Retro is “grappling with change” and some of its structures have been shown to be broken, according to Peter Smith, executive vice president and managing director of Liberty Mutual Re.

Meanwhile, the rest of the reinsurance market is playing catch-up in terms of its pricing, he said.

“There will be winners and losers. Retro is an example of the market grappling with change,” Smith told The Insurer TV as part of its #ReinsuranceMonth series.

Change will include the bases on which the retro market operates, he suggested, including retentions and program structures, as well as pricing.

“There’s going to have to be change, it can’t be more of the same. Ultimately, some of the retrocessional structures out there are broken and haven’t worked,” said Smith.

“That’s where the struggle will be, in the aggregate covers, for example. It’s not a place we’ve been, and it’s not where our appetite is. We’ve seen that hasn’t worked, and I think there will need to be changes. Cedants, customers and brokers recognise that,” he added.

Retro market hardening has already been under way for several years, and will continue, he noted, mirroring changes within the primary insurance market.

“Over the last five years the insurance market has hardened. It’s got its head around the problems that it was facing, the position it was in, and where it needed to get to. The retro market has been in the same place, broadly,” said Smith.

In a presentation as part of its pre-Monte Carlo Rendez-Vous briefing, Guy Carpenter said these market dynamics reflect the sustained period of cat losses since 2017, growing climate-related concerns, inflation and modelling challenges.

Progressive property retro hardening led to retraction in mid-year buying appetite

Looking ahead to the 1 January renewals, the reinsurance broker predicted retro capacity will remain somewhat limited for aggregate and low-attaching per-occurrence layers, despite material de-risking in 2022, but that the “generally positive performance” of mid- and upper-level retro occurrence layers will remain attractive to markets looking to deploy capacity.

Liberty Mutual Re has historically been a leading player in the retro market, but Smith emphasised a steady course rather than a sudden rush to increase or decrease market share.

“The message that we have is one of stability, and I think that’s really important,” Smith said. “We’re not shrinking it but we’re not growing it. The approach that we’ve taken historically is to focus on the right business, the right relationships and the right pricing curve through the cycle.”

Confident position

Speaking on Liberty Mutual Re’s reinsurance portfolio more broadly, Smith is confident in the reinsurer’s position in the market, characterised by cautious growth and conservatism, avoiding over-reliance on any single element within the portfolio.

“I think we’re well positioned, with a very strong, stable, supportive capital partner in Liberty Mutual Group. They have real confidence in the business, and we’ve spent a lot of time focusing on the challenges that we foresaw which are now playing out in the market,” he said.

He underlined the value of stability, purpose and the resilience of market partnerships.

“Resilience for me is about stability. It’s about being able to weather those storms; it’s about not being knocked off course by short-term problems. We have been optimising the book, so we’re in a great position to take advantage of some of the opportunities out there,” Smith added.

Despite the language of caution, Smith said Liberty Mutual Re has a growing appetite for cyber business.

“We see the demand, the demand is clear. We do have a growing appetite for cyber in Liberty Mutual Re,” he said.

However, the market needs to adapt its approach for cyber, as for other emerging risks and unmodelled perils, he stressed.

“We’re trying to solve new challenges with old methods. The insurance and reinsurance market is part of the problem. In many ways, the market needs to get out of its own way,” Smith warned.

Few models and a lack of data points remain a big challenge, he suggested, but through some humility, a change in mindset and a focus on talent, emerging risks can be better underwritten.

“Where have we gotten it wrong in the past; how do we correct some of those mistakes; how are other industries solving the problems of cyber?” he asked. “One of the strategies we’ve deployed within Liberty Mutual Re, is we’ve invested heavily in talent outside of our own industry.”

Watch the 11-minute video interview with Liberty Mutual Re’s Peter Smith to hear more on:

  • How to talk about risk against a backdrop of uncertainty
  • Appetite for new and emerging risks
  • Opportunities for Liberty Mutual Re
  • Retro market dynamics