NEWS
APAC cedants battle for smaller reinsurance pot
APAC cedants are now competing for their share of a smaller reinsurance capacity pot: Gallagher Re.
The supply/demand balance for property-catastrophe business in the Asia-Pacific region has shifted, with cedants now competing for their share of a smaller reinsurance capacity pot. As a result, price rises are almost inevitable but they could be more nuanced than in other parts of the world.
That is the view of Mark Morley, managing director of Asia-Pacific, Gallagher Re. He told SIRC Today that a number of forces are driving the change in dynamics, including unrealised investment losses, changing views on risk and inflation.
“The supply/demand dynamics are being driven partly by reinsurers’ changing risk appetites, and partly by the recent pressure that reinsurers have felt over unrealised investment losses,” Morley said.
“This is coupled with the impact of inflation and the effects of recent loss activity in the region itself and further afield, which ties back to the fact that most carriers are global.
“As a result, cedants are competing for their share of a smaller reinsurance capacity pot. We’re seeing significantly reduced deployment of reinsurance capacity at the frequency end, and oversubscription of programmes at higher levels.”
On inflation specifically, Morley said the situation in Asia is somewhat different from that in other parts of the world. In Southeast Asia for example, inflation rates are mid-single-digit—half the European rate and considerably below that in the US. The reasons for this lower number include much smaller fiscal stimulus packages in response to COVID-19, tighter labour markets, and proximity to strategic transport hubs.
“They are treating placements by region and by client.”
Mark Morley, Gallagher Re
“As the renewal gathers intensity reinsurers are beginning to recognise Asia’s economic nuances. Instead of adopting a blanket treatment, they are treating placements by region and by client, with inflation underwritten on a case-by-case basis,” he said.
“That’s to say, cedants are expected to explain the work they are doing to ensure limits are indexed, average clauses are applied, and portfolios are balanced. Buyers who can differentiate their approach will be differentiated accordingly.”
Gallagher Re’s research shows that the first half of 2022 delivered some of the best earnings results for reinsurers in the last decade. Hurricane Ian will have an impact on this and is likely to be an accelerant to the increased property-cat pricing, Morley acknowledged. “But premium income and earnings for reinsurers have improved in this period, and we expect to see a steady change continue in reinsurers’ pricing strategies.”
He added that the broker’s expectation is that any price rises—which it expects will be proposed for many accounts—will be measured, rational and based on an individual client’s track record.
“We expect to see a steady change continue in reinsurers’ pricing strategies.”
“We expect them to reflect the losses impacting the region, not simply take a global view or response. It would be in no-one’s interest to return to hugely volatile pricing, with excessive increases that could not be justified at an individual client level, followed by a deep soft market. That would be a retrograde step.”
Inflation and unrealised losses are temporary influencers of pricing. Prices will always respond to major capital events in the reinsurance sector, but Morley believes the market should take the opportunity to end the broad cyclical pricing swings.
“What we have now is a very good opportunity for the reinsurance market to show its value to cedants and their clients by offering stability, potentially using multi-year strategies to show the value of consistent pricing,” he said.
The broker’s main message to cedants this year is to be prepared, early. “That means clients and their broker partners must focus on desired outcomes and then determine and specify clear coverage requirements in support of a defined outwards reinsurance strategy.
“This is probably not the year to come to the market with multiple options. Reinsurers are increasingly segmented by client portfolio rather than market, so those cedants that are able to positively differentiate their proposition are likely to see better outcomes,” he concluded.
Main image: Shutterstock / Robilad Co
