LYALL HORNER: Thanks, Jo. Great to be here.
JO HOLLIDAY: So there's a lot going on at the moment geopolitically, Lyall. It's been a really lively couple of years in our marketplace. And as we're recording this, it'll probably change again. But it'd be really good to get your insights on what we've seen over the last couple of years and how the insurers have really responded to that.
LYALL HORNER: Sure. So as you referenced there, certainly 2022 to early 2024, we have witnessed some of the largest turmoil in our market, the hardest market since the early 2000s and post-9/11. Now, a lot of this was caused by war losses in Ukraine along with strikes, riots, civil commotion, losses in Hong Kong, Chile, South Africa, and the US.
But it's affected the full spectrum of political violence and terrorism markets as a single global market with one pool of premium. We've also more recently seen 2024 being the year of elections when we saw half the free world going to the polls, all set to a backdrop of extreme political polarization.
We've continued to see strain in Taiwan cross-strait relations and continued war conflict in Ukraine and the Middle East through last year. But the one thing that we have seen through that last year is the actual loss realization from that to the marketplace was comparatively low compared with those two to three years beforehand.
Alongside that, we've seen an abundance of new capacity entering the market, as well as increased competition from existing long-standing carriers. And therefore, despite all of this increased geopolitical instability, in spite of all the security challenges that insurers are facing compared with even 10 years ago, we are definitely seeing a marketplace which is generally softening.
While there are always going to be outliers, rates are typically reducing from two and half to 10% in the majority of territories. We're starting to see certain business interruption coverages that were cut through the past few years slowly beginning to return, and capacity deployment is generally back on the rise too. So all that instability in the world is not causing too many issues in the marketplace for our clients.
JO HOLLIDAY: That's really interesting, Lyall, because obviously there's a very broad geographical spread of some of those issues that you've highlighted. And the piece around political polarization, we've seen 80% of incumbents impacted last year, and it will be interesting to see how those unfold in the years ahead. But you've talked about the general market conditions and that softening. Are there any outliers or challenges that you see ahead of us in the next year?
LYALL HORNER: Sure. So insurers are always looking ahead. While the year of elections, that 2024, didn't experience the potential concern for losses that they had at the start of the year, there were still some territories, such as the post-election unrest in Mozambique and some of the unrest in French overseas territories that have seen, and are still seeing, their own micro hard markets within the global landscape, and pricing being up significantly and capacity challenged even on some relatively low limit requests.
Other countries are being watched as to how policy decisions, rather than the election results themselves, may spark future protests, future acts of violence, and further geopolitical instability. We are also continuing to face challenges with market appetite in Taiwan because of the continuing cross-strait relations concerns.
And especially when we talk about territories, such as Taiwan or Israel, historic market appetite to say only right terrorism coverage in those territories is now being pushed towards insurers only willing to offer coverage for full political violence, which is a trend we've seen even going back as far as Arab Spring.
Insurers are wanting to avoid any grey area in coverage as to where losses may be terroristic in nature, war in nature, or even anything in between on the political violence spectrum, such as protests happening at similar times to terroristic activities and even, say, a coup d'état. So they are encouraging clients to buy the full suite of perils and have that certainty of coverage.
JO HOLLIDAY: So basically avoiding those potential gray areas that could happen between different types of coverage.
LYALL HORNER: Yes, certainly. It's something that we also ourselves encourage our clients to ensure they have the most certain coverage, no gray areas, all while being within the best pricing that we can obtain from the marketplace. And especially where carriers in some territories are not differentiating pricing all that much between the perils because of those concerns of gray areas, it certainly is a focus and an approach that we are seeing taken to cover the full suite of them.
JO HOLLIDAY: And I think part of what's really driven the market over the last couple of years is the response of treaty reinsurers and their response to events and trying to stabilize the coverage and terms that they're offering. Can you elaborate on that a little bit, and what are the biggest drivers of the market, and how's that feeding into what we're seeing or clients are seeing?
LYALL HORNER: Sure. So as you say, the treaty market's reaction has been a big driver to the direct and facultative market for our clients. And a large part of the previous market hardening was driven by the treaty market's reaction to the losses ceded to them from the direct insurers's loss experience.
