Riding the waves: A reliable partner for volatile times

By AXA XL Chief Underwriting Officer, APAC & Europe, Etienne Champion

The corporate insurance market is now in positive territory and will remain healthy going into 2024. While significant price adjustments are not envisaged, macro-economic conditions and loss volatility will underpin underwriting discipline, explains Etienne Champion, chief underwriting officer, APAC & Europe at AXA XL. As we head into 2024, three big issues are front of mind for (re)insurers: natural catastrophes, cyber and social inflation. One theme that runs through these three key topics is volatility. Whether it’s extreme weather events, ransomware attacks or nuclear verdicts, large unpredictable losses are a major challenge for the insurance industry, and our customers.

Extreme weather trends

Take extreme weather events. This year alone has seen severe storms and floods in Italy, Spain and Greece, a near-record number of severe convective storms in the US, along with unusually large back-to-back storms in New Zealand. North America and Europe experienced another summer of extreme heat, including devastating wildfires in Greece, Portugal, Canada and Hawaii. Those types of events are typically very hard to predict in terms of location and time/duration.

Natural catastrophe loss volatility has never been higher, especially in the US and increasingly in Europe. Global insured losses from natural catastrophes totalled $50bn in the first half of 2023, the second highest level since 2011 and 54% above the 10-year average, according to reinsurer Swiss Re. Severe convective storms alone accounted for around 70% of global insured natural catastrophe losses in the first half of 2023.

Extreme weather events are now a major challenge for society, as the effects of climate change combine with other factors, such as inflation and urbanisation, to drive up the cost of natural disasters. We are now seeing this play out in the insurance industry. Increased volatility in natural catastrophe losses was a major driving factor behind hardening of the property insurance market over the past three years, and more recently in reinsurance. 

Rebound in ransomware  

Ransomware has re-emerged as a hot topic in recent months. Following a reduction in ransomware attacks in 2022, the frequency of incidents has started to tick upwards in 2023, with several large cyberattacks against large companies – the biggest ransomware attack this year, the MOVEit vulnerability, may have affected over 2,000 companies and 62 million individuals. According to the recent Thales Data Threat Report, 48% of IT professionals report an increase in ransomware attacks.

Dialogue between insurers and clients must intensify in response to the resurgent ransomware threat. Cyber insurance pricing has been falling of late, reflecting improved cyber security maturity among insured companies, and a reduction in ransomware activity last year. However, given the changing trends in ransomware, further adjustments in pricing may be required to ensure the market is sustainable going forward.  

Cyber is currently the industry’s fastest growing line of business. According to Munich Re, the cyber insurance market is expected to more than double by 2027 to $33bn. However, we recognise that the cyber market in Europe must mature, as well as grow. Product delivery is key for customer value when it comes to cyber insurance and there is still work to be done as a market around the consistency of risk assessment, incidence response and claims. For our part, we continue to listen to clients and build out our holistic cyber risk ecosystem, investing in risk assessment tools and consulting, cyber risk engineering, incidence response and claims. 

Spreading the risk of social inflation

Social inflation is an increasingly vexing issue for insurers, and one that treaty reinsurers are paying more attention to. Damages awarded in US courts have risen significantly since courts reopened after the pandemic. According to consultancy firm Marathon Strategies, corporate nuclear verdicts in 2022 totalled $18.3bn, having nearly quadrupled in the following two years.

After a considerable decline in 2020 and 2021, it now stands at more than triple the 2015 figure. 

Social inflation is at its worst in the US, driven by litigation funding, aggressive plaintiff attorney tactics, and changing attitudes towards accountability. The resulting above inflation indemnity costs in the US have a knock-on effect for capacity in other regions, while we also see signs of social inflation in other territories, such as Australia, UK and Ireland. 

Insurers and businesses have limited leverage when it comes to social inflation, although there are ways to mitigate the impact through robust risk management and litigation strategies. In the face of increased loss volatility, casualty insurers will take a disciplined approach to casualty limits going forward, as the market seeks to mutualise the risks of social inflation. By deploying lower limits, and increasing the number of insurers on a programme, the impact of nuclear verdicts can be spread more widely across the industry. 

Helping clients manage volatility

Heightened loss volatility and changes in reinsurers’ risk appetite has implications for the commercial insurance market. The property insurance market, for example, faces the prospect of increased losses from extreme weather with reduced support from the reinsurance market, which is likely to make secondary perils more difficult and expensive to insure. 

We recognise that large companies need cover for such events, and that the ability to do so is becoming an important competitive differentiator for insurers. Actions taken over the past three years have made AXA XL more resilient and well positioned to mitigate the hardening of the reinsurance market. 

We continue to grow and diversify our portfolio in terms of customers, geography and lines of business – for example we have accelerated our expansion into the mid-market - as we seek to rebalance our concentration on large complex risks. Such actions enable us to maintain capacity levels for natural catastrophe risks and able to absorb some of the increased reinsurance costs.

Emphasis on risk management 

With heightened levels of volatility, the need for risk management and dialogue has never been so great. Extreme weather, ransomware and social inflation will need insurers and insureds to work closely together to better understand the drivers of exposure and identify the most effective loss prevention and mitigation actions. Pricing for natural catastrophe cover, for example, will increasingly reflect the insureds’ geographical spread of property assets and the ability to demonstrate effective risk management measures.

As industrial risks become more complex and technical, both insurers and insureds need to take more time understanding their risks and working collaboratively on solutions.

Communication and information will be key going forward, which is why we continually invest in our people, systems and processes. Insurers need good quality usable information to accurately assess risk and to give clients credit for risk management actions.

AXA XL also continues to invest in expertise and services to help our clients adapt to the changing risk landscape and manage increased volatility. Our consulting business AXA Climate and our growing team of 400 risk engineers are helping clients assess climate risks and adapt to climate change and biodiversity loss. AXA XL is also investing in servicing captive programs. Captives have become an increasingly important risk management and risk transfer tool with a supportive momentum from various governments in Europe in the last 5 years. 

Volatile times, stable market 

Corporate clients can expect more predictable market conditions in 2024, following necessary structural changes in the commercial insurance market in recent years. We continue to see healthy rating levels in almost all lines of business driven by inflation, increased reinsurance costs and higher levels of volatility. The rate of price increases for property has slowed this year, while concern for social inflation has supported more robust pricing for casualty lines exposed to the US. 

The one notable exception is directors and officers (D&O), where pricing has declined steadily over the past 18 months following a two-year period of price correction and capacity constraints. D&O rates fell for the fifth consecutive quarter in Q2, and are now close to 2019 levels, according to the Aon D&O Quarterly Index. Current rating levels for D&O reflect increased capacity in the market, but sustainable pricing levels will be required to avoid a repeat of the turmoil a few years ago. 

Re-investing for the future

Recent strategic actions and investments place AXA XL in a strong position in our traditional market for large risks, and lay the foundations for our diversification into the mid-market. AXA XL is an important long-term partner for this market. And by growing profitably, we can make the significant investments required to raise service levels and support clients as they respond to the evolving challenges around us.