{{indexingdisabled}} Best's Review - March 2023 Edition - Asset Management: Economic Headwinds

Kuczinski: Insurers Can’t Handle

Climate Change, Catastrophic

Risk by Themselves

Retired Munich Re executive Tony Kuczinski spoke to

Best’s Review

about

how insurance companies have to do a better job of speaking as an industry

to deal with rapidly evolving risks. But they can’t do it alone.

by Tom Davis

ow that he’s retired from his position as

chief executive officer of Munich Re US P&C

Cos., Tony Kuczinski has a message—not just

for the insurance industry, but for everyone with a

vested interest in climate change and catastrophic

risk.

The insurance industry needs to work together

to better handle the challenges it’s facing.

But insurers can’t solve these problems all by

themselves, Kuczinski said.

Kuczinski, a longtime contributor to

Best’s

Review

, discussed climate change, catastrophic risk

and other pressing issues facing the industry in an

Tom Davis

is editor. He can be reached at

tom.davis@ambest.com.

BEST’S REVIEW • MARCH 2023

interview conducted after he departed Munich Re

on Jan. 1. He served 33 years at the company and,

since 2008, Kuczinski was responsible for Munich

Re US P&C Cos.’ property/casualty reinsurance and

specialty insurance businesses in the United States.

Following is an edited transcript of the

interview.

How have Munich Re US P&C Cos. grown

and changed during your tenure? Are there

certain accomplishments that you are most

proud of?

I’m proud of the fact that what we have

achieved over the past decade and a half is in line

with what we set out to do 15 years ago. We drove

growth, profitability, diversification and expertise,

Executive Interview

mailto:tom.davis@ambest.com

“To date, the industry has done an

excellent job of fulfilling our promise

to bring people, businesses and

communities from harmed to whole

after disaster strikes.”

Tony Kuczinski

Former CEO

Munich Re US P&C Cos.

while becoming more innovative, agile, client-

focused and responsive to industry and client

needs.

When I took over as CEO for Munich Re

in the U.S., our business was in a turnaround

scenario, and we were in this turnaround mode

for about the next two years. Most of the business

was reinsurance and, of that reinsurance, our

distribution was predominantly direct. We

intentionally shifted our reinsurance model to be

distribution-channel neutral, which in turn shifted

our business away from the direct channel toward

the broker channel. This was not easy or popular

in the short term—either internally or with the

brokers themselves—but ultimately proved to be

the right decision.

What about the changes in climate and

various catastrophic incidents that have

occurred in recent years?

I look at the role the insurance industry can

play in two distinct ways. First, as individual

companies, we should be responsible corporate

citizens, committed to reducing emissions and

limiting global warming. We have to practice what

we preach. Second, as we not only manage but

also help to prevent and mitigate risk, insurance

companies have to do a better job of speaking

as an industry—raising our collective voice—to

increase understanding of the extreme financial

costs involved in providing post-event coverage for

these rapidly evolving risks.

To date, the industry has done an excellent job

of fulfilling our promise to bring people, businesses

and communities from harmed to whole after

disaster strikes. For the most part, the industry

responds quickly and responsibly to these events.

As an industry, we are currently meeting the

financial obligations when claims are presented,

but I don’t think we have been proactive enough

in adjusting pricing for these increased exposures

or in driving needed change in resiliency around

the globe.

Of course, the insurance industry has a role

to play in preparing for and managing the risks

associated with climate change, but it can’t solve

the problems by itself. No matter what steps we

take as an industry, many other sectors need to be

involved. The insurance industry should be seeking

out various like-minded parties to develop more

public-private partnerships, implement community-

based solutions and generally raise awareness

of the need for rapid, joint action to address the

serious risks posed by climate change.

In terms of infrastructure, specifically,

governments must prioritize this issue in order

to ensure that everything, from roads to dams to

electric power grids, is resilient to climate change

and natural disasters. As governments consider

new spending, enduring resilience should be an

essential component of all such projects.

What do you see as the most crucial

challenges facing the industry and what are

some potential solutions?

Systemic risk and cascading risk, particularly

as they relate to cyber and natural catastrophe

exposures. Many solutions require insurance

companies to work collectively. I think it is

important to acknowledge that ours is a very

competitive business. However, competition

notwithstanding, there are effective ways that we

can respond to some of these issues if we speak as

an industry rather than individual companies.

