Reinsurers have a responsibility to their clients not to completely cut writing natural catastrophe business and instead to devise solutions for clients—but the pricing and structures of treaties must adjust to take in a new risk environment.

That is the view of Patrick Hartigan, group head of treaty reinsurance, Beazley, who told Monte Carlo Today that the re/insurer will not cut its cat capacity but will also not write any additional business until it feels confident that it can price in the impact of climate change and that the rates and structures it gets are appropriate.

“There is no expectation of growth on the reinsurance side in this renewal. The past five years have seen secondary perils come to the fore, and pricing has not kept alignment with that,” Hartigan said.

“The board is now keen to develop a robust methodology for how we factor that in and manage climate change in the portfolio. We have invested a lot in models and scientists, and we are looking for ways to factor in this risk. We do not want to be seen as averse to volatility as a market, but there are technical considerations that we must take into account.”

He believes that pricing will need to increase substantially, and the structures of treaties will change for a new level of risk to be factored into deals. Rates are now close to 2011 levels, with some pockets of the market closer to 2006, he said.

“The risk has increased so much and we believe that things could get even worse because of climate change,” he said. “There is no easy fix, but the mentality needs to change. The market needs a jolt and this shortage of capacity it is seeing might do just that.”

Hartigan notes that a driving force of the property-cat market in the past was an abundance of retrocessional capacity. “This allowed reinsurers to offer perhaps unsustainable business. But in the end, they both got hit.”

But he stresses that exiting the property-cat market should not be the answer for reinsurers, who have a duty to their clients to find solutions. “It is about acting responsibly,” he said.

“Reinsurance is about taking short-term risks but in the context of a long-term relationship. Volatility is much better handled in the long term, and it is nice to grow with clients. But we can only do that if the pricing and the structures are right,” he concluded.