NEWS
Reinsurers can press their advantage
Reinsurers should not be concerned about the capacity crunch in the property-cat market, says Resolute Global Partners.
The factors underpinning the capacity crunch in the property-catastrophe reinsurance market are easy to understand and can be explained by the basic economics of supply and demand. But reinsurers should not be concerned about the situation and should even press their advantage home.
That is the perspective of Glenn Clinton, managing director, property reinsurance, Resolute Global Partners, who argues that, after a very tough period for reinsurers, the pendulum has finally swung in their favour.
“We can now press this advantage,” he told APCIA Today. “We’ve had five straight years of rate increases at 1/1, and I expect we will see more at renewal. Insurers have been taking rate for five straight years and much greater increases than we have enjoyed.
“They are flush with cash. There is no substitute for rate, and we must get more now while we can.”
Clinton stresses that the reasons for the supply-demand dynamic are easily explained.
Demand is being driven by the hard facts of increased cat activity. In the past decade to 2021, average annual cat losses have tripled to just under $50 billion from a $16 billion annual average in the 1990s.
“Be they hurricanes or wildfires, today every peril seems to have greater power and destructive force,” he says.
“Loss frequency and severity is increasing apace, and buyers are constantly being reminded of their need for more cat cover. Insurers and reinsurers are coming to grips with far greater loss potential in our rapidly changing world.
“And this leads to the question: ‘Is it even possible to provide reliable and meaningful coverage for events that happen with such breadth and frequency?’,” he asked.
“There is no substitute for rate, and we must get more now while we can.”
Glenn Clinton, Resolute Global Partners
The fear factor
Supply is down for a mixture of reasons. Some significant players, jaded by the constant losses, have left the space completely. For the first time in many years, dedicated reinsurance capital is also down, he notes. This is partly because some of the biggest players have been hit by unrealised losses on bond portfolios. This might be temporary, but it does mean that in the short term there is as much as $40 billion less capital covering prospective catastrophe portfolios than in 2021.
Finally, on the supply side, Clinton cites inflation as a factor. “Reinsurers are keenly aware that building material prices have far outstripped Consumer Price Index inflation indices, energy prices are up 30 percent in the short term and a dangerous over-reliance on Russian gas has sent reverberations across many industries in Europe and the UK.
“These and continued post-COVID-19 lack of supply and supply chain issues mean loss costs will remain very high in the short term. Underwriters need a keen awareness of this increased loss potential at renewal,” he says.
“Standing still on exposures at renewal may not be a viable position. I’d not be surprised to see the more conservative operations cut capacity by 10 percent or so just to maintain status quo, despite whatever rate increases may come.”
Given so much uncertainty, Clinton says it is unsurprising that the markets are starting to base decisions on fear rather than rational contemplation. “Property-cat buyers see average annual losses increasing at alarming rates, sellers see higher probable maximum losses and less money in their coffers to cover them.
“One feeds off the other. Fear is the most powerful of motivators, and we shall see what part it plays at 1/1,” he says.
Clinton also expects tighter terms and conditions. He says some of the coverages being offered have become “ridiculously broad”, for example, a 150-mile radius being offered for wildfire coverage and unlimited hurricane hours clauses.
“What’s wrong with going back to 72 hours for wind and getting more certainty back in our PMLs?” he asks.
“Coverage gaps and ESG initiatives are not my concern.”
The main job
Clinton stresses that reinsurers should not concern themselves with an apparent lack of capacity in the market. He says the hard truth is that the reinsurance industry simply cannot cover all exposures—and it is not the industry’s job to do so.
“Who needs more capacity? More capacity means less rate,” Clinton says. “We are a $600 billion industry trying to cover trillions’ worth of exposures—we cannot be all things to all people. Our primary job is to provide a decent return for our capital. Coverage gaps and ESG initiatives are not my concern. Without a decent profit on the portfolio, the whole thing is for nought.”
He accepts that this will mean that certain types of coverage will become very expensive or unavailable in the near future. But this is not the fault of the industry—it is instead a hard truth based on increased exposures. “In Florida—and Bermuda—full wind cover is a luxury, as it will be in Australia soon. Not everyone can go to university, it’s the same principle. It is a question of choices,” he says.
There are some things the industry should strive for, he notes, including pushing back against individuals or organisations “who seem to believe we are supposed to be the answer to everything climate-related”.
But there are other, more practical measures. “Stop irresponsible building in cat-prone areas and expecting insurers or pools to pick up insurance for dumb decisions. Stop lawyers getting 70 percent of Floridians’ claims payments,” he concluded.
Main image: Shutterstock / MattAzz
