ROUNDTABLE: REINSURANCE
Q2: WHAT ARE THE DYNAMICS IN THIS RENEWAL SO FAR?
“Margins and returns both need to improve.”
Paul Simons
Simons: It is still early in terms of how everything will play out. Regarding supply and demand, there has been some debate on the influence of retro capacity or the lack thereof. In this instance the tail may wag the dog. Margins and returns both need to improve.
For a long time, property cat was the business that kept a lot of reinsurers afloat but this is no longer the case. We need to reconsider how we evaluate risk. The calibration of models is very much in focus, particularly considering the impact of climate change. Climate change is the catch-all term for the effects of weather and rising frequency and intensity.
Inflation is also a big driver and it is increasing loss cost. As an industry, we haven’t adjusted structurally around that. That needs to happen quickly.
There’s so much pressure from the C-suite and investors to get the cat business profitable in 2022. As an industry, we’re going to have a real problem around rate. We’ve reached a place where clients are prepared to pay more only if they’ve had a loss.
We have lost sight of the fact there is an adequate cost that must be charged for the risk, and it fluctuates.
Dunleavy: What we anticipated last year mainly did materialise. I wouldn’t characterise this as a challenging market because there has not been a sharp spike in pricing. We’re also in an environment where there is capacity and losses have been more earnings events. The solvency and credit quality of reinsurers has not diminished.>>>
“Sometimes we overestimate the impact of a single year.”
Christian Dunleavy
<<< But from a shareholder’s standpoint, the cost of capital simply isn’t being met. And we are still trying to understand what appears to be a shifting climate environment, which is undoubtedly driving behaviour and pricing. We also need to better understand the long tail classes and the impact of social inflation.
When I listened to earnings calls previously, it sounded like some managements may want to walk down to the floor and have a chat with their underwriters. Because what they are doing is not lining up.
That gap has narrowed, and the mandates from management are being enforced a lot harder now.
Underwriters are human, CEOs are human, and their psychology is critical. People have not been compensated the way they probably expected to be. All those things create this environment where people are still pretty focused on getting the correct risk-adjusted rate.
The dynamic has shifted, but, particularly in the cat world, so much of that market has been defined in the last 10 years by ILS capacity. Yet that is either withdrawing or shifting away from sidecars. All of that impacts how people can deploy capital. Sometimes we overestimate the impact of a single year, and we underestimate the impact of five-plus years.
We will see significant improvements when you look at the cumulative effect of the pricing environment from the beginning of 2019 and through to 2022 and 2023.
Shareholders and others are probably getting a little tired because they’re presented with plans on an underwriting year basis, which look like some of the best plans they’ve ever seen, and then the results are still not there—they’re quite the opposite in some cases. That gap has to narrow.
“Uniformity of discipline across the market is going to be needed.”
Matt Britten
Britten: It’s important to add that we’re coming off the back of one of the longest soft markets historically.
And you can say that rates need to go up a lot more to reverse the impact of that soft market, but uniformity of discipline across the market is going to be needed for that rate to get back to where it once was.
“In Europe, there’s just not enough rate.”
Christian Dunleavy
Dunleavy: I agree. Take, for example, Europe. For the past 10 years, people have given up 5 percent of their rate every year. So if rates increased by 10 percent, it’s insignificant. There has to be significant repricing in certain markets.
When you give up 5 percent for a decade-plus, you’ve cut your pricing more than in half. And it’s terrible news. The European floods should not have caused the kind of impact that they did from an earnings perspective. In Europe, there’s just not enough rate. It’s very simple.
“It will be interesting to see how the insurance market responds.”
Adam Champion
Champion: The diversification that you get from a modelling perspective determines the capital required to cover those risks. Yet the price continues to get lower and lower.
When we talk about a challenging market, we all agree that a true hard market is when there’s no capacity—and lately there’s been capacity. Deals have been getting done, and cedants have been fighting quite hard to get the rate they think they deserve, based on the performance of their portfolio. So while they accept small to moderate rate increases, they know that their deals will get done. It’s a fine point between available capacity and a true hard market.
And it will be interesting to see how the insurance market responds in this coming renewal.
“We expect a significant reduction in retro capacity.”
Anup Seth
Seth: From an Aon perspective, when we evaluate the overall cat losses, we expect this year to have a similar total insured loss of around $100 billion for pure nat cat, similar to 2020. But the frequency of the severe losses is very different.
Last year we had a huge number of smaller losses (between $1 billion and $5 billion); Hurricane Laura was the only one that touched around the $10 billion mark. However, this year, we’ve had three huge losses.
The way that impacts the retro market is very different. This year, we’re seeing many retro programmes being impacted, both occurrence and aggregate contracts. Therefore, we expect a significant reduction in retro capacity coming to one in 2022. We also need to factor in the trapped collateral.
However, we have also seen very active cat bond and mortgage insurance bond markets. We do expect that trend to continue into next year.
“Investors are mindful around where they put their capital.”
Josephine Noddings
Noddings: In terms of renewals, there are many uncertainties around how property losses might play out and how climate change might exacerbate losses in the future. This suggests prices may be subject to some uncertainty and investors are mindful around where they put their capital.
This also applies to environmental, social, and corporate governance (ESG) issues which investors are increasingly concerned about when considering where their money is going, and that could impact capacity. >>>
