Catastrophes have kept the focus on cost and frequency ahead of the January reinsurance renewals. The bar was raised last year, so what happens now?

By Wendy Pugh

Severe storms that have global natural catastrophe losses on track to top $US100 billion again this year have underscored decisions taken by reinsurers to raise levels at which they are willing to pick up the bill as they have moved to improve their performance.

A reset last year and soaring losses from non-peak or secondary perils gave the issue prominence again at the annual Rendez-Vous de Septembre gathering in Monte Carlo as negotiators prepare for January renewals.

“What we have seen in the nat cat side is that reinsurers have moved up the layers and have reduced the coverage of the smaller and medium-sized nat cat events,” Fitch Ratings Director Robert Mazzuoli said during a webcast. “[They] also have almost completely stopped selling aggregate covers.”

So-called secondary perils such as storms, floods and fires, which are less well-modelled compared to hurricanes and earthquake, have driven losses this year, and primary insurers have picked up much of the cost.

“The bulk of those losses coming from secondary perils are not impacting the reinsurance market at this stage, and that is something you can clearly see in the reported results of the reinsurance sector,” Aon Reinsurance Solutions Head of Business Intelligence Mike Van Slooten says.

Swiss Re says reinsurers are reverting to their “core historical function” as shock absorbers for infrequent high severity losses. This rebalancing has primary insurers seen as best-placed to absorb the higher-frequency attritional losses.

Significant moves aren’t anticipated for the upcoming January renewals, but the “shock absorber” approach is not likely to change.

“In terms of attachment point strategy, we are not looking for big shifts,” Swiss Re Property & Casualty Reinsurance Chief Underwriting Officer Gianfranco Lot told a media briefing. “We are looking for risk-adjusted changes as inflation comes through, but no big shifts.”

Guy Carpenter Global Head of Distribution Lara Mowery addressed the attachment points issue in discussing the outlook for the retrocession market, where negotiations were drawn out last year.

“There is increased certainty around supply to match demand, but reinsurers have remained clear in their intent to attach away from frequency perils and perceived attrition,” she said at an event hosted by the Marsh McLennan-owned reinsurance broker.

The alternative capital markets are seeing similar caution. Investors are showing a preference for catastrophe bonds, which could achieve record issuance volumes this year, rather than the sidecar arrangements used by reinsurers to share risks.

“That also implies moving up in risk remoteness,” Munich Re Board Member Thomas Blunck told a briefing. “Cat bonds tend to cover higher layers, and less the lower layers like sidecars.”

Discussions and reports released around the Monte Carlo conference indicate a hard market will continue, and there’s wariness around frequent low-level perils such as flood, storm and wildfire. More competition is seen at the upper layers, amid wide variations in appetite.

Munich Re says it is investing heavily in data and modelling and better understanding the range of catastrophe risks as it focusses on maintaining a diversified global portfolio.

1H Global Insured Losses

“Reinsurers have remained clear in their intent to attach away from frequency perils and perceived attrition.”

– Guy Carpenter Global Head of Distribution Lara Mowery

Stefan Golling, the Munich Re Board of Management member responsible for Global Clients and North America, says that across the market “underwriting matters again”, and some firms have found the perils environment too difficult and have reduced their appetites or quit the nat cat business.

“We have seen players in the industry in the past 12-24 months who have, I would say, raised the white flag,” he said. “I can actually understand that if you don’t have the resources, the capabilities or the ambition to really invest into underwriting, to invest in your own capabilities.”

Rising prices, changed terms and increasing investment income and demand have seen Fitch revise its global outlook on the reinsurance sector to “improving” from “neutral”, while S&P Global Ratings has moved it to “stable” from “negative”.

Reinsurers’ revised risk appetite indicates “a distinct shift” toward taking on severity exposure rather than frequency, S&P says.

“Reinsurers have remained adamant in pursuing pricing adequacy as heightened losses have battered their underwriting profitability. It is now a hard market, at least in the short-tail lines, and reinsurers are remaining disciplined.”

Reinsurers’ positioning for the January renewals – which are dominated by European and US risks – say prices are still not adequate following tough recent years and given economic and global challenges.

Outcomes in coming months will set the scene for later discussions, with Australian renewals a focus at the mid-year.

Insured catastrophe losses reached $US56 billion in the first-half, some 54% above the average for this century, according to Aon. US severe convective storms cost an estimated $US38 billion, while the main reinsured events were the Turkey and Syria earthquakes and back-to-back New Zealand catastrophes.

Global reinsurance capital dropped at the end of last year to $US575 billion compared to $US675 billion a year earlier, partly as rising interest rates reduced asset values.

Estimated capital recovered to $US620 billion at the end of June, boosted by retained earnings, asset values and cat bond inflow, but it’s argued there hasn’t been the type of resurgence seen in past hard markets.

“We don’t have a massive capital inflow and that means the market dynamics are not changing,” Munich Re’s Mr Blunck says. “The market dynamics we have seen recently in the renewals, I would expect them to prevail also going forward.”

Aon says improved reinsurer returns on equity have not continued for long enough to satisfy investors,  and market discipline is expected to be sustained for “the foreseeable future”.

Nevertheless, some areas are improving for cedents, with increased appetite at middle to higher layers.

“There are still some challenges in placing lower layers, where insurers’ needs are greatest, but there are also significant opportunities for reinsurers to be viewed as long-term strategic partners at these attachment points,” Reinsurance Solutions Global Growth Leader Joe Monaghan says.

Hannover Re says geopolitical uncertainties, the increasing frequency and severity of natural catastrophe losses as well as inflation rates and social inflation support further rate increases and improvements in terms and conditions.

“We have achieved significantly more adequate prices and conditions during this year’s renewals. However, these improvements are not sufficient in view of the still challenging risk situation,” Chief Executive Jean-Jacques Henchoz says. “Adequate pricing is a prerequisite for us to offer the best possible reinsurance capacity.”