Evaluation and pricing of risk must change

With reinsurance pricing having seemingly nowhere lower it can go and the industry increasingly internalising the growing exposures on both primary and secondary bases that it faces in the coming years, it is becoming increasingly clear that something has to give.

During softer market periods, carriers typically give up some more exposure in return for standing firm on pricing, and while that can provide a degree of short-term cover, it can also lead to risks being taken on where previously there were none, leading to the type of uncertainty and surprise losses that the COVID-19 pandemic sprung on many companies.

Ahead of the 1.1 renewal season, many reinsurers are sending clear signals that rates will have to rise after a series of hefty losses over the past two years—but will that alone be enough to tackle the issue?

SiriusPoint’s president for international reinsurance, Monica Cramér Manhem, thinks that higher prices will be insufficient to address the increased exposures that emerging risks such as those stemming from climate change or cyber breaches pose to the market.

Speaking to Bermuda:RE+ILS, Cramér Manhem said that the burgeoning hard market would have to work in tandem with a re-evaluation of the industry’s approach to risk if it were to get exposures to a more manageable level in the coming years.

“We’ve seen improvements in pricing over the past few years but what we need to look at for 2022 isn’t just a hardening market. When I look at a hard or hardening market it’s basically providing increased rates and pricing for unchanged exposures,” she said.

“What we’ve seen in the past few years and definitely this year is a fundamental change in exposures.

“The events over the past year show that there has been a dramatic increase of so-called secondary peril losses in the world. The dramatic flooding in Europe this summer and also in the US with Hurricane Ida with significant precipitation has meant we are moving away from what have been the primary perils we’ve seen in the past—earthquake, wind—with a lot more severity and damage coming from ‘secondary’ perils such as flooding losses, drought, and wildfires,” she explained.

A new reality

With the rise of these secondary perils, the market faces a different type of challenge, and Cramér Manhem says it will have to adapt its whole way of thinking to the new reality, particularly when it comes to risks impacted by climate change.

“The frequency and the severity of these losses fundamentally means that the evaluation and pricing of risk has to change because we have to make price adjustments as an industry for the change in the impact of climate change on those secondary perils,” she said.

“That’s different from a traditional hardening market. It’s re-evaluating pricing models and taking into consideration the consequences of climate change.”

While the challenge that lies ahead is stark, Cramér Manhem thinks there remains plenty of growth for the industry in future, particularly in regions and industries which remain underinsured relative to the value that they produce.

She pointed to the large gap between economic losses across the world and insured losses as proof that the industry still has areas in which it has yet to convince buyers of the value of the product.

“Our industry is supposed to support resilience and rebuild economies and businesses after large losses. That’s what we’re there for. But it’s also important to say that economic losses, generally speaking, are still much bigger than the insured losses we see. It varies from country to country and area to area but a lot of people are talking about this protection gap,” she said.

“There are opportunities for re/insurers. On the reinsurance side, we are important capital providers, too, especially to small and medium-sized businesses. Globally, there will be a need for further reinsurance cover.

“It’s a question of finding those solutions, of being a speaking partner that can provide that resilience. But you also need to provide your shareholders and capital providers with the returns they’re expecting for putting that capital at risk,” she concluded.