BEST’S REVIEW • MARCH 2023

Post-Pandemic Commercial

Real Estate Investments Shift

Changes in the way people work and shop have prompted insurers

to choose multifamily housing and industrial properties over the

traditional asset classes of retail and office space.

by Terrence Dopp

reg Michaud has an admittedly unscientific yet simple way to describe what happened to

the commercial real estate investment market at the end of 2022.

“It just froze,” said Michaud, head of real estate finance at Voya Investment Management.

He said his team did about $3 billion of business in the first six months of

Terrence Dopp

is a senior associate editor. He can be reached

terry.dopp@ambest.com

T’

EW • MAR

2023

Asset Management

mailto:terry.dopp@ambest.com

the year, followed by about $500 million in the

second half.

“I’ve never seen a year that’s been that volatile,”

he said. “We were probably signing up or looking

at 12 deals a week, down to zero deals a week for

a couple of months when just nothing was coming

into the office. The market absolutely just froze.”

The COVID-19 pandemic, coupled with rising

interest rates, triggered a fundamental shift in

the market, specifically as to how insurers view

commercial real estate investments and which classes

attract the most interest. Carriers entered 2023

with money to deploy but were waiting for rates to

stabilize before making decisions.

“Ultimately, the returns and expectations

have to be adjusted by the market participants,”

said Bill Petak, chief executive officer of Nassau

CorAmerica, a real estate investment management

firm with insurance clients as a focus. “Until there’s

a recalibration of the wide bid-ask spread, which is

driven by interest rates and the related cost of debt,

the market transition activity will be slow. But at

the same time, funds have to put their money out

and insurance companies have to deploy capital.

Each one picks their safe spot to do it.”

Commercial real estate breaks down along four

broad lines: retail, industrial such as warehouses,

multifamily housing such as large apartment

buildings, and office. While life insurers traditionally

have found steady returns across all four lines, the

industry is seeing a shift in its segments.

“Insurers have been moving away from office

and retail for a number of years now, focused

more on multifamily and industrial,” said Jason

Hopper, AM Best associate director. “The pandemic

exacerbated that. I don’t think, for either of those

types of properties, insurers would suddenly have a

change of heart. The downward trend in appetite is

Key Points

Challenges:

The COVID-19 pandemic shifted work

patterns, making remote work more common and

complicating the office space component of the

commercial real estate investment market.

Shifts:

Insurers now are focused more on multifamily

and industrial properties, said Jason Hopper, AM Best

associate director.

Bright Spots:

Well-located and functional industrial- and

distribution-related assets are growing and will continue in

importance, said Bill Petak of Nassau CorAmerica.

T’

IEW • MAR

2023

“I’ve never seen a year that’s been that

volatile. We were probably signing up

or looking at 12 deals a week, down

to zero deals a week for a couple of

months when just nothing was coming

into the office. The market absolutely

just froze.”

Greg Michaud

Voya Investment Management

going to continue there.”

Hopper said that inflation and interest rates are

the two biggest factors exerting pressure on the

market. He doesn’t see performance of the office

segment making an outsized impact on commercial

real estate as a whole.

Michaud’s take: “It was 100% interest rates. Initially

what you get as interest rates jump is that people

pull back, because all of these owners of property

thought they were going to sell it at a low capital rate.

Buyers are now unsure where rates are going. I don’t

necessarily think interest rates have to drop to make

the market move but they have to stabilize.”

Office space has seen these variations fracture

further along regional and use-based lines. Suburban

office complexes, along with those properties that

feature desirable amenities, have fared well, Michaud

said. For properties without amenities or located

in urban cores, vacancy rates are elevated, he said.

And investors who would overlook a big-city office

tower might seriously ponder financing a medical

office that’s sure to stay occupied.

Meanwhile, less than half, or 44%, of those polled

on the commercial real estate market by J.P. Morgan

Chase for the company’s 2023

Business Leaders

Outlook

survey were optimistic about prospects for

the global economy in 2023. Almost two-thirds, or

65%, said they were optimistic about the asset class

in the coming 12 months. And 54% said they would

meet a downturn by staying the course or even

making strategic acquisitions.

In October of last year Allstate selected Voya

to manage its $850 million commercial mortgage

portfolio. Allstate retained ownership over the

involved assets, which were transferred to Voya

under a separately managed account. Voya was

given responsibility for future originations meeting

BEST’S REVIEW • MARCH 2023

a target allocation in the class.

