The return of in-person conferences was welcomed after two years of mainly digital interactions, but catching up with old friends and colleagues face to face was not the only reason a physical conference was appreciated. This year’s conference season was the setting for some extremely tough renewal conversations, particularly about catastrophe capacity, or the lack of it, and how to ensure cedants could obtain what they needed.

Warnings signs and opportunities at Monte

The warning signs were there from the off at the Monte Carlo Rendez-Vous (September 10–14, 2022) as TigerRisk unveiled a “cat capacity SWAT team” to deal with the challenges of a loss of capacity in the nat cat especially.

Rob Bredahl, chief executive of TigerRisk Partners, said that cedants seeking large amounts of property-catastrophe capacity in this year’s renewals should be under no illusions as to how tough this renewal could be.

“I have seen some brokers playing down how difficult the market is going to be,” Bredahl said. “We think it could be extremely difficult and we, and our clients, are preparing for a very tough market. If we are wrong, it would be a great relief, but it’s better to prepare.

“Clients are concerned about availability of capacity for the first time in decades. They’re pausing on adding more catastrophe exposure to their balance sheets because of the potential lack of reinsurance.”

The launch of Tiger’s SWAT (special weapons and tactics) team is central to the broker’s strategy to find solutions. It is dedicated to identifying new sources of property-catastrophe capacity, as a potential capacity crunch looms for cedants ahead of next year’s cat renewals, many of which are themselves seeking more coverage as property exposures soar.

“We are systematically approaching investors that have either invested or shown interest in property-cat business before and we’re presenting them with a menu of ways they can enter the market,” Bredahl said.

The logic is sound: in the context of hardening rates, now is a very good time to invest in property-cat business. The challenge is simply explaining the opportunity to investors in a way that cuts through the wider noise of macroeconomic challenges including inflation and rising interest rates—and to get deals done in time for the year-end.

“It is a big job but it needs to be done to best serve our clients. When we sit down with our clients and they say: ‘what are you doing to help us?’—there’s the answer. We are scouring the planet for cat capacity for the benefit of our clients,” he said.

Nancy Bewlay, chief executive officer of AXA XL Reinsurance, had also been monitoring the capacity-short property-cat space. In Monte Carlo she told Intelligent Insurer that her remit to add value to parent AXA Group requires smart cycle management and the ability to recognise when an opportunity presents itself, such as in the current capacity-short property-cat space.

An exodus of capacity from the property-cat market has resulted in the best pricing in that sector since 2006—and this means a clear opportunity for reinsurers able and willing to operate in that space, Bewlay said.

“We are still a big provider of nat cat capacity; there has been a big loss of capacity in that market, so we do see growth potential,” she said. “We manage our cat book carefully and strategically deploy our capital with a view on controlling our nat cat volatility.

“A capacity drain has meant there isn’t enough capacity for the primary market. Markets that would have had 150 percent on a placement last year are struggling to get 100 percent. In places such as Florida, it is even worse.

“It’s a tricky space but for those of us who have remained there is certainly an opportunity to look at the risks in the market and charge an adequate price that reflects the exposure.”

Supply and demand across the pond

Just days before re/insurance leaders gathered for APCIA 2022 (October 2–4, 2022) in Dallas, Texas, Hurricane Ian hit Florida, ratcheting up the pressure on an already strained market. Keith Wolfe, president, US P&C at Swiss Re, told Intelligent Insurer that the event would add more fuel to the fire raging in the US property-catastrophe market.

He said multiple macroeconomic factors had already impacted the supply-demand imbalance in this part of the reinsurance market over the last six to 12 months and losses from Hurricane Ian will only accelerate some of those dynamics.

“Prior to Ian’s formation and landfall, there was already skyrocketing inflation, which was starting to put serious pressure on property lines in terms of replacement costs,” said Wolfe. “That created a timing issue around things being underinsured and what they’re really worth when they are damaged and repaired and replaced.”

In addition, supply chain issues, some still related to the COVID-19 pandemic and some to the macroeconomic environment, were still creating challenges.

As a result of these two factors alone, Swiss Re had started to see cedants require more limit in the mid-year renewal—in the region of 12 to 15 percent. This meant a greater demand from insurers for property-catastrophe capacity across the board.

Yet, Wolfe explained, this timing dovetailed with a number of factors that caused reinsurance capacity to shrink. Unrealised investment losses in many big reinsurers shrank balance sheets—in the short term, at least. That removed capacity from the property-catastrophe market, just when it was needed most.

“Two things are both going in the wrong direction, to create a very bad situation,” Wolfe said. “There’s a lot less supply and a lot more demand, all at the same time, independent of any events, including Hurricane Ian.”

