CRISTINA FERRARI, VIG RE
Underwriting discipline will support a more resilient society
Today’s complex and multifaceted risk landscape means there is still a bumpy road ahead for re/insurers, and more is needed to reach a sustainable state.
Reinsurers are coming out of several years of underperforming results, with August’s AM Best Market segment report, “Global Reinsurers Face Challenges Even as Conditions Improve”, showing that their median return on equity was below median cost of equity in five out of the six years since 2017.
Cristina Ferrari, chief underwriting officer at VIG Re, says that the industry can point to a multitude of factors behind this, many of which are interconnected. Factors behind underperformance run the gamut from natural catastrophe events, particularly the impact of secondary perils, to the COVID-19 pandemic and supply chain disruption, inflationary pressure, large scale geopolitical instability, and rising social inflation and litigation funding.
Reinsurers’ returns have not been in line with investors’ expectations, and that is particularly acute now that interest rates are back at the mid-single-digit level and less risky instruments are attractive. Ferrari says this is reflected in the still moderate inflow of capital to the reinsurance industry. In the short term, no significant changes are expected, and the available reinsurance capacity is likely to remain limited compared to the rising demand.
A complex risk landscape
Several of the loss drivers mentioned above have been described ironically as “gifts that keep on giving”, Ferrari says.
During 2023, natural disasters manifested with a frequency and a magnitude that was on the whole unprecedented. In July Aon’s “Global Catastrophe H1 2023 Recap” reported that global insured losses from natural disasters in the first half of 2023 were the “fourth highest on record” after 2011, 2022 and 2021. The majority of the H1 2023 losses were caused by severe convective storms in the US.
Natural perils continued into the summer with heatwaves, dramatic floods in Libya, hail storms in Italy, Slovenia and Greece, and wildfires across the globe including in Canada, Hawaii and Greece. These events demonstrate that the term “secondary” perils has become obsolete, she says.
“The deteriorating impact on technical results due to price surge is a painful reality.”
Cristina Ferrari, VIG Re
The severe earthquake in Turkey and Syria in February has prompted fundamental reflections around modelling capabilities for a peril that was deemed “well known and understood”. The catastrophe has also highlighted the difficulties in capturing the actual underlying risk exposure.
Inflationary pressure, while moving downwards, remains and is expected to transition from goods to services. The actual speed of inflation reduction is highly uncertain, while the deteriorating impact on technical results due to price surge is a painful reality. Ferrari says that one example of this is motor in Germany, where the German Insurance Association (GDV) is expecting a €2.5 billion ($2.6 billion) technical loss for the industry this year due to increases in spare parts and repair costs.
Enhanced rigour
According to Fitch Ratings’ August report, “European Reinsurers: 1H23 Results”, the H1 2023 results for the reinsurance industry have been positive: the four largest European reinsurers significantly improved their year on year profitability, with return on equity exceeding cost of capital.
Rates improvements, mainly in nat cat, have attracted the interest of aspiring new players Alpine and Mereo Advisors, which are each looking to raise $1 billion.
This is happening as a significant proportion of reinsurance underwriters are experiencing a phase of enhanced rigour on technical terms and conditions for the first time. And following 2023’s hectic 1/1 renewal, the industry is not in a position to bring longstanding client relationships to the edge, explains Ferrari.
She adds that reinsurance is not at a turning point, and that a sustainable balance has not yet been reached.
Continued inflation will mean exposure and demand will keep increasing, while multiple uncertainties put the spotlight on reserve risk. There is pressure to meet return on capital expectations, which will drive rigorous capacity deployment. In addition to this, the severe damage from natural perils underlines the need for tight accumulation control and proper modelling of the latest loss trends and climate change impact.
“We will continue the dialogue on risks and contract certainty.”
All of this is happening when 76 percent of global nat cat-exposed risks are estimated to be unprotected, according to Swiss Re Institute’s Sigma 2/2023 report, meaning the re/insurance industry has the chance—and the duty—to contribute to closing the protection gap.
But a key question remains: how does the industry enable societal resilience without robust underwriting and sustainable technical results?
“It’s time to go back to basics to solid risk assessment and appropriate pricing,” she says.
It’s not either/or
Will underwriting discipline come at the detriment of client relationships? Absolutely not, Ferrari says.
“VIG Re stays true to its motto: ‘We’ve got your back’. We look for proximity and technical dialogue with our clients to shape win-win solutions that address their needs.
“We are entering this renewal with a willingness to profoundly understand the underlying risks in our clients’ portfolios and embrace a forward-looking approach to underwriting assessment. We continuously engage with our partners to reflect on the true level of exposure, modelling assumptions and macro trend forecasts together,” she explains.
“We will continue the dialogue on risks and contract certainty, especially on cover-related provisions, for example around loss occurrence definition, strikes, riots and civil commotion, and cyber exclusion, to ensure the utmost clarity and alignment of intent.”
Ferrari says that with plenty of digital opportunities still to be explored by re/insurers, VIG Re is looking forward to a collective effort from the industry to ensure greater data access and standardisation of information, especially on environmental, social and corporate governance issues.
Cristina Ferrari is the chief underwriting officer of VIG Re. She can be contacted at: c.ferrari@vig-re.com
Main image: Shutterstock / Bradley Dennien