Voya Investment Management is a full-service

investment management operation with a portfolio

of $15 billion in real estate assets. The company

is involved in two ways: Michaud’s team manages

$4 billion on behalf of the firm. The remainder is

third-party investments primarily for insurance

companies and pension funds.

Economic Headwinds

The commercial real estate investment market

can involve commercial mortgage-backed

securities, direct mortgage lending and numerous

other products that can even include ownership

of properties. The class experienced uncertainty

during the second half of 2022 due to the potential

of a 2023 recession, geopolitical risk and the

Federal Reserve’s interest rate increases.

The broader category of structured securities,

which includes securities backed by both

residential and commercial mortgages, has long

benefited from an influx of money from insurance

carriers. But both residential and commercial

mortgage-backed securities saw issuance drop by

50% through October 2022, AM Best found.

Insurers increased their holdings of CMBS

by 46% since 2011, according to a December

AM Best Special Report,

Insurers’ Structured

Securities Holdings Continue to Rise

. The greatest

concentration was on the life and annuity side,

which collectively held more than $800 billion in

structured securities in 2021. They made up about

a third of portfolios.

If the economy tumbles into a recessionary

period, shop owners, logistics companies and

multifamily leaseholders become strapped and

defaults could increase. In turn, the owners of

Asset Management

those assets would have less money to repay

the loans contained in the original investments.

In that respect, the broader economy creates a

condition that feeds into the commercial real estate

market and causes a very immediate pain point as

leaseholders surrender keys to owners.

“There is an enormous amount of equity sitting

on the sidelines or needing to be invested. But its

returns are only enhanced when the financing

and debt markets are active and transactional, and

enough activity is there to support it,” Petak said.

Fragmentation

At the beginning of the pandemic, retail

appeared dead in the water as lockdowns

hampered stores’ sales and activity and prompted

fears of cascading bankruptcies, which did not

materialize at the rate some had feared. As things

have slowly returned to normal, well-located

community-based neighborhood retail found an

equilibrium, and that corner of the market has

begun to stabilize, Petak said

In a related development, many consumers

turned to online purchasing, which proved to

be a boon for industrial centers. Demand for

warehousing and last-mile facilities proved a strong

tailwind for the segment, Michaud said.

Multifamily housing, which had been gaining

steam as the investment of choice within the asset

class, never experienced the same levels of stress

as retail. Petak cites the need for more affordable

housing in the U.S. as one inherent strength,

along with constant turnover of leases and strong

occupancy figures. This means that even in a soft

market the projects usually retain the ability to pay

lenders.

The demand for office space, however,

decreased as COVID-19 made working remotely

more common. The National Association of Realtors

in its own recent survey of that component of the

commercial real estate market said hybrid work has

become a reality for many people in the workforce,

and “this trend only goes one way.”

Across the United States, the fourth quarter

of 2022 saw inflationary pressures ease. Office

tenants remained guarded as they adjusted to

rising costs of capital and falling valuations,

according to JLL, a professional services firm

that specializes in real estate and investment

management. Leasing activity fell 10.8% in the

“The pandemic exacerbated

that. I don’t think, for either

of those types of properties

[office or retail], insurers would

suddenly have a change of

heart. The downward trend in

appetite is going to continue

there.”

Jason Hopper

AM Best

fourth quarter of last year, and while it rose above

2021 levels, the absorption rate of new office

space was still negative for 2022.

Petak said he sees market sector shifts;

understanding those shifts, along with close

evaluation of individual projects, are key factors

in making good investment decisions. Multifamily

housing projects and well-located functional

industrial- and distribution-related assets have been

growing segments of the commercial real estate

market, he added, and will continue increasing

in importance while office space will see

considerably stricter underwriting.

“The real estate industry will recalibrate; it

always does,” Petak said. “As the market comes

back, and the financing markets come back, which

generally represents a large part of any real estate

asset’s capital stack, you’ll find that 2024 should

start on a positive trend.”

BEST’S REVIEW • MARCH 2023

Death Beneﬁts Reach Record

Levels in Pandemic Times

Death benefits paid out by life insurers in the United States reached more

than $100 billion in 2021 as higher mortality in the broader population crept

into books of business.

by Terrence Dopp

ife insurers paid out record levels of claims

in 2021 as COVID-19 drove mortality levels

higher. Two years later, it’s not clear when—or

if—that trend will abate.

