large portion of the GDP damage done by global pandemic. I don’t think retroactive coverage will happen, but that’s still not resolved.

Another bad outcome would be that COVID-19 losses are at the higher end of current estimate ranges, and then we have further cats. We are entering hurricane season as we speak. If we can’t get enough price (because it’s not realistic) or we can’t get improved structures (because the market doesn’t allow it) then a realistic worst case is that COVID-19 is bad, additional cat losses hit (on the cat or casualty side), we get improvements but we’re still looking at a low ROE scenario.

So best and worst cases are different in scale, but not a difference in kind? Best-case: losses are bad enough to wake us up, not bad enough to take us out. Worst case – it takes us out.

That’s right, it’s a simple business David!

How do different parts of the world view COVID-19?

The business interruption exposure is most relevant, and different policy forums around the world have different approaches. It’s fair to say that in the UK, Canada and Continental Europe, we found a lot more policies than we thought existed, and a lot more policies where insurers affirmatively granted coverage for communicable diseases. In those situations, there will be losses but they will be resolved more quickly. The U.S. also has some affirmative coverage, but in general less than other places.

The vast majority of U.S. commercial policies use ISO wording which, in my opinion, clearly excludes BI coverage. The U.S. has a fair number of manuscript property policies and elsewhere doesn’t use ISO wording, so a lot of time and billable attorney hours are going to be spent from this pandemic. Some manuscript wording is unambiguous. Other manuscript policies might require physical damage to trigger business interruption, or might be silent on excluding communicable disease. There will be a dozen variations in between. This is going to take a long time to play out in the manuscript property market and given the U.S. litigiousness, it will probably be more focused on the U.S.

People will want to buy pandemic insurance. To what extent is it insurable?

I think it’s insurable but there’s a lot of work to be done. There have been ~10 large epidemics/pandemics in the last 100 years. You could build a model off that! Insurers and other scientific bodies have to put a lot of effort into the development of models. Generally, that’s when insurance market solutions take hold, when there’s some type of modeling of frequency and severity beyond the underwriting. I don’t know a lot about pandemic models but I’m sure there’s data out there that is inconsistent and hard to get to. I think it’s modeling.

If society wants the insurance industry to provide meaningful solutions to business interruption losses and GDP hits, then it’s going to have to be some type of public private partnership. The private industry can’t take on that type of exposure. Nor do I think it smart for governments around the world to take on that exposure wholesale. When you enter a partnership and have a solution that goes through the private market, the private market can seek price discovery, tailor coverages, provide incentives to mitigate and avoid risk. All these good things come from the private market, not necessarily the public market. I think a public private partnership (whether PRIA or otherwise) will be part of the answer.

How will rising protectionism affect your business?

I don’t know how long there will be less movement of people – not because of protectionism (unless you define protectionism as I don’t want to catch a virus on a plane). My personal position in terms of how trade affects business (including insurance)? I’m a free trader. I don’t like protectionism and I don’t like trade wars. The easier it is for capital and people to move around the world, the better it is for business and society. I understand the politics behind the sentiment, and that the world can’t run on business principles. Real world conflicts do emerge and sanctions, trade barriers and other protectionist measures get put in place. In general, I believe the freer the trade, the more opportunity for insurance to grow and provide better solutions and protect society against loss.

10 years from now, will anything be different about the insurance industry?

Today’s industry doesn’t look like it did 10 years ago. Globalization and technology has changed it significantly. In terms of the pandemic, work environments will have to change. A business like TransRe can create remote work environments and not lose out on productivity. One of our insurtech customers told me their operations are going great, that their productivity is high and doing well. That company has all sorts of KPIs to measure that, but then he added, ‘I don’t have a KPI for creativity’. It is important for their business that humans interact in a room. I thought that was an interesting perspective. We are based in New York and London is our second largest operation, so it’s a real life, real time challenge for us.

We are actively working with our employees to create environments where we can still go into the office and collaborate together, while adding the flexibility for people to work at home. I think it’s easier for us than massive insurance companies. I can’t imagine how they’re approaching the issue. I’m dealing with 650 people in 25 different locations and we’re not heavily file-intensive. It is all online. If you are an insurer, with 10,000 people, that’s a quantum level more difficult to ensure your operations run smoothly.

