Secondary concerns

One thing the panel agreed on was that nothing was yet set in stone—much, of course, will depend on what the rest of the hurricane season brings. More big losses from this and other events could completely undo a first half that promised the most favourable performance for five years, according to Van Slooten.

“Up to the recent hurricane, if the rest of the year was fairly benign, we might end up with reasonable earnings, which would be quite a big relief for the insurance community. It’s a bit more open to question now, after this latest loss in the US.

“That’s why there’s so much sensitivity around what happens in the remainder of the year,” he said.

US losses will also be felt in Europe. Champion said: “Our main product is the global programmes. They usually contain a fair bit of US exposure, so we are hit by everything happening.

“One of our biggest losses was the wildfire in California last year. The European industrial risk segment is impacted by everything happening over there.”

Moreover, as Champion suggested, it’s not just hurricane risk and other traditional “primary perils” that are a concern: other perils such as floods and fires are bringing increasing losses, while not being as thoroughly understood.

The central challenge is not so much bearing the losses as understanding them, according to Sullivan. “The assessment of risk is about pricing and planning around traditional hurricane and earthquake risk, but we’re also seeing fires and floods. The tools and knowledge around those perils are not as advanced,” he said.

“We’re thinking about risk assessment and whether we’re comfortable with these perils. We’ve seen in Europe that these are severe events. Are they going to become frequent?”

Mollinier agreed, saying: “The so-called secondary perils are a big concern in the industry and for investors in terms of the links to climate change and what that might mean going forward.”

Secondary perils could also be a key reason why new capital in the industry doesn’t prevent rate rises at renewals.

Waiting on the sidelines

There are other reasons why the impact of new capital can be overstated. First, the amount of new capital is significant, but it’s not a flood, according to Van Slooten.

“We’ve seen a handful of new startups and quite a lot of capital raised by existing players, but there was also some capital destruction last year as a result of the pandemic, so the capital that was lost was replaced, and a bit more has come in,” he explained.

Even in an age of COVID-19 and fewer face-to-face meetings, insurance is a business built on relationships that provide some bulwark against competitive pressures.

“There’s capacity keen to come and keen to take share, but most cedants will try and maintain their panel, particularly if there’s been a loss,” said Sullivan. “Some of those relationships go back a very long time.”

The main negotiations are likely to stay with incumbents, but there is also business that new capacity is likely to leave untouched.

“In the usual property and casualty (P&C) space, we have two categories of insurers and reinsurers, and we’re among the four or five that are primary carriers able to carry out huge programmes,” explained Champion.

“In that space, we don’t see much of the new capacity simply because the infrastructure we have put together over the last 30 years is a huge investment, and it doesn’t happen overnight.”

There is more capacity that could make a real difference to discussions at renewals. For now it’s waiting on the sidelines, according to Van Slooten. “One of the major reasons for that is this concern around the impacts of climate change and secondary perils.

“People are trying to work out exactly what is going on.” That’s true for insurance-linked securities (ILS), too, he added.

“Uncertainty causes people to pause. On one level, in a time of very low interest rates, the market looks enticing for investors. It looks like a good opportunity.

“The trouble is we keep getting these recurring losses coming from sources that are not very well modelled, and that causes people to think again,” he said.

Another impact of uncertainty could help tip the balance in renewals: cedants are also trying to make sense of a changing world, and it could impact their demand for cover.

“After everything we’ve seen in the news with the wildfires and the floods, the appreciation of risk has increased.

Demand has certainly held up very well in the last three to four years, and if we see continued growth in demand for reinsurance, it can have an impact.

“We tend to focus a lot on the supply side, but it could be a factor,” Sullivan concluded.

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