Reinsurance: the value proposition

Reinsurers arrive in Monte Carlo for this year’s Rendez-Vous buoyed by a renewed sense of optimism, following a strong performance for the year to date.

With investment recoveries having steadied capital levels, top-line earnings were boosted by further pricing improvements as hard market conditions continued through 2023 renewals.

The impact of Hurricane Ian shortly after last year’s Rendez-Vous had strengthened reinsurer resolve as we headed into this year’s 1.1 renewals, and that sentiment has been maintained throughout subsequent renewals this year.

While pricing movements have driven top-line growth for reinsurers, it has been changes to terms and conditions that have had the most significant bearing on profitability.

Most notably, the upward shift in attachment points – coupled with a continued withdrawal from aggregate covers – has enabled reinsurers to miss the majority of the catastrophe losses which have hit the industry in 2023.

While H1 catastrophes are generally considered to have totalled around $50bn, the lion’s share of this was driven by what are typically considered “secondary perils” – particularly severe convective storms in the US – where individual events are not typically large enough to attach to reinsurance programs.

The result has meant international reinsurers have been largely spared from impacts. But for many primary carriers, particularly in the US where the majority of 2023’s catastrophe losses have occurred, the picture is very different.

Several US carriers have pulled cover in certain states as they contend with the new reinsurance environment – a challenge compounded by current inflationary trends. The US personal lines coverage crisis is now attracting significant media attention, raising potential for increased political interference.

All of this raises questions about the value proposition of reinsurance. Reinsurers may argue their role is to protect balance sheets – not earnings – but the upward shift in attachment points clearly diminishes the value proposition of reinsurance for those insurers that are now retaining that volatility.

As we look ahead to this week’s talks in Monte Carlo and beyond, the question is: what happens now? Will reinsurers continue to push hard on rate, and terms and conditions? In today’s edition, Aspen’s Mark Cloutier has become one of the first reinsurance CEOs to publicly commit to doing so, but others will follow over the coming days.

This raises the questions as to whether the sector has reached “peak hardness” and also its longevity. Scor, for example, is clearly of the view it has legs. Its new three-year plan has established a goal of sub-87 percent P&C combined ratios for 2024-26. Even last year that would have been regarded as wildly optimistic.

It will also be interesting to see whether this “new normal” (for now, at least) fuels greater interest in other forms of reinsurance. Parametric products, for example, have already grown in popularity in recent years. Are cedants willing to take more basis risk when indemnity cover is high? One would assume so.

As reinsurers absorb less of the industry’s loss bill, the question of the sector’s relevance again rears its head. The reinsurance sector’s retreat from natural catastrophe risk comes at a time when questions are being asked about its willingness to provide cover for perils such as systemic cyber and pandemic.

To maintain its value proposition, reinsurance must at least be part of the solution. Should it retreat completely, the solution will likely come from elsewhere.

However, the counter-argument is compelling. Reinsurers must charge a rate appropriate to the business they are assuming – indeed, this is an unusual hard market because it is driven more by inadequate returns rather than deficient capital.

The stage, in other words, is set for another intriguing round of renewal negotiations…