More than just rate hikes

Nowakowski may have travelled to Baden-Baden from his new office half-way around the world in Hong Kong, but his take on the 1/1 renewals has a very familiar European sound to it: the market needs more than just rate hikes—it needs fresh structures, most notably higher attachment points, and some work on tightening wordings.

“This year is a perfect example of everything converging: it is a very difficult environment for insurers and reinsurers on the back of the continued trend on the nat cat side and climate change,” Nowakowski said. Climate change is an entrenched part of the calculus and most reinsurers have now acknowledged that what used to be called secondary perils are now demanding a more primary position.

Put that together with the higher hurdle rates driven by a rising cost of capital and the status quo looks unsustainable. “This year we as a company, and the market, expect that important changes need to happen to the property business,” he said.

Anyone who thinks that can be solved on pricing alone is advised to head back to the drawing board. Contract structures, with retention levels foremost in view, lead the determinations and price follows.

“We are very often talking about price, but price is only one element,” Nowakowski said. “We also need to see the changes in the structure and the terms and conditions of the reinsurance cover.”

Structures begin from retention levels, stagnant for a decade’s worth of not just underlying portfolio growth, but also inflation including the runaway readings from the past year, Nowakowski says in chorus with his industry peers. “The cost of capital is far too high to blow so much of it on lower aggregate levels.

“But from my point of view, the structure of the programmes is the most important element,” he said.

To know whether Peak Re can make good on any implicit threat to walk away from worn and time-tattered structures, one might need to compare Peak Re’s options for its diversification drive. Nowakowski can speak to a plethora of options.

Diversification is not an explosion in all directions at once. Asked about targeted growth directions, Nowakowski alternatively talks about creating a balanced portfolio, underwriting discipline and opportunistic shots down lines where competencies have been built, what he calls “underwriting by understanding”.

Peak Re’s shot into US casualty via its Bermuda platform shows the possible scope and speed of diversification, now at 25 percent of book.

Pressed on directions, Nowakowski names casualty, motor, credit and bond “and then we continue to support our clients in property, because our property book is an important part of our portfolio”.

“You can always play the very client-centric approach,” Nowakowski said of the Asian business approach upon which Peak Re built its early growth. “But at the same time you need to be constructively opportunistic and look around.”

And still on the table: to continue the several-year drive to write more non-proportional “where we expect better margin” and can play different levels when looking at natural catastrophe risks.

“Most important is to keep the underwriting discipline,” Nowakowski said. “At some point with some clients if we have a global relationship, we can be more flexible. But it doesn’t mean we can be relaxed on pricing or terms and conditions.”

Rating concerns

Appetite, wherever the underwriting looks best, need not be overly constrained by a recent move to a negative rating outlook by AM Best and Moody’s, he notes, which have expressed concerns over how macroeconomic headwinds and conditions in the capital markets could put pressure on Peak Re’s major shareholder, Fosun International.

Peak Re is doing “everything in our power” to head back to stable. “Obviously we are not pleased with the negative outlook, but this is something based on the assessment of the major shareholder,” Nowakowski admitted.

“AM Best and Moody’s emphasise that on a standalone basis, we are a solid and sound reinsurer.”

Peak Re feels “very confident at the management level” and is working with shareholders to “address the rating agencies’ concerns,” he said.

Talks to date with cedants on the matter have proved reassuring in both directions, Nowakowski suggested.

“We have discussed this with many of our clients and our clients feel comfortable” with the current rating array. “We are able to have a very honest and open discussion about what Peak Re can do for our clients,” he concluded.