For Mark Bernacki, chief underwriting officer of Amwins, the specialty insurance broker, a scramble for capacity as the renewal deadline approaches seemed likely. He also believes that the end of the hard market conditions could be two years away.

At APCIA, Bernacki said that “this market, with five-plus years of upward positive rate moment, is definitely and definitively the longest-standing most stable hard market” he’s ever operated in.

He attributed market conditions to poor underwriting results, social inflation, regulatory issues in some US states, Florida in particular, question marks over the accuracy of risk models and underestimation of cat event frequency and severity, and the global economic environment.

In spite of the challenges Bernacki was confident that opportunities abound for carriers willing to take risks. “I’m a big believer that when others run it is the time to come in and capitalise on the opportunity,” he said.

He flagged property-catastrophe, and specifically southeastern US property-cat, as a key opportunity, noting that “some of the best underwriting metrics I’ve ever seen in the property side are currently happening”.

However, he advised those wanting to take advantage of the opportunity to be cautious and price in the unexpected. He admits that finding reinsurance partners could be a challenge in the run up to the year-end renewal.

“I’m expecting continued firming and very late quotes and scrambling for capacity. I would anticipate continued holes in programmes that are looking to be filled after the effective dates,” he said.

Take early offers amid shortages

Capacity concerns continued at Baden-Baden (October 23–26, 2022) as conference veteran Simon Bird, executive underwriter at Brit and active underwriter for the 2988 syndicate, urged buyers to consider taking any early offers on coverage rather than pushing back too hard on price.

Having attended 29 industry conferences in the south-west German spa town, Bird wears several hats at this reinsurance gathering and still called 2022 “unprecedented”.

“Buyers should go early because everything is going to take longer,” was Bird’s strong advice. “It will take longer to place and if you leave it to the end the capacity may not be there.”

Some cedants “may not like what they see” in bids received early November, but they ought to avoid the desire to resist too much. “It’s human nature to push back: if you are a buyer, you’ve already paid more than you planned mid-year, but assumptions may no longer be valid.”

By the time of the Baden-Baden meeting, it appeared that there had been a change of tone in renewal talks. Bird recounted a story from a reinsurance colleague taken aback by a cedant, a buyer of European catastrophe reinsurance, who asked the reinsurer’s opinion on structure, rather than simply demanding pricing. “In prior years, the cat buyer would have said: ‘this is what we are coming with. Price it’.

“There was a certain humility,” Bird said. “This guy met a European cat buyer who said what they were thinking of doing and asked him what he thought.”

Reinsurers have been demanding higher retentions, arguing that a decade’s worth of stagnant retentions just don’t stand up in a world of heightened inflation.

“In the past, cat buyers have got away with murder,” Bird said by way of comparison. “It has been under-priced for years.”

The dearth of cat capacity has also driven demand for alternative risk transfer (ART) solutions, such as technology-driven parametric insurance products, according to Mario Tucholke, commercial director for Germany, Austria, and Switzerland (DACH) at Descartes Underwriting.

“Continued insurance market hardening across the industrial sectors and regions has put mounting pressure on nat cat deductibles and the availability of competitively priced capacity. We are seeing big opportunities in storm, hail, and flood covers, especially in the German market,” Tucholke said.

“As we’ve seen this summer, drought and river level volatility have become more of an issue. Agricultural and renewable energy yields are also affected, and seeing increasing demand for cover. Meanwhile corporates are being urged to contain their premium spend. That’s an opportunity point for underwriters of parametric products.”

He said that as traditional insurers continued to pull back from more challenging risks, not least in climate-change-related areas, parametric solutions are increasingly popular among risk and insurance managers. “The time is now, not only to introduce a kind of ART to the customer, but also to establish a solution that will be state-of-the-art tomorrow.”

Stress on retro side

Normally, by the time conference season has ticked round to the Singapore International Reinsurance Conference (SIRC, October 31–November 3, 2022), experienced industry players would expect to get a keen sense of the underlying dynamics around the year-end 1/1 renewal.

But this year “many reinsurers are still firming up their strategies” pointing to some late negotiations this year, George Attard, chief executive officer, Reinsurance Solutions, Asia-Pacific, Aon, told Intelligent Insurer at the event.

He blamed Hurricane Ian for making an already complex market even harder.

“Coming out of this year’s Monte Carlo Rendez-Vous, the sense was the US would be a hardening to hard market; the rest of the world would be focused on available capacity, but dependent on pricing and structure. Then Hurricane Ian came along and created a bit more stress in the system,” Attard said.

He said that the messaging around 1/1 in Asia-Pacific comes through a global filter, but he added: “Aon thinks capacity will still be available in the Asia-Pacific region, but subject to pricing and structure. The markets will be looking for risk-adjusted pricing increases to compensate for the last five years of results.”