NEWS
A hard market, or the new normal? Swiss Re is not sure
There are so many exceptional factors at play, it is hard to understand the true nature of this market.
Too many rate-driving risk factors have dovetailed at once to be certain whether the reinsurance market is enjoying a cyclically high hard market or settling into a new normal, top officials at Swiss Re dared to argue in a pre-Baden-Baden reinsurance event.
“Hard market is a big word,” Thorsten Steinmann, Swiss Re’s head for northern, central & eastern Europe, told an online briefing days before the annual gathering in Germany. “I cannot say if this really is a hard market, or the new baseline,” he said. “It depends on so many factors.”
There are too many exceptional factors to be certain, Swiss Re suggested, noting that nat cat events continue to confound expectations; macroeconomic uncertainties including inflation are creating pressures; and geopolitical tensions continue to rise.
This means it is hard to say whether reinsurers are enjoying a purely cyclical hard market—or something else. And if it is a hard market, its strength remains untested. Return on equity for the segment has fallen shy of the cost of capital more often than not since nat cats started exceeding historical trends.
“It’s not even certain that the industry can earn its cost of capital in 2023,” Steinmann said, citing a rising cost of capital as interest rates keep climbing, offsetting a notable portion of gains taken in the 2023 property market reset.
That 2023 property-cat reset, characterised by a hike not only in rates but also in retentions, may have done the fundamental job of shielding reinsurers from base level frequency losses. But even that correction is “probably not 100 percent” finished, with work to do in select regions and individual programmes.
“We have appetite to grow our nat cat business.”
Thorsten Steinmann, Swiss Re
Prices have to be right
Measured by the old-fashioned indicators of supply and demand, the market’s hardness is less questionable.
Jens Mehlhorn, Swiss Re’s head of EMEA property underwriting, sees “only a limited inflow of new capital” and what capital does flow in “has a clear price tag”.
The demand side, in turn, is responding to the natural catastrophe trend and ever-persistent inflation with more coverage inquiries to reinsurers, Mehlhorn claimed. “We hear from clients that they want to buy more protection on the top,” he said.
The cost of capital works both ways: capital costs have risen for cedants as well: “Buyers compare cost of capital to the price of reinsurance,” Steinmann noted. “Reinsurance is simply more competitive.”
Swiss Re sympathises with its cedant partners on the question of rising needs. Insured losses globally have now exceeded $100 billion for five of the past six years, and this is set to repeat in 2023.
“It seems to be the new normal,” Steinmann said. “We expect it to grow 5 to 7 percent every year,” he said of the trend line for the nat cat-insured loss totals.
That puts secondary perils, the broader set of unmodelled weather perils behind headline hurricanes and similar, well above “sweep-under-the-rug” status at some 58 percent of the global total over the past decade.
“Casualty is in a very uncertain landscape.”
Patrick Roder, Swiss Re
It’s not just US severe convective storms. Europe, free of the major modelled perils, has been a poster child for secondary perils—German hail, Nordic storms, Italian, Greek and Slovene floods and southern European wildfires have all resulted in sizable losses this year.
But that does not deter Swiss Re—as long as the price is right. “We have appetite to grow our nat cat business,” Steinmann said. “Adequate returns, commensurate with the risks we take, are essential.”
Mehlhorn echoed this: “Swiss Re has appetite in the property space,” he said. “We want to grow where we have clear structures and wordings, where price corresponds with the risk.” Structures means retentions. “We are a shock absorber,” he told the briefing. “We provide protection for the high events.”
Casualty lines, meanwhile, have their own frequency and severity issues, driven by litigation finance. And it’s not just US lawyers any more: some 60 percent of European class action securities cases are funded.
“Casualty is in a very uncertain landscape,” Patrick Roder, Swiss Re’s head of casualty underwriting for EMEA, said. Reminiscent of the 2023 property-cat market reset, he said he’d not only hike prices to levels “adequate to the risk that the industry is covering” but he’d also adjust structures for “more sustainable risk-sharing” between reinsurers and cedants, including “reasonable retentions and structures” that can keep pace with inflation.
Main image: Shutterstock / SvetaZi