We will likely hire people with different traits in future. When everyone’s locked down at home the experiment is on! We have the technology (communications, computers, iPhones, videos). We’re on video conferences all the time. I have seen an employee in their laundry room because they have a small apartment in New York. Others are sitting outside by the pool. The changes will be interesting. We have discovered a silver lining – people are forced to think about how to create an effective work environment at home. We have also learned who in our company really struggles with technology. It’s not just the old guys like me. Some people love technology, some are comfortable with it, and then others (that you might expect would be comfortable) turn out not to be comfortable at all. This will change how we hire and train people.

What advice can you offer to stay productive during lockdown?

We don’t have a KPI for productivity. We’re not that sort of company. But we know that our productivity as a global team has never been higher. If we had a KPI, it would be through the roof. However, there is a real downside to that. It is hard to get these words out of my mouth, but our people at home are probably working too hard or too long. People are not taking breaks or days off. We are insisting that people take time off. We want to know what week you’re taking off, and we want you to turn everything off.

Productivity is not an issue because of the way our business is structured and because of technology. It’s now figuring out to get people to get that balance where they’re productive but not burning themselves out.

London has always been more face to face. How will that change?

I don’t know, I’m not English! Many years ago (at a different company) we stupidly moved our office from the first floor to the fourth floor. We lost 50% of our submissions because brokers were unwilling to get in an elevator.

Historically, London has been a face to face market and that’s really important. It is great in many ways and that’s why I love going to London. I would hate to lose that. I hope that once we get through this pandemic, that some type of reasonable protections/mitigators are put in place where you can actually get in a room with people and transact, Lloyd’s will lead the way and do that.

Brokers prefer face to face for a richer exchange of information, but does it help productivity or loss ratios? If it is more expensive what are the benefits?

Like with everything in life, there are pluses and minuses to every business model. Face to face engagement is important. You work through problems easier and come to more successful outcomes. You tend to make more definitive decisions when you’re sitting with someone in a room versus on the phone. Going back to my earlier comment about our insurtech customer, there is a creativity that we have to protect and nowhere has been more creative in the insurance industry than London. Some folks might be a little more creative over a pint of beer or at least in the same room with people than on a video conference. I don’t have a solution, but I would hate to lose that. The benefit of more remote video conferencing and the use of technology is on the expense ratio. You can’t quantify creative benefits to loss ratio and business outcomes. You can quantify the fact that you’re not attending any industry conferences this year. You don’t want to get too carried away and let the accountants run your strategy. There has to be some type of balance.

Expense ratios are being squeezed. What would force things back to the way they were?

I’m not picking on accountants. They would go back to the old way if it made business sense. One of the benefits of insurance is you don’t get runs on the bank. People continue to buy insurance. It is a critical global product. In a science fiction world where no one could leave their home for the next five years, insurance would still provide products (services and product development might be a little different) but it might not be as quick or as creative.

At the moment we are spending down relationship capital (that we have already built up). Relationships are now managed online. Will we see a deterioration, more conflict in the workplace and burnout?

Your comment about relationships is an important one, especially in reinsurance. I can’t tell you how many deals we do based on trust. A terrific broker, partner, or customer calls and says, ‘listen we have a problem here’ or ‘we have an idea we’d really like you to support.’ There’s no data or the data looks bad. You have to trust that they will execute in a different way or whatever the case may be. To be honest, if someone I don’t really know calls me, I’m less likely to agree to that person than someone I’ve played golf with, had a couple of beers with, or worked with personally over the years. Those kind of tough placements or creative ideas generally get done between people who have a good familiarity with each other and have a high level of mutual trust. If something were to go wrong or pear shaped, I know you won’t leave me out in the cold.

You have coped with these ‘distance’ issues for some time. What have you learned about making remote work successful?

Prior to TransRe, I worked for GE. They did a lot of things wrong, obviously, but they were progressive about working remotely. I grew up in an environment where you didn’t have to be at the office. At TransRe, myself and a group of people have been doing this for 20-25 years. It becomes organic to you that when you are with people, you take the opportunity to really reconnect (at conferences, cocktail parties etc.). You don’t see these people Monday-Friday. You might only see some colleagues a few times a year. So you work the phones hard and make sure that you connect with your actuaries and claims people along with everyone else to make the right risk decisions. There’s no magic pill to it.

