CATRINA GEMMERICH, VIG RE
The drivers behind the new reinsurance normal
Nat cat will continue to fuel the hard market—but other lines of business need to follow, writes Catrina Gemmerich of VIG Re.
After last year’s 1/1 renewal, and a significant correction of the global cat pricing, there has been a lot of discussion this year about whether the hardening market will continue. The “bigger” 1/4 and 1/7 renewals suggest that it will, at least in the cat market. But to fully answer this question it is worth evaluating the fundamental drivers of the reinsurance market.
An escalating toll
Natural disasters—ranging from hurricanes to wildfires—have been escalating in frequency and ferocity, ratcheting up cat premiums. The 2023 Turkish earthquake was the biggest single event with losses for almost all reinsurers but mainly within cat budgets.
The upcoming hurricane season will act as a decisive indicator for global cat performance, mirroring the reverberations of 2022’s Hurricane Ian. With climate change amplifying the occurrence and impact of cat events, the upshot will be a rise in prices and more stringent underwriting criteria. One good year will not compensate for the continued losses of the previous years.
For DACH (Germany, Austria and Switzerland) the recent flood event in Austria, but also storms like Lambert in Germany, may hint towards new realities.
Economic uncertainty
Economic factors such as inflation, interest rates, and a more vulnerable geopolitical landscape increase volatility and consequently reinsurance pricing. Even if central banks in the US and Europe fight inflation with ongoing interest rate increases, inflation remains high and the impact to the global economy remains uncertain. Therefore, the uncertainty around global economic factors remains high and present market players with an unstable environment.
“VIG Re is ready and committed to support clients for the 1/1 renewal and beyond.”
Catrina Gemmerich, VIG Re
Regulatory changes
We currently see ESG-related regulations entering the reinsurance industry with a profound impact on underwriting guidelines, risk appetite and certainly additional transparency and reporting requirements. Even if not strictly regulatory per se, the just-finished IFRS 9/17 standards take up significant resources and the impact on the direction of business has yet to be seen. But the costs of additional regulation certainly have an impact for the reinsurance market.
Competitive frictions
In the context of the factors already discussed, VIG Re expects to see a high demand for reinsurance capacity in 2024.
The capital influx into the industry is still very low given the market hardening of the last 1/1 renewal. So far a “class of 2023” has yet to materialise, which indicates that the supply of reinsurance capital is not expected to meet demand.
It’s important to note that these drivers can interact and reinforce each other creating a cumulative effect. The market is influenced by a complex interplay of these factors, and many more, and their impact can and will vary across different regions and lines of business. Nevertheless, the fundamental drivers point towards continued market hardening in nat cat for the 1/1 2024 renewal.
“The costs of additional regulation certainly have an impact for the reinsurance market.”
Beyond nat cat
Cat pricing clearly points towards market hardening, but the question remains: how will other lines of business react? For VIG Re, the risk appetite is geared towards long-term and sustainable structures with a clear alignment of interests. Structures that have failed to evolve or that have suffered from continuous high losses, will be more closely reviewed in the upcoming renewal, with proportional property programmes expected to face more scrutiny.
Economic uncertainty is a major focus for casualty lines as inflation continues to be a major discussion point that needs to be adequately reflected in reinsurance prices.
A way out?
The key reinsurance market drivers and the current global economy point to challenging conditions.
However, VIG Re along with the industry is capable of solutions for these challenges and there are key success factors for reinsurers and clients. We are entering a new normal macro-landscape where the value of reinsurance will be demonstrated and a new equilibrium between reinsurance buyers and sellers will be found.
Buying strategies for this renewal will become even more important, particularly if they can outline a clear strategic rationale for a reinsurance plan tailored to this market environment. Reinsurers on the other hand will be asked to demonstrate their ability to sell capacity and communicate accordingly.
Ultimately, as client selection is key to any insurer, it will be as important for a reinsurance buyer in selecting reinsurers. VIG Re is ready and committed to support clients for the 1/1 renewal and beyond.
Catrina Gemmerich is managing director, German branch office and head of DACH & Nordics at VIG Re. She can be contacted at: c.gemmerich@vig-re.com
Main image: Shutterstock / LEON_PHOTOGRAPHY
