Viewpoint: Embracing change and building resilience in European financial lines

Financial lines markets across Europe are undergoing a rapid transformation, presenting both challenges and opportunities for the managing general agent (MGA) sector.

As we move away from the hardening market experienced in recent years, we find ourselves in a period of severe market softening – it is crucial to maintain market discipline to avoid extreme corrections.

The financial lines market is one of the notable areas experiencing change in this region, where many international insurers are eager to access the European market post Brexit. With this influx of new international insurance capacity, and an increase in line size deployment by the incumbent insurers, market discipline is weakening, and underwriters face the pressure to meet financial budgets.

Despite these challenges, there are other market segments than financial lines with a clear gap between demand and supply, such as aviation, political risk and construction risk. MGAs with strong local expertise and presence can capitalise on these opportunities by offering specialised coverage and meeting the unique needs of underserved segments.

In the realm of directors’ and officers’ (D&O) insurance, recent high-profile cases such as WireCard and Credit Suisse, have brought the importance of this coverage to the forefront. Furthermore, the interest rate increases of the past two years have raised questions in relation to the ability of debt-leveraged companies to refinance their debt at sustainable terms and their necessity to strengthen their capital base by issuing new shares.

ESG burden

A new European environmental, social and governance (ESG) directive is also starting to be implemented in various country laws, with Germany taking the lead, adding to the regulatory burden that directors are already facing today.

Last but not least, and as a result of recent geopolitical events, many countries have strengthened their domestic agendas or changed their strategic alliances, and become more protective and inward looking, threatening the growth of international trade. Many European companies may have to adapt to this new international trading environment by restructuring and reorganising their assets and resources.

Underwriters are now expected to scrutinise the risks more closely and hopefully end their premium discounts to reflect this increased risk environment. While underwriters were previously focused on emerging areas like fintech, biotech and cryptocurrencies, the spotlight is once again on the more traditional financial institutions and companies.

In light of the influx of new insurance capacity, recent events will not drastically change the market short-term, but they should, at least in theory, lead to a market correction medium to long term. So, it remains uncertain whether these recent events will lead to a shift in the softening trend of the D&O insurance market. However, they serve as a stark reminder for financial institutions and other firms to consider sufficient D&O coverage and implement best risk management practices.

With new entrants to the D&O sector, capacity remains high, but at a minimum deceleration of the market softening should become a reality. For example, underwriters are now looking more closely not only at the credit quality of bank assets but also the asset mix, deposit base, duration of assets, and potential depositor flight exposure. Their risk selection and pricing should become more disciplined. Local knowledge and expertise will again be crucial in connecting capacity with the right risks.

Positive change

While challenges persist, there is potential for positive changes in the market. At one point, adjustments in pricing are anticipated, as the current rates may not adequately reflect the systemic risks encountered. Monitoring the situation closely will be essential in the coming year. In the meantime, the safest underwriting strategy is to de-risk the insurance portfolios and remain disciplined notwithstanding the budget pressures.

We may witness some D&O insurers transitioning out of the sector and new providers emerging to fill the void. The attitudes of reinsurers toward portfolios with D&O exposure will also impact coverage and capacity.

We hold a positive outlook, particularly for banks. First, the presence of uninsured banking deposits will incentivise banks to mitigate their risks. Second, as mentioned before, the combination of a few high-profile banking failures, persistent inflation, post-pandemic fallout, geopolitical instability, energy price increases, and a focus on ESG has heightened D&O exposures across Europe and led to greater focus on the benefits of having effective insurance in place, and the overall resilience of organisations.

To navigate these changing dynamics, maintaining a disciplined underwriting approach is crucial. The recessionary climate and withdrawal of government support increase the risk of insolvency, potentially leading to an uptick in claims.

Cyber focus

Another of the most prominent European markets experiencing change is cyber insurance. Increased pricing competition from international insurers eager to capture a share of the growing European cyber market has resulted in severe market softening. However, the stability of cyber coverage remains a concern for insurers, particularly in light of the rising risk of ransom­ware and cyber warfare.

To address this, insurers are introducing sub-limits for more exposed cyber insurance covers. Despite the pricing pressure, the cyber market continues to show potential, especially among small to medium-sized first-time buyers who still remain uncovered.

The recent vendor-related MOVEit hack exposed major corporations’ vulnerabilities, and also the potential for a cascading cyber event with ramifications across sectors. Once again, this has led to calls for enhanced cyber security measures – serving as a stark reminder of the persistent threats faced by both large corporations and small and medium-sized enterprises in the realm of cyber security. The attack, driven by poor cyber security practices, has unveiled the critical need for heightened security measures across organisations to safeguard sensitive data and systems.

As the demand for cyber insurance continues to grow, MGAs can play a vital role in providing specialised and tailored coverage to these underserved segments of the market.

Resilience is key

Effective D&O and cyber insurance, along with wider financial lines insurance, contribute significantly to an organisation’s resilience. They provide financial loss protection, support risk management efforts, and enable businesses to recover quickly from unexpected events. By having appropriate insurance coverage and leveraging the expertise of insurers, organisations can enhance their ability to withstand and thrive in the face of challenges, ultimately safeguarding their long-term success.

The future of the European MGA sector lies in embracing change, helping companies build resilience, and focusing on long-term value creation. By staying agile, leveraging technological advancements, and upholding market discipline, MGAs can thrive in this evolving landscape.

At the same time, MGAs are not burdened by legacy systems and can adapt quickly to the evolving landscape. Insurance capital providers are increasingly supporting this emerging distribution model, recognising the advantages of avoiding the fixed expense bases of traditional insurance companies. By embracing differentiation and relevance, MGAs can navigate the softening market while building a resilient future.

As we look ahead, it is important to monitor market dynamics closely. The evolving landscape of financial lines insurance presents both challenges and opportunities. By staying agile, embracing technological advancements, and maintaining market discipline, MGAs can continue to thrive in this ever-changing environment. Let us seize the opportunities that lie ahead and work together to build a stronger and more resilient European MGA sector.

Gerard Van Loon is chief executive of Alta Signa