General view on reinsurance and retrocession markets

In terms of capital, the reinsurance market is in an extremely comfortable position, with around a 70% increase since 2015. It is a capital rich industry that arguably has not made money for the last decade. In terms of market hardening , the reinsurance market is very segmented at the moment so it cannot be said that the entire market is hard. Some segments are very capital intense whereas some are much more difficult, such as specialty markets, retrocession and US financial lines on an excess of loss basis. At the moment it is difficult to make market predictions based on the past, because there are too many current uncertainties such as the war in Ukraine, inflation, tail risk, all of which may lead to capital providers playing safe. Not all the market is hard, but in these uncertain times the nervousness of the market is developing rapidly.

From the reinsurer perspective, there has been some hardening on the direct side but with the impact of climate change and inflation further remediation is needed. The retrocession market is hard because of investor fatigue after several losses and not getting the returns they expected. Increases in interest rates may divert third-party capital elsewhere. There has been an increase in traditional reinsurance capital over the last couple of years, seen by insurers as stable part of their long-term protection. Third-party capital providers are more cautious after being burned by some events.

However, the market is still seeing catastrophe bond issuances as they are still quite attractive to investors as they have definite terms and protect against named perils. The growth of alternative capital hasn’t happened as dramatically as expected, as catastrophe bonds are deployed in safer, low frequency areas, making them interesting for very large buyers but not very helpful for ordinary buyers faced by the problem of high frequency of losses.

Secondary perils

Secondary perils have been a major source of loss activity in recent times. According to a recent Swiss Re sigma report, 73% of all natural catastrophe losses so far in 2022 were caused by secondary perils, including convective storms, flooding following heavy rains, winter weather events and wildfire. Secondary perils accounted for around USD 81 billion in insured losses in 2021. The reinsurance market has traditionally focused on high severity risks, looking at the big catastrophes that could potentially put reinsurers out of business.

There was a constant flow of minor losses from secondary perils, but these were not modelled and usually fell within retentions. However, these are now creeping into reinsurance layers so it is possible for reinsurers to have negative results even without large losses from primary perils.

Climate change is making the situation worse and the industry needs to get better at assessing and modelling secondary perils in order to incorporate these developments into the price. Flood and hail are hardly unknown perils, there have been spectacular losses in the past so heavy losses from these perils are more about poor underwriting and not understanding the portfolio. The flood event in Germany in July 2021 was not expected to happen where it did, causing around USD 14 billion of insured loss. Such events are becoming bigger because of greater concentration of values.

The industry is fairly comfortable with earthquake and windstorm models, but some perils are incredibly difficult to model, which is perhaps why they are referred to as secondary perils. Reinsurers and regulators are devoting more attention to flood going forward, so this might prompt more investment from modellers. Windstorm models are always front and centre, but, just like in primary insurance when things that weren’t priced for impact on losses, the pricing models need to change to take account of secondary perils.

From a rating perspective, the rating agency wants to know if a company understands the risks, how they mitigate them and how they manage secondary risk exposure. In agricultural insurance, the risks associated with transitioning to climate change can be more challenging to deal with than the physical risks.

Inflation

Inflation is the number one concern in the (re)insurance industry. There are a number of causes contributing to the current strong price increases, such as oversupply of money, the war in Ukraine and the economic impact of the pandemic, increased cost of labour and parts and supply chain issues.

On a global basis, reinsurers are generally able to absorb some levels of inflation by revising prices annually. However, if this turns into claims inflation and reinsurers have to increase reserves, this will cause heightened monitoring from rating agencies.

Inflation is not a uniform phenomenon, the differences across business lines and markets can be vast. In the UK, claims inflation is largely in line with the Consumer Price Index but premiums are not necessarily keeping up, such as in motor. We have probably not seen the full impact of inflation yet, ongoing lockdowns in China are still affecting supply chains. The possibility of recession in the US, Europe and China is a big uncertainty.

From a reinsurance claims perspective, coming from a long period of no inflation, claims are now taking longer to settle and are more expensive, which will have an impact on the industry. It seems that after more than twenty years without inflation, the sector has collectively forgotten just how much impact inflation can have on claims, and now needs to do more to adjust the pricing.

For primary insurers, inflation is a cumulative problem so it needs to be addressed early and primary rates need to be increased so that reinsurers don’t have to superimpose. Temporary inflation is manageable, but if it will be a problem for the industry if it persists. Inflation is currently outstripping the benefits of higher interest rates, we are in a changed world and can’t just do the same things we used to do, including how we deal with inflation.

Session panellists:

• Peter Beaumont, Managing Director, Cornish Mutual (UK)
• Matteo Cussigh, CEO, Peak Re (Switzerland)
• Dirk Spenner, Managing Director EMEA North/East, Gallagher Re (Germany)
• Angela Yeo, Senior Director, Analytics & Head of Operations – Analytics, AM Best (Netherlands)
• Andreas Beckmann, Chief Underwriting Officer, R+V Re (Germany) moderator