Ken Brandt index

Brandt noted that the reinsurance market is largely paying ceding commissions of 30 percent or more on quota shares.

“That’s economically feasible in this part of the market because of all the price increases,” the leader of Alleghany’s reinsurance operations said. “But it’s not very sustainable through the cycle certainly.”

Brandt highlighted that there is a wide variance in the underlying performance of cedants. For example, he estimated that the top-quartile performers in D&O outperform the market by at least 15 points. The problem, he said, is that the top quartile carries the least amount of premium.

“So as a reinsurer right now, it might be rational to write this business giving ceding commissions over 30 percent but when the market turns – and the market will turn – it’s just not feasible,” Brandt said.

“There’s not enough business that’s going to be in the 50s loss ratio or maybe even the 60s loss ratio to support these kinds of ceding commissions. So that’s going to be a challenge for reinsurers.”

A year ago Brandt had commented to this publication that the US casualty market was the reinsurance area most in need of improvement. That market is better a year on, he said, with significant rate increases and ceding companies’ limits reducing “sometimes quite dramatically”. 

“I think it’s worth highlighting, though, that these improvements aren’t driven by a lack of insurance capacity,” Brandt said.

“It’s being driven by poor results, it’s being driven by troubling social inflation, it’s being driven by a loss emergence and that’s all within an environment of pretty anaemic investment yields. So there are reasons that it is better, and there’s likely more work to do.”

Brandt said that the market is breaking down into two major camps of buyers. The first camp is companies that have confidence in their portfolios and are taking more net. 

The second camp is companies that are not as confident because they are reunderwriting their books, are under new leadership or are a new company, or are not certain about their loss emergence.

“Those companies are not only not taking more net line, a lot of them are buying more quota share,” Brandt said.

Cyber market the most challenged 

Brandt said that the cyber market is now the area with the greatest challenges, as a result of the soaring number of ransomware attacks in the past two years.

“Ceding companies are trying to get ahead of this and they’re pulling back coverages, they’re reducing limits, they’re applying sub-limits and obviously they are throwing a lot of rate at the problem,” Brandt said.

“But we don’t think anyone particularly has a handle on it.”

In addition to the ransomware attacks, Brandt highlighted the systemic exposure in the cyber market. 

“While ransomware can affect your earnings in a negative fashion, systemic losses will affect your capital and it may even affect some people’s solvency, quite frankly,” he said.

As a result, Brandt said “reinsurers will be tentative at best” about cyber. 

“We pulled back several years ago our cyber writings,” the executive said. “We’re still interested in supporting the cyber market but not in an unlimited way. Our reinsurance is offered on a capped basis generally.”

Commenting on UK and European property catastrophe programs, Brandt said these have not seen pricing increases for many years, with rate on lines down 40 percent to 50 percent over the past decade.

“This is largely driven by a lack of large loss activity in that timeframe so maybe that’s understandable,” the executive said.

“But that’s all in the rear-view mirror now with the onset of Covid losses and with the tragic European floods. So I would expect very meaningful rate rises for property cat at 1.1.”