2023 will test ingenuity and inventiveness of insurers

Jamil Elbahou, CEO & chief underwriting officer of Connect Underwriting, explains the year ahead will test the insurance market as the impacts of a long wished for hard market become ever more apparent.

Not so long ago during the protracted soft market, competitive capacity and underwriters were relentless in their desire to place risks ahead of the competition. At that time, it was hard to predict – and unpalatable even to consider – the sequence of events required to halt declining rates and send them into reverse.

Now, we are told, we are in a ‘proper’ hard market, but this much longed for state inevitably reflects the greatly increased volatility of a world suffering the global economic aftershocks of the pandemic, and with the war between Russia and Ukraine showing little sign of ending anytime soon.

Particular difficulties face certain classes, meaning that in the short-to-medium term at least, conditions are likely to deteriorate before they improve. For example, even before the pandemic, strikes, riots and civil commotions (SRCC) had been escalating rapidly. In 2021 widespread civil unrest grabbed many headlines, culminating in the Zuma riots in Africa, which was classified a cat loss by Lloyd’s – the first the political violence & terrorism market had seen for some time. Now, in China, premier Xi Jinping is facing stiff opposition, with outrage over Covid rules spilling into mass protest and displays of open hostility toward government not seen since Tiananmen Square.

In many regions political volatility due to ongoing economic disruption is likely in 2023, meaning war, terrorism and SRCC underwriters are unlikely to have seen their worst days yet. As the world braces for a prolonged economic downturn, those countries whose debt-to-GDP ratios prove unmanageable are particularly vulnerable and are being closely monitored by underwriters. As seen in recent years, when populations cannot obtain basic provisions for prolonged periods, riots and even the violent overthrow of government in coup d’états can ensue.

With a relentless series of natural catastrophes in 2022, causing $10bn in insured losses in Q1 alone, such events are likely to continue to pose significant challenges for the underwriting community in 2023. The reliance of insurers on risk models is increasingly being questioned and model development will be a particular area of focus, having proven time and again to be inadequate by virtue of the losses the market has sustained. This is essentially due to the speed at which models are developed being outpaced by climate change. With this increasing focus and a clear imperative, it is likely that 2023 could see risk modelling capabilities develop more rapidly, with traditional underwriting experience influencing new models in combination with parametrics and other emerging technologies. Certainly, treaty cat is something of a dirty word in the market at time of writing, with rates increasing and conditions also likely to tighten at 1/1 renewal, which will be a real litmus test.

Cyber, which also has the potential to produce considerable losses, is another area that will continue to be closely watched in 2023, as knowledge about cyber and electronic risks continue to evolve. Despite a lack of knowledge and with some being forced to exit the class in 2022, competition to win business remains extremely strong, driven largely by the favourable rate environment. As with cat risks, the veracity of the industry’s cyber modelling capabilities is also being questioned. A similar compulsion therefore rests with cyber risk modellers to bring about advances more rapidly in 2023 and build in increasing industry experience to enhance the market’s predictive and analytical capabilities and enhance its overall resilience.

As businesses replace ‘just in time’ management with ‘just in case’ stockpiling, supply chain risk is a further area likely to continue posing challenges for the insurance industry into 2023 and beyond. Following the pandemic, natural disasters, trade disputes, cybersecurity breaches and other disruptive events, the world’s once highly efficient supply chains have become unreliable. This has put the insurance industry in a very vulnerable position as market wordings were not designed for the circumstances now facing insureds worldwide.

All these challenges are substantial, likely to be exacerbated by the world’s weakened economic state and their simultaneous occurrence presents a further challenge to insurers. 2023 will test their ingenuity and inventiveness in devising models, risk management strategies and risk transfer programmes capable of supporting clients through the difficult days ahead.