A big part of what has worked for me and people like me for the last 20 years is that we have a mothership to go to. I work on the West Coast but I’m in New York a lot and I have an apartment in New York and that’s important. As a manager it is very difficult to do an effective management job if you are not meeting with your people and engaging with them and your customers. I think the most important key to a mobile work environment is that you have the opportunity to not be mobile, and go to that home office. You go to that major office and interact with people. That’s really important.

What has been the most transformative technology change in your career?

Mobile technology has made everything so much easier. When I started doing this, I used to have a beeper and that seemed pretty cool. Then came the cellular phones, the Nokia flip phone, Blackberry and then the iPhone and Android came along and just wiped everything else away. Mobile technology and the ability to fly anywhere with your iPad and have everything with you (work emails, files and movies). That has changed everything. Access to all your important information wherever you are.

I think COVID-19 will improve technology again, especially the work from home experience. I don’t want to work on my iPad at home. I want to work on my desktop, have an effective teleconference speaker and strong Wi-Fi (whatever other tools that we need).

I think video conferencing is also going to improve and be fully adopted, finally.

Do you have any routines to make remote work easier?

Not really. I’ve been doing this for a long time and I have to be effective in my home office. When COVID-19 hit, people were scrambling in their laundry rooms to create some space and get a Wi-Fi signal. I’m lucky to have a separate area with a regular office set up and everything I need. I know a handful of people in our company who are similarly situated.

COVID shows people that in order to work from home for extended periods of time, they have to create that kind of environment within their own homes. Our company will provide them with whatever they need, but I think larger companies that deliver these types of home office products will improve their offerings as well.

How do you keep in touch with people?

We are doing a lot of things not ‘business-wise’ but important to the business. We do things socially online, groups of employees, brokers and some customers. We have a Peloton group who complete regular challenges. We have a bunch of movie buffs in our company. We took Bill Simmons (ex ESPN broadcaster) idea. He has a podcast called The Rewatchables where he lines up a movie each week and the podcast discuss that movie, with trivia thrown in. Someone in our IT team has created our own Rewatchables club and that has been a lot of fun. We have around 30-40 people who join online by video. They are assigned a movie to watch (like a virtual book club) and it’s fun, good for the morale and connectivity.

This situation doesn’t feel permanent to me, but we are replacing ‘normal’ while we’re locked in at home. If the future is more stay at home, I don’t think you can fully replace the benefits of in person engagement.

The Spanish flu pandemic hit New York years ago and now there is another pandemic. Society would have never gone into lockdown if we were unable to work from home.

I agree. There’s an enormous resiliency to humankind and its need to socialize and get beyond these kinds of things. You can get quite depressed watching news channels and only reading worst case scenarios, which we tend to do in (re)insurance. I think society will get through this as strong if not stronger because of the need to socially interact with each other. Capitalism is a very strong force that can work through these things and I think our industry will be no different.

Will this pandemic change how people assess risk and buy protection?

Returning to my first answer, I’m fairly optimistic. I think it’s good to be in reinsurance right now. There’s going to be a lot of appropriate measures taken across a broad spectrum of product lines and regions that will improve the risk-return calculation for the industry.

Whether you’re talking about property cat or U.S. casualty there was already a fair amount of momentum building, and COVID-19 is just going to push it forward harder and longer. I don’t think we will overreact but there’s always that potential – that you build an entire return model based on a $100 billion COVID-19 loss that comes in at $20 billion.

Clearly reinsurers were not getting appropriate returns for the exposures we were taking on. That was changing before COVID, and I think COVID will allow us to actually get appropriate returns.

You haven’t talked about supply and demand. Would a class of 2021 affect your optimism?

That is always a fear. I know it’s early but if you look at Florida property cat renewal in June, the rates went up significantly, coverages were limited in a lot of cases, there was a host of shortfall requests on non-concurrent terms and no one really showed up to blunt the improvements. There are a couple of markets out there that could have shown up and said, ‘alright we’re all in.’ That didn’t happen.

We have to get better returns on that particular product in that particular region but that’s the epic challenge of our industry. There are no barriers to entry and capital is going to go where it’s going to go. We’ve benefited and suffered from that all at once in our industry, but we’ll see where that capital goes. The capital might not be interested in going into an industry with cyber, wildfires, pandemics and the threat of legislative rewrites. They might say ‘let’s buy more equity because the equity markets are rebounding.’ We didn’t talk about supply and demand but there’s always the prospect of a class of 2021 happening.

My guest today is Ken Brandt. Ken, thank you very much.


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