As #ReinsuranceMonth draws to a close, the scene is set for renewed impetus among reinsurers and retro writers to push for more meaningful rate increases at 1 January.
This, of course, is familiar territory and it is true that buyers (and their brokers) are masters at tempering reinsurer resolve as the 1.1 deadline edges closer.
Nonetheless, it is a fact that modelled loss estimates continue to edge upwards for Hurricane Ida, and as we explore elsewhere in this week’s edition, Property Claim Services’ preliminary $26bn estimate for the event points to potential for an ultimate industry loss of $30bn or more.
Ida may be painful but it is at least an expected event. The scale of July’s European flooding was not. The current expectation is a record regional loss for the peril of €10bn or more – twice the initial estimates. And 2021 has already seen a record-breaking US winter storm loss in the $10bn to $15bn range as well as severe convective storm losses again totalling well into double-digit billion dollars in aggregate.
These losses create earnings volatility for (re)insurers, which has been reflected by headline results in recent loss-hit years.
Several steps can be taken to manage this volatility – increasing cat budgets, for example, or buying more reinsurance (or retro) where it is available (an obvious opportunity for reinsurers).
As Aon’s Reinsurance Solutions CEO Andy Marcell explained in an interview with The Insurer TV earlier this month, (re)insurers are now assessing whether the frequency and severity experienced in the last five years will continue for the next five years.
That debate will continue through the upcoming renewal season and beyond.
But perhaps the bigger question is whether the industry is properly pricing in this apparent impact of climate change in the cat risks it assumes? In this regard, a recent report by S&P Global Ratings is both pertinent and concerning.
S&P warns reinsurers may be underestimating their exposure to natural catastrophe risk by up to 50 percent.
The rating agency said its study of insured loss activity over the past 30 years suggests a $150bn annual insured industry loss has a 1-in-10-year return period, but warned the industry is currently modelling this size of loss at a return period of between 1-in-20 and 1-in-30 years.
A 33-50 percent uplift in the industry’s assessment of its exposure would bring it in line with the 1-in-10-year return period identified within the S&P study, but would also require a material increase in the amount of capital the industry needs to hold for cat exposures.
While the report is intended as the start of a dialogue with the industry rather than being pre-emptive of short-term rating actions, it should still serve as a significant wake-up call.
While many carriers have been talking the talk around the need to price for climate change, there remains a question mark over the extent to which they are walking the walk.
However, the intervention of S&P as a quasi-regulator could prompt widespread action and reshape the way the industry evaluates its catastrophe exposures.