Guy Carpenter chairman David Priebe has said he is hopeful reinsurers and cedants can come to a “meeting of minds” on the thorny subject of how to address inflation at the upcoming 1.1 renewals, with discussions already taking place around the issue.
Speaking during a roundtable hosted by The Insurer at this year’s Monte Carlo Rendez-Vous, Priebe said the first step in addressing the challenge was to sit down with companies and analyse on a portfolio-by-portfolio basis how they are addressing inflation in their pricing and insurance values and how they have been doing this over the past several years.
“We can then look at what that means for different excess-of-loss structures, where inflation can have a more amplified effect, and have an open conversation about it,” he said.
“What I’m feeling good about is those conversations are happening now – in September and October – so there will be greater clarity and hopefully we can come to a meeting of minds.”
Underlying rate momentum
From a positive standpoint, Priebe said there is discipline in the market, particularly at the primary level.
“There is extremely strong underlying rate momentum at the primary level, with product offerings being modified to constrain limits,” he said.
“However, geopolitical conflict is creating massive uncertainty and playing havoc with investment markets. There is anxiety around climate change. We also have a potential recession on our hands and continued social unrest.”
With capacity supply and demand imbalances, Priebe said 1 January will likely play out as a “very interesting and challenging renewal”.
“Our primary clients will be seeking increased limits to address inflation, but capital hasn’t yet come into the market to meet that increased demand. So we will see challenges in the property market.”
Increased limit demand
Priebe said differentiation was taking place on a cedant-by-cedant basis.
“Risk-adjusted pricing will continue to move and reinsurers will be pushing hard in Europe,” he said.
“It may become a pure price decision, as it just doesn’t make sense to buy volatility protection at certain levels. The ability to purchase aggregate cover will remain extremely constrained”
“There will be increased limit demand from primary companies somewhere in the region of 10-15 percent. Because of inflation and non-peak exposures pushing losses into these programs, there will also be pressure on attachments.
“It may become a pure price decision, as it just doesn’t make sense to buy volatility protection at certain levels. The ability to purchase aggregate cover will remain extremely constrained,” he said.
Retro capacity constrained
Priebe said there remained challenges in putting together aggregate protection for reinsurers in the retro market, although the per occurrence market continued to be “available and strong”.
“I expect you will see a continued expansion in the willingness of investors to back the cleaner, simpler structure of a 144A cat bond, so you will continue to see growth in that market,” he said.
“In terms of capacity coming in to support a sidecar structure or a newly formed collateralised reinsurance vehicle – discussions are taking place but as yet nothing has materialised.
“I hope that we can encourage investors to step in more to back reinsurers on a sidecar basis, but that may take more time.”
“In terms of capacity coming in to support a sidecar structure or a newly formed collateralised reinsurance vehicle – discussions are taking place but as yet nothing has materialised”
Cyber “keeps getting more challenging”
During the roundtable Priebe described cyber as “an exciting and important market”.
“And it’s only getting more important every day. It’s probably right now about a $10bn marketplace, in terms of cyber premiums. As the world becomes a riskier place, it keeps getting more challenging,” he said.
He said mitigation was key around cyber risk.
“The dynamics of this risk change every minute – it’s not hours, it’s minutes – because of the sophistication of predators and attacks,” Priebe said. “It is going to require a very significant technical approach to underwrite and manage this risk. And because it is systemic, we as an industry have to ask how much of the risk we can assume.
“I think this is the key thing the industry has to get to grips with – how can I better measure the aggregation risk and the systemic nature of this risk, so that I can better understand what my potential tail risk is against my capital.”
Ultimately Priebe said there will likely be a need for public-private partnerships to manage that tail risk.