Market still facing ‘turbulent’ 2022: RPS CEO Cavaness
Despite signs of moderating price increases earlier this year, the combination of elevated cat activity, accelerating loss cost trends in casualty, and ongoing capacity constraints will continue into next year, the CEO of wholesaler Risk Placement Services (RPS) has said.
Joel Cavaness said that, while market conditions and capacity featured heavily in discussions at the Wholesale & Specialty Insurance Association (WSIA) annual meeting, the state of the market largely remained the status quo.
“We're still in for a pretty turbulent '22 from a pricing perspective,” he said.
While the wholesale CEO acknowledged new capacity had come into the market, the capital was not “completely organized yet to really have a significant impact on pricing or capacity” on overall market conditions.
Cavaness said the new capacity was welcome, noting that the amount needed to replace the pullbacks of major incumbents left room for many entrants.
“It's a big market, there's room for a lot of people,” he said.
Cavaness pointed to the downsizing of AIG’s Lexington and also Lloyd's, which had both cut billions of dollars in premium in recent years.
“In certain segments and verticals, you have carriers that have cut back from deploying $100mn in limits to $5mn, and you’ve got to replace $95mn worth of capacity,” he said.
“There's room for more players in this particular industry. [There’s] a lot left for a market to absorb.”
In evaluating property market conditions in the run-up to the new year, the RPS chief executive said the overwhelming feedback from carrier meetings had shown real credibility to carriers’ calls for discipline.
“If I've only heard it from five, and I hear something different from 15, I don’t put a lot of credence in it,” he said. “But if I hear it from 40 out of 40, you know it's pretty consistent.
“And pretty categorically, everybody says the same thing: we have not made money in cat property, and we have to do something about it.”
Beyond property, the wholesale executive expressed a view on casualty that has become increasingly widespread – that the widening gap between rate increases and loss-cost trends in the casualty market are likely to come under pressure as the economy re-opens.
“The general feel, at least for the casualty people, is that social inflation will actually be worse than it was prior to the pandemic,” Cavaness said.
Amid concerns over rising jury verdicts, he added that clients and carrier executives – attempting to stave off ever more costly verdicts and litigation – felt pressure to settle claims for amounts higher than they would otherwise.
‘We’ve been talking about this for 10 years’
According to Cavaness, staffing was the biggest topic of conversation at WSIA, where several carrier partners told him they had more than 100 positions they were unable to fill.
Cavaness is among those executives who consider “growing their own” to be a key part of the industry’s solution to this problem.
“We knew this,” he said. “We've been talking about it for 10 years, that there was going to be a shortage of talent in our industry because Baby Boomers are just about done.
“We're really not doing anything about the core problem. We're not bringing people who are outside our industry into the industry, nor are we doing a great job as an industry of bringing people out of college into our industry.”
Cavaness called the movement of underwriting talent “disruptive” for his firm, as it often meant shifting business to a different carrier.
“That old carrier doesn't have the talent to actually underwrite the deal and get the deal done, and the new company does,” he explained.
“You end up having to shift carriers to where those folks went because your old carrier doesn’t have the people that can actually transact it.”
As the movement of underwriting teams around the industry proliferates, executives have expressed differing opinions on the extent to which business had become institutionalized, with some trading partners emphasizing that ties among firms outweighed the value brought by the individual staff.
“If you own the product, then you have a greater chance of institutionalizing the relationship,” Cavaness said.
‘Very selective’ when it comes to MGA M&A deals
In addition to operating a transactional brokerage arm, RPS also manages a major delegated underwriting authority division. Speaking on the MGA M&A market, the executive was skeptical about many of the businesses now up for sale.
“A lot of the new MGAs have been in existence for a very short period of time – three to four years – and many of them have decided ‘hey, we're successful, we knocked it out of the park in three years, now pay me a multiple of what I've done.’
“Well, three years is not a long track record in this industry. You're taking a pretty big risk to go out and pay them many multiples of their profit.”
Cavaness said due diligence ahead of buying an MGA was critical and compared the fragility of the MGA business model with that of a show pony.
“I call them one-trick ponies,” he said. “If the pony breaks his leg, you shoot the pony and the show is over. And it's a disaster. You have to be very selective in the ones you're going to roll out naturally.”
Given the heavy consolidation of the wholesale market in recent years, and with intermediaries now turning their attention much more fervently to acquiring underwriting businesses, Cavaness argued that strong growth and profitable performance were sufficient ends to themselves, rather than simply chasing market share.
“If somebody wants to pressure themselves into being number one, we’ve never had that aspiration,” he said.
“I want to have a really good company that's well respected in the community, by our employees, and our customers. And so far, it's worked.”
‘Excited to partner with Willis Re, and that's not just pumping up the press’
Cavaness’ firm is expected to gain a new sister company by the end of this year in Willis Re, if the transaction is not delayed by regulatory inquiries.
Arthur J Gallagher CEO Pat Gallagher has been bullish on the potential to marry up the resources of the reinsurance intermediary with his company’s wholesale arm, principally for the reinsurance broker’s ability to build out more capacity for both retail and wholesale clients.
“I can tell you I'm very excited to partner with them,” Cavaness said of Willis Re, “and that's not just pumping up the press… the talents they have, the data they have, the analytics they have to be able to build things… that maybe we didn't have under the roof before to the same degree.”
Pointing to Gallagher’s existing reinsurance business, he said the acquisition would add to the firm’s ability “to get things done” exponentially.
“We've always been a very collaborative company under the umbrella, and we'll continue to be even that much more with Willis Re,” he said. “We're excited about it.”