Historically, terrorism political violence treaty programs were benefiting from large economy of scale discounts from being in composite treaties with marine, property, or other political classes of business. But when especially the losses in Ukraine hit multiple correlating classes, that was a big driver in this being split out.
And that alone increased rates on the treaty side dramatically, let alone the other loss experience from the other countries we talked about at the start and at similar times a few years ago, the wider treaty and retro market macroeconomic challenges that we were facing.
JO HOLLIDAY: And some of the things that we saw in those treaty renewals was a doubling of premium, significantly higher retentions and attachment points, and also some of those conditions around contingent and SLCC type losses. Did you feel that these were passed on pretty directly to our insureds?
LYALL HORNER: That's one of the things that we certainly noticed a split in the approach. While, as you say, the treaty insurers were almost taking the approach of double-double half, some were talking about double the price, double the attachment point, and half the capacity offered. The direct impact to clients was a bit more tempered, was trying to be-- was trying to be managed over a number of years.
And certainly things such as insurers having their treaty program with an occurrence clause that now was limiting all losses to be within a city, and then if multiple cities were hit in the same country, that meant the occurrence clause for their attachment point applied multiple times over. But they did not pass these on to direct insureds.
So positive from a direct insured position to not have as dramatic pricing or coverage changes. But what that meant for the markets over the past few years was they were having to quickly navigate change in profitability requirements, change in underwriting appetite and approach, and rebalance their portfolios to meet treaty reinsurers's needs so that long-term they could continue to give clients stability of coverage while still being competitive in the marketplace.
As we look to the past year, though, that's where a lot of the insurers have rebalanced their portfolios for the most part and we have started to see some reductions, some improvements of coverage on the treaty side, which, along with the new capacity in the market, has certainly seen-- has certainly been a driver of that market softening.
JO HOLLIDAY: Really interesting. And it will be really interesting to see how that evolves. And I mean, perhaps we could leave-- finish off this session maybe with some food for thoughts for clients. What can we support clients in doing now to put them in the best possible position for any upcoming renewals they may have over the coming months? What are the things that they should be thinking about?
LYALL HORNER: Sure. So when we look back to the last few years and the hardening market really made clients think about their programs, think about their exposure, market availability, and, of course, their own budget constraints. Going into a softening market, we encourage clients to continue to think carefully in the same way.
We take an analytical approach with all of our technology tools, looking at key accumulations, deterministic loss scenarios, and mapping against geopolitical and security intelligence to consider all the loss factors. So continuing that through the softening market is key to insureds having the best result in their renewals through this year and coming years.
JO HOLLIDAY: And presumably, it may also help them challenge some of the limits that their lenders are requiring them to have with that data-driven analytics behind them.
LYALL HORNER: Exactly. Some of the analytics may show that previous lender requirements could be challenged, limits could be reduced. For some clients, it may identify exposures that have changed since lender requirements or programs were first designed, and the programs therefore need to be updated to meet the needs of the current risk exposures that the client has.
What we want to do is take this identification of new exposures and take advantage of the rate reductions and the increased market capacity available to either buy back anything that was cut in the last few years, buy higher limits to meet those new exposures, or buy back coverage extensions and wider perils. For some clients, it really is a mix.
On some clients, we may challenge the terrorism limit and may reduce that, but that reduced limit, along with the premium reductions that may be available from rating relief, can be reinvested into potentially new perils that they don't currently buy, such as strikes, riots, civil commotion, if there's still uncertainty of coverage in their property policy, or active assailants, where certainly events in the US and around Europe and further around the world, we're seeing an increase in activity, and the impact on certain businesses, especially with media coverage, is something that they need to be managing that crisis well and these kind of programs can help support that.
JO HOLLIDAY: So really interesting, Lyall. It seems like a really good time to have a really good think and review grounds up approach really to current structures and scope of coverage using that sort of data analytics to really inform those decisions. Lyall, thank you very much for your contribution on this episode of the Marketplace Insights podcast. See you on the next one.
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