NEWS
Secondary perils ‘to be at forefront’ of Baden-Baden discussions
The market is more favourable for reinsurers than for many years, but concerns persist, says Aspen.
The current market is more favourable for reinsurers than it has been for many years, thanks to improvements in pricing terms and conditions. But increasing loss trends and inflation mean they cannot rest on their laurels.
This is the view of Phil Hough, global head of property reinsurance at Aspen. “We expect a more orderly renewal at 1/1, with more certainty about capital availability than there was 12 months ago.
“But we expect reinsurers to continue to push for additional rate rises to keep pace with loss trends and inflationary impact,” he told Baden-Baden Today.
Asked about investor sentiment, Hough said it was clear the hardening market has not been driven by a shortage of capital—rather, there is a diminished appetite from investors to deploy capital.
“Despite the improved pricing environment, there has not been a significant influx of new capital; investors remain cautious, particularly in respect of non-modelled and so-called ‘secondary peril’ catastrophe risk,” he said.
Hough expects some new capital to enter. While he thinks private equity will remain on the sidelines, due to concerns over the industry’s recent volatility and climate change, he thinks reinsurers will raise incremental capital on the insurance-linked securities (ILS) side.
“We expect reinsurers to continue to push for additional rate rises.”
Phil Hough, Aspen
If there is no significant loss between now and the end of the year, sufficient capacity should be available at year-end, he said. But it will be available only at rates and terms and conditions deemed acceptable by reinsurers, themselves under pressure from shareholders, investors and/or the retrocession market.
“2023 looks set to be another year of $100 billion-plus insured catastrophe losses. What is more, approximately 70 percent will come from non-peak or secondary perils,” he said. “We expect the secondary perils—flood, hail and convective storm in particular—to be at the forefront of renewal discussions.”
There will be other points of contention in negotiations. Hough expects coverage for political risks such as terrorism and strikes, riots and civil commotion to be discussed extensively at Baden-Baden against the context of continued geopolitical uncertainty and volatility.
“It is an emerging systemic risk with a loss trend, which needs to be taken into consideration,” he said.
Measured growth
Asked about appetite for property-cat business, Hough described 2023 as a “true hard market” and he expects market conditions to hold firm in 2024.
But he added: “We will see some regions, including parts of Europe, requiring further signs of improvement to achieve the required level of sustainable pricing.”
“We are keen to collaborate with clients to provide support.”
Aspen’s approach to 2024 will be to look for measured growth with its preferred core clients, while maintaining discipline in respect of attachment points, pricing adequacy and clearly defined coverage.
In terms of wider negotiations ahead of the 1/1 renewal, Hough said increased retentions remain a concern for cedants. “There was some emotional reaction to and tension from this change in 2023.”
However, he stressed, retentions had not moved for many years—not even to even keep pace with inflation. “This has resulted in more risk being transferred to reinsurers, to the degree that reinsurance was moving closer to providing earnings protection.
“Now, we are seeing a rebalancing, with reinsurance returning to what it should be: a form of capital protection, transferring volatility from our cedants’ balance sheets. This, we believe, creates closer alignment and greater underwriting and portfolio management discipline.”
Hough said that achieving alignment with cedants was important to Aspen Re. “This can be achieved through transparency, consistency in approach and predictability when it comes to renewal negotiations.
“We are keen to collaborate with clients to provide support and create solutions based on a long-term perspective that achieves the required level of risk/return over time.”
Main image: Shutterstock / Menno van der Haven