As discussions get under way ahead of 1 January, The Insurer hosted a virtual panel debate to check the pulse of the market and discuss some of the biggest issues that are shaping the forthcoming renewals.

Compass

In the first of our panel debates during #ReinsuranceMonth, Axis Re’s chief underwriting officer Katie Partington Howarth said that while the market was moving in the right direction, there were a number of “uncertainties” that were informing early-stage renewal discussions.

Partington Howarth pointed to Covid-19, which she deemed a live ongoing event, the unknown impacts of social inflation, potential for continued prior year reserve development and climate change as all informing this year’s renewal conversations with cedants.

“I think the market is definitely healthier but I definitely think there are still some uncertainties out there and it’s still a changing landscape that we have to be really aware of and we have to make sure we’re keeping pace with, not just from a rate perspective but also from a terms and conditions perspective,” she explained.

Katie PH PQ

Partington Howarth added that while the market is “getting healthier” it must remain diligent and closely observe these “uncertainties”.

“There are still uncertainties out there that we need to keep our eye on and make sure that we feel that we are charging appropriately for the risks that we’re taking on our balance sheets,” she added.

Kathleen Reardon PQ

Kathleen Reardon, CEO of Hiscox Re & ILS, said that while it was naturally “early days” in terms of discussions with clients, conversations were pointing towards “some much-needed pricing momentum” at 1 January. 

“And compounded rate year-on-year is what we need to get to sustainable profitability and be there for our clients in the long term,” she said.

Fitch Ratings’ senior director Brian Schneider said that from the rating agency standpoint, the state of the reinsurance market was “quite favourable”. 

He outlined that while pricing at the various renewals this year had been lower than some reinsurers had expected as rate momentum slowed, reinsurers have continued to secure rate increases for the past two years.

“So from our standpoint, we see it as the best overall market since 2005,” Schneider said.

“As such the prices should continue rising into next year and beyond as reinsurers, from what we’re seeing, are exercising discipline,” he added.

Schneider suggested that rate increases will continue at 2022 renewals. “We’re looking at maybe high single-digit, low double-digit type levels. Hopefully, we’ll start to approach the rating adequacy as we get these additional rate increases.”

Brian Schneider PQ

Gallagher Re’s managing partner Matt Fitzgerald said that from a “broad brokerage side” he had observed a deceleration in rate momentum, however he noted that this had been more pronounced in different classes.

“I think there does feel to be a slowing in rate momentum in the reinsurance market,” Fitzgerald said.

In the property reinsurance market, he identified that secondary perils were becoming “a very relevant part” of market discussions, while in some specialty classes, Fitzgerald pointed to a potential plateau in pricing dynamics.

“I do believe the specialty classes may be where the see-saw is at a level playing field on some of the more commoditised products,” he continued.

“Some of the specialty products there’s a shortage in capacity and I do think that still weighs in favour of underwriters … I think it feels as if a steady status quo is on the horizon at the moment.”

Matt Fitzgerald PQ

Alternative capital in the reinsurance sector

Discussing the future role of alternative capital in the sector, Schneider said that it will continue to play a “very important part of the industry”. He said that alternative capital’s role in the reinsurance sector has now reached a level of maturity as well as acceptance.

“It has strong support from the reinsurers now, but if you looked at when it was first starting out, there were some potential conflicts between whether it was stealing business from the reinsurers,” Schneider added.

“But it’s here to stay, it’s converged, and investors, in particular given the diversification benefit with low correlation to other assets, that’s always going to be a driving force in them coming to the market.”

Reardon said alternative capital in the sector remains a “compelling strategy” for Hiscox Re & ILS investors, with the executive suggesting that interest hasn’t waned since the advent of Covid-19. 

“Their interest has, if anything, increased post-Covid – we’re being very transparent, we’re keeping them very well-informed of how losses evolve,” Reardon said. 

With returns still largely uncorrelated from the majority of investors’ other strategies, Reardon said the reinsurance sector remains “attractive” to investors.

The panel agreed that matching alternative capital with emerging risks is another challenge the industry faces, but Reardon said that “it’s overcome-able”. 

“We have to perhaps in the first instance find a way to shorten [the tail] of those exposures, be it pandemic cover, cyber cover, but we can certainly tackle those things and other challenges we’ve had about trapped capital and releasing of the collateral, a lot of healthy discussions are going on and we’re getting there,” she said.

Partington Howarth echoed Reardon in calling for the industry to develop solutions that would allow alternative capital to close the protection gap, especially with ESG-associated risks.

“Really using alternative capital – which I know has an interest in the overall ESG space – we talk about how we can put that capital to work within our industry to close these coverage gaps, address some of these new challenges … alternative capital can really help us with some incubation projects here to really understand how we address these needs,” she said.

“I think it’s going to take a few times for us to work through products and this is something where I’m really hoping to see increased participation from alternative capital who may have some different time horizons and different ways that they’ll be looking at generating return and generating a market,” she concluded. 

This panel debate was hosted on 24 August before Hurricane Ida made landfall in Louisiana