London’s Covid-restricted Christmas provided a rare chance to get to know one’s neighbours a little better. I don’t mean in the sense of a renewed social covenant where we returned to an idealised version of the 1950s in which we all looked out for each other, arriving gaily on doorsteps unannounced, proffering baked goods and sage counsel.

No, my opportunity for fact-finding fell firmly into the nosy neighbour category. Being forced to celebrate the Holiday season alone left nowhere to hide.

Recycling boxes do not lie. Gone were the apocryphal fathers-in-law and their insistence on drinking hosts out of house and home. Banished were the maiden aunts and their addiction to pungent liqueurs with strange names.

As the refuse collectors wearily began their New Year’s clean-up, neither the flash nor the frugal had any excuses to hide. It was wonderful sport. And what holds true for suburban snooping also applies to global wholesale specialty and reinsurance renewals in 2020-21.

This year we found out exactly what the market’s true appetites were. I am happy to report that a thorough inspection of the global (re)insurance street’s refuse shows that these appetites are healthy.

The soft market excess has long gone. The pavement has not been littered with discarded jeroboams of vintage champagne since at least 2016, but there is early evidence that austerity will soon be coming to an end. Three years of rate rises, mostly in the primary insurance business, have begun to restore confidence in the underlying profitability of the overall book.

The net result is that on a global aggregated basis we are now at overall rating levels that most would be happy to maintain indefinitely. Meanwhile capital levels have recovered and are ahead of where they were a year ago.

We can also learn much from the fact that a long-flagged crunch in retro – the reinsurance that reinsurers themselves buy – was largely avoided. Some reinsurers bought less and instead sold catastrophe bonds, while some raised new capital and opportunistically switched from buyer to seller. Supply and demand managed to rebalance themselves incredibly quickly.

The only pockets of hardness that remain are the ones you already know very well about in the tough end of casualty insurance. Here it will still take time for capacity crunches to ease, but the core news is good.

After running scared to reinsurers for capital relief, readily swallowing harsh terms in previous renewals, the better insurers in these classes were finally happy to retain more of these risks unless reinsurers gave them sweeter deals. They are starting to regain confidence that after doubling prices and restricting cover, what they are writing now is very likely to be profitable.

A path to recovery

It cannot be long from here to recovery. When fear ends, greed is never far away! But there is one fly in the ointment. And it’s a big fat one. Ongoing Covid cover has disappeared, never to return.

Indeed, this renewal was far more about making sure that everyone was on the same page on this existential question than it was about remediating pricing levels. The industry took a look at a global systemic exposure of US$ trillions and swiftly concluded that this was not a commercially insurable risk. The bins on the street are overflowing with discarded disease exposure.

This renewal reinsurers inspected original wordings like a lottery winner frantically searching the laundry basket for a lost jackpot ticket. Except they weren’t looking for winners, but were on a mission to cut out potentially fatal covers hidden in underlying wordings. Only insurers that had never given original communicable disease cover avoided exclusions on their reinsurance treaties, but this was a moot point.

The assumption was that as 2021 works through, any underlying Covid exposure on insurance policies will expire and that all new and renewal insurance will be applying an appropriate exclusion. Like with the disease itself the strategy is one of containment and inoculation. If you want this cover you will need to fund this yourself. It is never coming back.

However, for the Covid losses already in the system from contracts on the books in 2019 and 2020 the news is somewhat better. Whilst still almost entirely comprising theoretical, incurred but not reported (IBNR), entries, the overall numbers look much more manageable than they looked before massive government aid packages and rapid vaccine development made a big dent in the most pessimistic loss assumptions.

Today Covid looks like costing the equivalent of a medium-sized ($US30-50bn) US landfalling Hurricane and one that the market expects to pay for very slowly over many years. Industry cashflows are likely to stay positive. The healthy capitalisation and relative vigour of the market also bodes well for disputes. In a beauty parade for newly profitable business in a cashflow-positive world, no-one will want to be known as the reinsurer who didn’t pay their Covid losses. The bill will be quietly eked out of profits for years to come.

The odd rumble of litigation is still going to be possible, particularly if aggressive cedants get creative about trying to aggregate business interruption claims into catastrophe excess of loss programmes, but this is unlikely to be a systemic problem. Stick to players with sensible proportional protections whose fortunes will be fully followed by their reinsurers and you shouldn’t be in for any nasty surprises.

So, should you be inviting yourselves around and looking for new long-term (re)insurance partners in 2021? By all means. The market is in good health and the best incumbents have further differentiated themselves. They are here for you now and have increased appetites at these more sustainable pricing levels. 2021 and 2022 should be years of continuity and increased pricing stability for consistent buyers.

And without exception the new class of 2020 neighbours who have just moved in are actually very seasoned players who know exactly what they are doing. Their pristine balance sheets may come in useful, so it is worth inviting them round soon to check them out. Lockdowns permitting, it will be time to meet the neighbours in 2021.

Mark Geoghegan is the founder of The Voice of Insurance podcast.