A hard market in reinsurance is among three main reasons why primary insurance rates will continue to rise for brokers’ clients for at least another year or two, Intact Financial Corp. CEO Charles Brindamour suggests.
In a recent virtual fireside chat with UBS analyst Brian Meredith, Brindamour set the stage for his commentary about the reasons for the hard market by observing that return on equity is at historically low levels across the industry. While Intact reported July 28 its ROE was 10.1% for the three months ending June 30, the ROE for the Canadian industry at the beginning of the pandemic crisis was about 5.5%, Brindamour said Aug. 11 during the fireside chat. Historically, the industry ROE performance is around 9% to 10%.
“To get back to its historical performance, two years’ correction is needed – 18 to 24 months,” said Brindamour. “Then you throw the current context in. And what do you have in the current context? Well, you’ve got three main things. One, a lower interest rate environment. Two, pressure coming from COVID-19. Three, pressure coming from the reinsurance market, which is also fairly hard and restrictive at the moment. So, if you layer that on top of an industry that was generating 5% ROE, our perspective is that you’ve still got 18-24 months of momentum in the market.”
Dan Glaser, CEO of Marsh & McLennan Companies Inc., has similar observations about the reinsurance market.
“Reinsurers are being cautious in the amount of capital they are willing to expose in an environment of great uncertainty,” Glaser said July 31 during a conference call discussing the financial results of Marsh & McLennan for the three months ending June 30. Marsh & McLennan owns commercial brokerage Marsh, reinsurance brokerage Guy Carpenter, and consulting firms Mercer and Oliver Wyman.
For the industry’s July 1 reinsurance renewals, there were “meaningful increases” in rates for treaties with large exposure to wind losses in the southeastern U.S., suggested Glaser. Some property catastrophe treaties in Florida were up 25% to 35%, while rates for property catastrophe treaties outside of Florida were typically up 5% to 15%, said Glaser.
During the UBS fireside chat with Intact, Meredith asked Brindamour about the long-term implications of COVID-19, which was declared a pandemic Mar. 11 by the World Health Organization.
“What’s clear to us is that’s its really hard for [small to mid-sized enterprises] at the moment and we might lose 3% to 5% of SMEs as a country,” said Brindamour. “The middle will consolidate. The small will be smaller, and there will be more of those. The question we ask ourselves is: How do we win at the smaller end, and how do we differentiate ourselves at the mid end?”