P&C sector only in early stages of hard market: Whitt

The commercial insurance industry is only in the early stages of a hard market as low interest rates, loss fatigue, and the catalyst of Covid-19 drive carriers to push for further price increases to get back to covering their cost of capital, according to Markel co-CEO Richie Whitt.

In the latest in The Insurer’s The Best Policy podcast series, Whitt said the hardest market he had seen in his career was in the early 2000s when 9/11 was the accelerant for rate improvements already in train.

“This market isn’t quite there yet. And I really do believe we’re in the early stages of this hard market, and I think this hard market has a way to run,” he added.

Similar to the early 2000s, an already improving pricing environment for insurers has seen a catalyst in the form of Covid-19. But there is a culmination of other factors that mean hard conditions will be sustainable, said Whitt.

“It has been pretty much straight down for the last four years in terms of interest rates to where they are essentially zero now. Then you’ve got a decade of price decreases such that many lines ended up in deficit in terms of pricing.

“It’s been a tough run of natural catastrophe losses since 2017… then you have Covid-19 and the impact on the financial markets and economy,” the executive observed.

“This market isn’t quite there yet. And I really do believe we’re in the early stages of this hard market, and I think this hard market has a way to run”

Markel co-CEO Richie Whitt on the sustainability of current market conditions

Carriers and their investors – as well as ILS investors – are now suffering from “loss fatigue” he suggested, and that had led to lower risk tolerances.

“Everybody is looking and saying ‘I need to get some price increases to get back close to my cost of capital’,” Whitt suggested.

On Markel’s book, the insurer is continuing to see strong rate increases in property and executive risk, where rises of 20 to 30 percent are commonplace. Primary and excess casualty are also seeing substantial rate increases in the magnitude of 10 to 20 percent.

However, Whitt said that the carrier’s small business segment had been impacted by reduced demand during Covid-19.

Reinsurance catch-up

The executive acknowledged that reinsurance pricing has been lagging behind that seen on primary business, but said he is optimistic there will be “more catch-up” at the 1 January renewals.

“There’s a bit of a tug of war going on. Primary insurers want to keep as much of the improvements as they can for their results, but the reinsurers would obviously like to get as much as they can for their results,” he said.

Whitt cautioned that in the face of large reinsurance cost increases, some primary insurers may look to retain more business.

“In our reinsurance operation we’re going to be watching very carefully and support those cedants that we feel are providing us a fair share of the improvements in prices and terms that are happening in the market,” he added.

Capital allocation

In recent years Markel has been building out its capabilities organically and through M&A to create a platform it believes positions it well to take advantage of hard market conditions as well as to cycle manage.

Its recently restructured specialty insurance platform, reinsurance operations, retro, ILS fund and fronting divisions allow it to allocate capital to underwriting opportunities in many different ways.

“We believe the companies that are going to win in the future are the ones that can most efficiently connect risk to capital, and this is one of the reasons why we’ve been building these capabilities”

Whitt on matching capital to risk across the Markel platform

“We’re seeing numerous ways in which the various pieces we’ve assembled can help us solve problems for customers and partners,” he added.

ILS investor appetite rebounding

Markel’s third-party capital management platform, which includes ILS fund giant Nephila and retro-focused start-up Lodgepine Re, has seen rebounding investor interest after an initial freeze when Covid-19 hit earlier this year.

Whitt said that initially investor attention had been on areas of their portfolios impacted by the financial markets turmoil, rather than the 1 to 2 percent they typically invest in ILS.

“As things started to rebound in the second quarter when the markets regained their footing and started making up some of the ground lost in the first quarter, investors’ attention could return to ILS,” said the executive.

Whitt said that interest had strongly rebounded with “really good conversations” leading to a number of subscriptions in Markel-managed funds already.

“But as they should, ILS investors are really doing their due diligence. It’s been a bad run for ILS cat risk since 2017, with the significant losses from 2017 and 2018, and the issues around trapped capital,” the Markel co-CEO commented.

“We still fully believe in the potential of the ILS market. Obviously ILS capital has decreased in the last few years, and I won’t predict where it’s going to go over the next two, three or four years. But over the next 10 or 20 years I believe it does nothing but continue to grow,” he said.

ILS