Munich Re’s Winter: Market will settle at 1.1 amid much improved underwriting environment

As discussions continue amid the most challenged 1 January property catastrophe reinsurance renewal in decades, Munich Re US president and CEO Marcus Winter is confident the market will eventually settle albeit with significant pricing improvements, cedants retaining more risk and a greater focus on the core, traditional coverage.

The tightening of the reinsurance market has been evident since the mid-year renewals at 1 June and 1 July, Winter told The Insurer.

“After 1 June, we had one or two cases where brokers called us and said they wanted to have a bit more capacity

“They talked about very small amounts – maybe $2mn of capacity on a cat program which is not much - but that was an indication that already the capacity had started to get tight,” the executive said.

Since then, Winter said a range of factors have come together at the same time which have caused capacity to become increasingly restricted.

“What’s really driving the market at the moment is the lack of retrocession capacity and the lack of alternative capital in the market, and that is met by an increased demand. Those two factors have caused this capacity crisis,” Winter stated.

Clients, the executive explained, are looking to increase the limits of coverage under their programs in response to inflation and the heightened impact of climate change.

At the same time, because of higher interest rates, the alternative capital markets – a key source of retrocession capacity to property cat reinsurers – are being drawn to asset classes outside of the industry.

“If you can get 3 or 4 percent risk free interest rates on US government bonds, why would you continue to write cat programs with a high volatility?” Winter said.

Alternative capital trapped as a result of prior events has further restricted the retro cat capacity at play, Winter explained.

Reinsurers themselves have also reduced their property cat capacity in response to the sector’s poor performance in recent years, further restricting its availability.

Munich Re’s appetite unchanged

Winter said Munich Re’s capacity for 2023 is unchanged compared to this year, although the reinsurer will only write business provided the price, terms and conditions meet its underwriting criteria.

“In the past the prices have not been where they should have been at, and now with the change in the market dynamics they will be much closer to what we think is the technically adequate price,” said Winter.

While Munich Re is focused on supporting its existing clients, Winter said the reinsurer is also open to new opportunities.

“For the right type of client, and the right structure and the right price, of course, we can also entertain new business. Some clients have decided to retain more which frees up capacity. And we can redeploy that capacity for other companies,” Winter detailed.

Market moving

The Insurer recently reported comments from KBW analyst Meyer Shields that highlighted the limited number of reinsurance programs that have so far cleared given the fraught renewal discussions.

Market sources have indicated that there has been movement in recent days as the market nears the crucial 1 January renewal date. But Winter said that is inevitable given the programs have to be placed.

“We're getting closer to year end and at some stage, the reduced capacity has to come into play, and that's what we’re seeing now – [it’s just] the capacity is low, and that the prices are very high.

“The programs have to be placed by 31st of December. You can't not place them. There's always earthquake season, and then we can have storms and freak weather events.

“Any prudent risk manager will not leave their balance sheet exposed after 31st of December without coverage, and there's no need to. There is capacity at a price available,” Winter stated.

While the property cat renewals have taken much of the market’s focus, Winter said uncertainty across the board is causing reinsurers to reconsider the pricing needed for their coverage.

“The overall uncertainties are huge. There's the legal system abuse in the US, there’s the war in Ukraine and all the follow-on topics for aviation, marine and other lines of business, and we still have supply chains being at risk,” Winter said.

“At the moment and into 2023, it's more than just property cat that now starts to firm up where terms and conditions, risk structures, the whole risk sharing arrangement is under discussion,” the executive stated.

“The really bad loss trends on the casualty side in the US [have led] to a firming of the casualty market, but not to the same extent as property. Not yet. They’re all improving, but not at the same speed,” Winter added.

Clients to retain more

Looking to 2023, Winter forecasts "cedants will retain more risk, particularly at the lower end of programs, while some of the structures that arose during the softer market years – aggregate structures, drop downs, cascades and multi-year deals – will largely be consigned to the past.

“[Cedants] will go back to the basics with the reinsurance structures that they're going to buy,” said Winter.

“It will be more focused on the right level of retention, and then the right level of stretch for the programs,” Winter added.

Insurers, the executive said, will focus much more on the quality of the incoming business, with reinsurers doing the same.

“The whole industry, in my expectation, will focus much more on getting additional talent with traditional underwriting skills into the door.

“The idea that we can replace the core traditional skills of risk selection, risk assessment, structuring of the coverage and coverage design with an actuarial exercise apparently has not worked,” Winter stated.

“We need to spend time and energy in training underwriters, both on the insurance and the reinsurance side, to be able to navigate a situation where we all have a very risky environment that we want to mitigate.”

According to Winter “ultimately, the reinsurance market will need to find new balance”.

“Equity positions may need to be rebuilt, market profitability restored, and long-term partnerships will prove much more resilient than short term oriented and more opportunistic transactions.

“It may take some time to get there, but over the last century the insurance and reinsurance industry has proven its resiliency vis-à-vis a broad range of shock scenarios.”