In 2021, the most recent year for which

data is available, the life insurance industry

distributed a record $100.28 billion in total

death benefits, according to AM Best’s BestLink

data. The higher-than-normal payouts began

in 2020, the first year of the pandemic, when

life insurers saw death benefits rise 15.4% in

the largest one-year increase since the 1918

influenza outbreak. The 2021 increase was

10.8%.

Breaking the data down even further, death

benefits for individual life totaled $73.52 billion

Key Points

Record Payouts:

Life insurers paid out more than $100

billion in death benefits during 2021 and another $97 billion in

annuities benefits, according to the American Council of Life

Insurers.

Life Expectancy:

During the pandemic era, the Centers for

Disease Control and Prevention twice lowered life expectancy.

Unknown:

How patterns might shift and whether numbers

will get back to historic levels remain a mystery.

Terrence Dopp

is a senior associate editor. He can be reached

terry.dopp@ambest.com

BEST’S REVIEW • MARCH 2023

in 2021, up 9.3%, while death benefits for group

life totaled $26.75 billion, up 15.3%, according

to the BestLink data.

“It’s reasonable to assume that in this time

of COVID, part of this [increase] was driven by

COVID,” Andrew Melnyk, ACLI’s vice president

for research and chief economist, said. “It’s very

reasonable to assume that, so we think that has

continued on into 2022.”

Life Insurance

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Death benefits did recede to $69.1 billion in

the first nine months of 2022, from $74.27 billion

during the same period in 2021, according to the

BestLink data. Yet that figure remains elevated from

the $59.18 billion paid out during the same period

in 2019 before the pandemic hit.

Continued Hardships

Perhaps the single largest statistical impact of

COVID-19 has been on life expectancy, which

dropped twice in the United States as a result of

a disease that was widespread and led to severe

lockdowns to try to halt its spread.

By early February, 1.1 million people had died

from the virus and more than 102 million people

had been infected, the Centers for Disease Control

and Prevention said. In addition to cases directly

linked to the disease, there were issues such as

complications from long COVID-19 and health care

that was delayed by the pandemic.

Across the United States, life expectancy

dropped in both 2021 and 2022 to 76.1 years,

the lowest since 1996, according to CDC data.

While COVID-19 remained one of the top three

causes of deaths in 2022, heart disease and

cancer surpassed it, according to the Kaiser

Family Foundation.

R. Dale Hall, managing director of research at the

Society of Actuaries, said the big caveat is that all-

population mortality rates don’t always line up with

what life insurers see in their books of business.

The insured population tends to be wealthier and

have better access to health care—two factors that

correlate to better outcomes, he said.

He estimated, however, that COVID-19 is driving

about three-fourths of the increased mortality.

“Even if you took COVID out of the causes

of death and looked at the residual pieces of

information, mortality still would have been up 4%

or 5% in 2020 and a percent or two in 2021,” Hall

said. “We’re starting to see some leveling off.”

Deaths due to chronic conditions such as

diabetes, hypertension and liver disease are all

elevated compared to pre-pandemic years, Hall

said. In fact, cancer deaths among the insured

population have risen slightly, in part due to

deferred health care and delayed detection during

the lockdowns, he said.

“If you’ve got continuous access” to care, he said,

“even slight changes in health can be attended to

Death benefits paid by insurers

will continue to rise due to

higher sales, inflation and the

general cost of claims.

Edward Kohlberg

AM Best

because a doctor notices it and says ‘We really need

to take action.’”

Future Signs

Louis Silvers, a senior financial analyst at AM

Best, said that in 2020, deaths were clustered

among those over 65, while in 2021 they were

concentrated in the working-age population.

Today, companies must decide where to go with

mortality assumptions: Do they stay the course or

raise projections?

“There’s a lot of uncertainty,” Silvers said. “That’s

the biggest takeaway here. Companies are either

waiting to see and leaving it where it is, or taking a

little bit of conservatism with the uncertainty and

saying it could be a little higher and adjusting their

mortality assumptions upward.”

Edward Kohlberg, an AM Best director, said

death benefits paid by insurers will continue to

rise due to higher sales, inflation and the general

cost of claims.

Economies across the globe were shuttered as

lockdowns due to coronavirus began and stanching

the spread became job No. 1.The U.S. economy

shrank to historic lows, then grew swiftly as things

BEST’S RE

IEW • MARCH

2023

Contents

Kuczinski: Insurers Can’t Handle

Climate Change, Catastrophic

Risk by Themselves

Post-Pandemic Commercial

Real Estate Investments Shift

Death Beneﬁts Reach Record

Levels in Pandemic Times