Top 12 themes for Reinsurance Month
Over the coming weeks The Insurer will examine the key dynamics likely to shape discussions ahead of the 1.1 renewals. Below we highlight 12 themes that will run through our #ReinsuranceMonth coverage and beyond as the industry prepares for another challenging renewal period.
1. The hard market continues…
Hurricane Ian’s arrival shortly after the 2022 Monte Carlo Rendez-Vous ensured a level of dislocation at 1.1 not experienced for many years. For property catastrophe renewals, these hard market conditions have been sustained through 2023’s other major renewals, with substantial price increases coupled with more favourable terms for reinsurers, notably the lifting of attachment points. As we look ahead to 2023, there are no signs of this trend ending, but questions remain as to whether the reinsurance value proposition has been diluted by the changes to terms and conditions.
2. Investor appetite/capital
This is a market fuelled more by inadequate returns rather than scarce capital but it is noticeable that the lack of a “Class of 2023” of start-ups shows continuing investor caution.
There are signs this is dissipating – especially in ILS/retro (see more below). Expect chatter in Monte Carlo this week regarding some new capital inflows. Might it have a marginal impact on the higher layers at 1.1?
3. Vesttoo fallout
The collateral fraud allegations facing ILS-focused Israeli insurtech Vesttoo over recent months sent shockwaves through the industry, impacting fronting carriers, MGAs, transformers, other counterparties and intermediaries. The allegations have left Vesttoo fighting for its survival, with a significantly diminished executive team and around a quarter of its workforce remaining. The fallout from the Vesttoo scandal will continue to drive news headlines during #ReinsuranceMonth and beyond. While MGAs have scrambled to find alternative capacity (and, in most cases, have successfully done so), there are still many questions that remain unanswered including the enthusiasm of certain intermediaries, the lack of scrutiny on collateral adequacy and whether regulators/rating agencies will take a tougher stance on letters of credit.
4. Casualty concerns
While property catastrophe renewals have remained hard, the casualty position is less certain, and has begun to cause concern among some reinsurers. Swiss Re, for example, saw its combined ratio in the class rise to 110 percent during Q2 after further liability and motor reserve strengthening. Swiss Re has reduced its casualty premium base in 2023. Munich Re has also cut its proportional casualty book this year. Given these casualty concerns – in particular around US liability – the question remains as to how this will play out at 2024 renewals.
5. Inflationary pressures
Inflationary pressures are continuing to impact both casualty and property classes. In the case of the former, inflation has been one of the drivers of increased reserving among reinsurers. For property, inflation continues to impact the cost of claims with materials and labour costs still at highly elevated levels compared with the pre-Covid era. While reinsurers have been pricing in these elevated costs during recent renewal periods, further pricing action may be needed in 2024 to reflect this ongoing trend.
6. Modelling changes
Another factor set to play a prominent role in renewal discussions is the launch of Version 23 of RMS’ NA hurricane model. The latest version points to increases of up to 20 percent in expected losses in Texas, the Gulf, Florida and southeastern states. Launched in June, it is likely to play a significant role in thinking ahead of 2024 renewals.
S&P is also considering model changes that could significantly increase capital loads for more remote nat cat risk.
Both should add steel to underwriters’ convictions…
7. Retro availability
A lack of retro capacity was one of the major drivers of hard market conditions at this year’s 1.1 renewals, and the extent to which retro capacity opens up will potentially play a significant role in how the January 2024 renewals play out. There is unlikely to be any return of aggregate protection following the widespread contraction at recent renewals. Last year Hurricane Ian dispelled any notion that investor fatigue in the retro market would come to an end. The extent to which ILS investors come back in will also determine the extent to which the hard market sustains in 2024.
8. Secondary perils (surprise cat losses)
Major loss activity during 2023 has largely been characterised by “surprise events”. A record European earthquake loss in Turkey, record losses in New Zealand from flooding/Cyclone Gabrielle and the Hawaii wildfires are all examples of billion-dollar events which sit outside the typical drivers of large losses for the sector, but are nonetheless impacting earnings. This shift in loss patterns will provide another discussion point over the coming months and highlight the need for the industry to better prepare for an evolving risk landscape which requires a more proactive approach.
9. Reinsurance broking – the war for talent
Among reinsurance brokers, the last 12 months have seen an escalation in the battle for talent with the newly combined Howden Tiger pulling off several audacious swoops to bring in highly respected and experienced team members from larger rivals. This has in turn triggered further recruitment by the big three reinsurance brokers as they look to replace those taken by rivals, sparking litigation among the competing firms. These tensions show no sign of relenting…
10: Will WTW return to treaty reinsurance?
The competition for talent could yet increase if WTW decides to return to treaty reinsurance. The broker’s lock-out following the sale of the previous Willis Re business to Gallagher expires in December 2023.
Given the current opportunity in the reinsurance space, a return would make strategic sense for the broker – the question is how and when it might execute it.
11. New markets, new products and systemic risks
The (re)insurance industry has to stay relevant by providing answers to the major risks facing society, businesses and the global economy which narrow the “protection gap”. But many of these challenges – cyber, pandemic and climate change, for example – can only be tackled with innovative thinking and collaborations with the capital markets and governments. There are many discussions taking place, but currently more words than action. The industry’s standing – and future growth prospects – will be enhanced if it is able to turn some of these ideas into pilot schemes in 2024…
12. Generative AI
The power of generative AI (GenAI) has already been illustrated by the widespread adoption of technologies such as ChatGPT. An underlying theme during the Rendez-Vous and beyond will be how GenAI can be deployed across the (re)insurance sector.
GenAI can play an important role in improving underwriting and actuarial processes, enhancing analytical and risk assessment work. It will also require strong governance and controls. But in the right hands, these tools could be a key differentiator for the sector’s leading players…