ROUNDTABLE: REINSURANCE
WHAT IS UNDERPINNING AND DRIVING THESE MARKET CONDITIONS?
“Rates are improving but inflation, including rapid commodity inflation, is increasing.”
Kent Howard
Jerome Halgan: Loss experience in the first place, but inflation is a big factor. For the 1/1 renewals, there were some “heads in the sand” with some capacity still viewing inflation as transitory back then. Today everybody accepts that inflation is going to be in a range around 10 percent and that it has an impact on price and capacity.
Demand is increasing due to inflation’s impact on everyone’s PMLs. And given some noted withdrawal of capacity and minimal new supply, the supply and demand equation turns into the favour of the seller who has capacity.
Kent Howard: We continue to hear expectations that North American wind-exposed property rates will be the hardest we’ve seen in a decade or more. Rates are improving but inflation, including rapid commodity inflation, is increasing at rates not seen since the early 1980s. I’d be curious if you think rates are keeping pace with inflation.
“We have seen markets pull back capacity.”
Jessica Laird
Peter Bell: Probably not on a risk-adjusted basis. Insurance rates have increased more than reinsurance rates and, on the other side, retro rates have been increasing more than reinsurance rates. We are squeezed in the middle and that is going to have to correct itself.
Tim Mardon: The impact of inflation is difficult to measure as it impacts claims and rebuilding costs. That means it has a geared effect into cat layers.
Jessica Laird: You also have to consider climate change. The risk is increasing, we believe, and we are factoring that into our pricing. Even with an increased view of risk, the risk-adjusted rate is going up, but it can vary significantly depending on what layers you are looking at.
Further up the risk tower where layers haven’t experienced losses, there seemed to be more crowding. Lower down, we have seen markets pull back capacity. Overall, however, appetite for volatility is less.
“Withdrawal of capacity has also been mainly from aggregate product.”
Conor Gaffney
Conor Gaffney: Yes, and the withdrawal of capacity has also been mainly from aggregate products (or products offering earnings protection). That is where supply has gone away.
And for cedants no longer able to purchase these aggregate covers, they’re having to take action and review the scale of their property cat writings.
Brad Adderley: Where players have pulled back on property cat capacity, is that because they are less interested in those lines completely, or is it simply due to the pricing?
“It is not about price any more.”
Jerome Halgan
Jerome Halgan: It is also the consequence of business planning which can happen months before the renewals are done. A number of reinsurers, given the losses in the past few years, decided to reduce their property cat portfolio and focus on the simpler and easier to price deals (as opposed to aggregate covers for example).
For these companies this was more of a strategic decision and on the risks that do not fit their revised appetite, it is not about price any more.
Bell: I agree the volatility at the bottom has put people off, even with rate increases. There have been some big increases over the last couple of years but the underlying primary rates have been increasing by more.
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