During global insurer Chubb’s first-quarter earnings call, CEO Evan Greenberg described the rapid softening in the property and casualty insurance market as “silly,” citing a misalignment between supply and demand factors related to capital in the re/insurance industry and high intermediation costs.
Chubb reported that the company reduced its exposure to primary accounts and its excess and surplus (E&S) segment by canceling renewals on most of its shared and strata property insurance business during the first quarter.
In addition to divesting businesses it believed were mispriced, Chubb purchased additional reinsurance to further protect its remaining property risks.
“Pricing conditions for real estate and financial products are soft in some important markets, and the pace of real estate pricing in those markets is, frankly, what I would only describe as foolish,” Greenberg said.
Explaining further: “If I take a step back and look at the overall market pricing for shared and tiered in North America and London, overall pricing was down 25% to almost 30% in the quarter. In fact, you can see that trend is accelerating.”
“By the way, the cost of damage, to highlight, the cost of damage to shared and strata properties is about 4-5 per cent, so you can work out the math there.”
When asked about the drivers behind this weakness, Greenberg highlighted the market’s “hunger,” attributing pricing pressure to an oversupply of capital entering the industry through channels that prioritize volume over technical underwriting discipline.
“The supply, the capital, is chasing a relatively limited number of businesses. And by the way, in a concentrated way,” he said.
The executive noted that the current market dynamics are different from those in the retail business because the large account risks in E&S and London are “boxed” and easily accessible to anyone with a balance sheet.
“It doesn’t require a lot of capacity,” Greenberg said. “It requires some balance sheet capital and a couple of underwriters, and then you get into the market. So, it’s a hunger. The structural difference this time is just the way capital manifests itself. It manifests itself in a volume-based incentive system.”
“MGAs, most of them, are just based on volume. What do they bring to the table? They bring cheaper prices and higher commissions. It’s the reinsurance market, it’s also alternative capital, and the volume of apples in supply is captured by intermediaries.”
He concluded with a warning: “That’s what you’re reflecting here. The ultimate losers, by the way, are the ultimate risk takers who put the money in. This is a short-tail business. The report cards will be out soon, so stay tuned.”
