Industry is at a crossroads in 2023

Markel International, London

Last year was undoubtedly a dynamic one for the industry: it started with a bang, and we saw the insurance-led market improving, with rates continuing to increase across most lines of business, writes Andrew McMellin, Markel International.

As the year progressed and we went into the second half of 2022, the level of rate increases took a turn and reduced considerably. This was particularly the case across professional and financial lines, as well as cyber. This was paired with good rate adequacy and an improvement in the underlying results across the market more broadly.

That said, the devastating crisis and war in Ukraine had an indisputable impact on war and terrorism lines with detained vessels and the war on land respectively. Significant loss provisions were made and resulted in rates substantially increasing in these classes.

While some carriers withdrew capacity in such lines, Markel stepped up to provide solutions to our clients. Our hull and war team are a great example and worked around the clock to ensure we provided consistent service – our involvement in supporting a broker grain corridor facility was testament to this, as well as what we felt was our responsibility to contribute to society at a challenging time.

Twice the challenge

When looking ahead to 2023 and what has the potential to have an impact on the industry, there are two factors that are inextricably linked that jump out. Although neither of these are new, they are likely to remain at the forefront as challenges the market has to tackle together.

The first is the economic and inflationary environment. We have seen increases in economic inflation driven by an astronomical rise in both energy and food prices, which can largely be attributed to the Russia-Ukraine war.

We have also observed the lingering effects of Covid-19 affecting our industry, with supply constraints still existing as China remained locked down through most of last year, which has inevitably caused the cost of materials to go up.

On the topic of Covid-19, there has been a post-Covid catch-up on casualty claims as the judiciary systems have slowly opened, particularly in the US, accompanied with an increase in the frequency and severity of the casualty claims that come through.

Furthermore, there has also been an impact on increased asset values, where clients have had to purchase higher limits on property classes. This has been a particular problem in natural catastrophe areas, as supply of insurance is constrained and results in both reinsurance and retro constraints, which thus may lead to rate increases as there is less supply of product at the time of heightened demand.

The inflationary impact is likely to mean a strengthening of reserves on earlier years, while the impact of higher claims in future years will depress results unless carriers can achieve rate increases to offset these. What is more, a timing impact from premiums obtained today versus the inflation heightened claims of tomorrow can also be offset by higher prices. Another factor that leads to higher prices to achieve similar returns on capital is the increased cost of capital from the uncertainty that is driven purely by the prospect of inflation on portfolios.

Geopolitical issues

There are multiple risks from heightened tensions globally including between Russia and Ukraine, Russia and Nato, China and Taiwan and the Korean peninsula, to name a few. There is also a growing risk of riots being driven by increased energy and food costs, particularly in developing countries, as populations may look to blame governments for their predicament.

With such conflicts comes increased insurance risk, particularly for war and terrorism (including war on land, strikes, riots and civil commotion and political violence). Therefore, the heightened risk will have an impact on pricing as there will be a need to get higher prices for that increased risk next year.

However, some carriers may have less appetite for such risks and supply of insurance is once again constrained, which is likely to create an increased pricing environment.

On top of these two factors is the late completion of reinsurance covers, which means either insurers may not be able to confirm cover or they may have to retain more risk themselves.

Increased reinsurance pricing and higher retentions could force higher prices in the insurance market to pay for insurers retaining greater risk themselves and exposing their capital more. This is affecting both short and long-tail lines and it could be said we are transitioning and now entering a reinsurance-led hardening market.

If this increased retained risk is not passed on in the form of higher insurance prices, insurance carriers will be exposing their balance sheets to lower returns on capital exposed, which would ultimately mean shareholders get smaller returns.

However, in the middle of the difficulty lies opportunity across the market. While clients and the market are aware of these wider issues and factors, our clients do not want extreme rate fluctuations when the underlying dynamics remain the same.

Therefore, 2023 will be a time more than ever when insurers like us will truly have to continue to work hand in hand with broking partners to manage clients’ expectations, provide solutions that are fair to all parties and source business in lines where we can grow and support our clients and society at this time.

Andrew McMellin is managing director of the wholesale division at Markel International


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About Markel International:

Markel International is a division of Markel Group Inc, a US-based holding company trading on the New York Stock Exchange (NYSE: MKL). Markel International writes insurance and reinsurance business through six divisions and through offices across the UK, Europe, Canada, Latin America and Asia Pacific. Markel International’s insuring entities include Syndicate 3000, Markel International Insurance Company Limited, Markel Insurance SE., and Markel Resseguradora do Brasil S.A. Its UK national markets business also provides legal and professional fees insurance cover as well as legal and tax consultancy services.