“You’re looking down two barrels of a gun: one in the past, one in the future, even if the present looks OK,” he said. “But we need to get a lot more premium in now just so we can trade through an under-reserved and under-assessed prior history. Only the recent past is ever well-priced.”

Bird warns on the underappreciated maths for excess-of-loss deals under inflation: an x percent increase in limit measured against (unadjusted) attachment points is notably larger than x percent. “It exponentially impacts the layered insurance,” Bird noted.

The property side might take some relief from the boost which inflation gives to insured asset values, which comes through as premium, but that is only a small ingredient in the recipe for rate adequacy. Reinsurer returns on capital suggest much more is needed.

And property can no longer be seen simply as a short-tail line. In fact, high inflation can radically alter the cut-off point between what might be thought of as long-tail and short-tail. A several percent miss on your inflation forecast might be a double-digit claims cost increase by the time some final claims are covered. Hurricane Ida is teaching lessons: the final x percent of claims are “notably above” the final x percent of claims costs.

A change in tone

Early reports suggest that the message has hit home and something has changed in the tone at Baden-Baden. Bird recounts a story from a reinsurance colleague taken aback by a cedant, a buyer of European catastrophe reinsurance, who asked the reinsurer’s opinion on structure, rather than simply demanding pricing. “In prior years, the cat buyer would have said: ‘this is what we are coming with. Price it’.”

“There was a certain humility,” Bird said. “This guy met a European cat buyer who said what they were thinking of doing and asked him what he thought.”

At play: an increase in an attachment point, a key demand from reinsurers who have argued that a decade’s worth of stagnant retentions just don’t stand up to a world of heightened inflation.

“In the past, cat buyers have got away with murder,” Bird said by way of comparison. “It has been under-priced for years.”

The humility reflects a legitimate threat on the horizon, Bird believes.

Global reinsurers could crowd their way into the much larger US markets, despite that market’s own set of unique challenges. The European market is sufficiently smaller than the US that the heightened cost of global retrocession coverage could push reinsurance allocations towards a strategy of US focus, offset by industry loss warranties (ILWs), leaving Europe under-covered.

“If you plan on writing a worldwide book of business and retro gives you global cover, you are paying all those other territories other than the US and you have to make them pay,” Bird said. “You might as well just write North America and take an ILW.”

That’s the ultimate capacity argument for an early-mover advantage in Europe.

“If you leave it to the end, the capacity may not be there,” Bird said. “You may not like the price you see on November 1 or 15, but you are better off taking that price than holding out, ultimately paying more and having gaps in your programme.”