But a panel of senior industry leaders has called on insurers not to “overreact” to the recent run of losses and instead to focus on the future availability of cover as climate change impacts become more pronounced.
During a virtual panel hosted by The Insurer, Hannover Re CEO and Chairman Jean-Jacques Henchoz, Guy Carpenter’s European CEO Massimo Reina, Leadenhall Partners founding partner and CEO Luca Albertini, and Axa Global Re Global CEO Guillaume Lejeune, highlighted how 2021’s natural catastrophes have prompted (re)insurers to reassess their appetite for cat risk.
Last year was one of the largest catastrophe loss years on record, with Munich Re estimating the economic loss bill at $280bn of which approximately $120bn, or 43 percent was covered by (re)insurance protection.
This compared with an industry catastrophe bill of $82bn and $57bn in 2020 and 2019 respectively.
While there are a multitude of other factors driving a wider portfolio rethink, with Hannover Re’s Henchoz and Axa Global Re’s Lejeune citing inflation, loss costs and cyber as key topics being discussed between cedents and reinsurers – one of the primary concerns is the developing impact of climate change and the trend of rising cat losses.
Reaction at 1.1
So, how did this series of events in 2021 which led to losses of this scale impact the renewal at 1.1 and is expected to steer conversations at other major renewals moving in 2022?
“I think the Bernd loss, in particular, and more generally losses from secondary perils such as the Texas ice storm had the most direct effect on the renewal season,” said Guy Carpenter’s Reina.
“Regarding Bernd, which occurred in the middle of July, it is a complex loss and it took time for our clients to accurately assess the impact on their portfolios and to release data which meant it also took time for reinsurers to digest the data and to try and include the recent loss experience in their view of risk,” he added.
Reina said this reevaluation will continue as 2022 progresses, and had resulted in some “particularly wide” reporting at 1.1.
“Some reinsurers did not feel entirely comfortable releasing their reports and waiting for others to make the first move, which can be unsettling for cedants,” continued Reina.
Despite these challenges, both Hannover Re’s Henchoz and Axa Global Re’s Lejeune asserted that the renewal was orderly and that discipline prevailed, as did the preservation of long-term trading relationships.
De-risking of portfolios
Indeed, this discipline materialised via a number of different underwriting strategies as reinsurers sought to reassess their view of risk in some areas, namly property cat. But it also led to a bullishness among those cedents who were keen to better leverage relationships in the wake of tough cat programme placements.
“Generally, there was a tendency to play more across the board and take a holistic view at the renewal,” said Henchoz. “We tend to do so at Hannover Re and that’s why we continue to be very consistent over time. But maybe cedents looked at cross-selling opportunities at the same time, so sometimes when a cat programme was difficult to place, there were some cross-selling moves to be able to play across the board,” he explained.
“It played very well for cedents who are true partners and have a long term orientation. These cedents had a better outcome than others, as opportunistic behaviours do not work very well in this phase of the market,” he added.
Axa Global Re’s Lejeune observed there were “some reinsurers clearly de-risking”.
He said: “On those, we sometimes had some surprises between what was said in the early stages of the virtual Monte-Carlo and Baden-Baden meetings and the line they were able to put and maintain.
“And we saw others that were more fundamentalist trying to manage I would say stability in the support they are bringing to cedants, and all players were trying to get more of the non-cat covers or more market share there. So, we saw a balancing [act] in the stance of cat with the non-cat,” observed Lejeune.
Where the industry’s response was perhaps felt the most following a year of elevated cat losses was in pricing and terms and conditions. The overall consensus is that terms and conditions tightened enough over the course of discussions, but that there could have been more momentum on rate.
“I tend to joke all the time on renewals saying that if all the parties are equally unsatisfied, this is a very successful renewal,” said Hannover Re’s Henchoz.
“I think it was a very successful renewal. In the end, rational thinking prevailed, long-term thinking prevailed which is good for markets generally.”
He added: “Reinsurers in the past decade have not really shown a stellar performance when it comes to ROE metrics and for that very reason, I think there is a lot of pressure from shareholders on the industry to make sure that pricing is adjusted to the growing exposures. And there are of course topics like climate change or inflation which are very difficult topics to handle but I think we did that in a very professional way.”
The cost of climate change
To what extent the prevalence of the secondary perils is attributable to climate change and how these evolving weather patterns are both adequately modelled and quantified are big questions looming over the industry.
“I think it’s very hard to put a number on this,” said Guy Carpenter’s Reina.
“It is clear that climate change is having an impact on certain types of events. Obvious ones are flood, wildfires, of course, and convective storms. This has put a focus on a need to better understand all material perils and not just the ones that drive the worst case events which are wind and earthquake,” he said.
“But as everybody said, the market should not overreact to one year. The Bernd storm for example is the type of events that climate models suggest would occur more frequently. And so we should check that the models capture these types of events with reasonable frequency but it doesn’t mean they will happen every year.
“If we estimate that flood losses will increase by 60 percent by 2050, that actually translates to less than two percent per annum, just to put it in perspective. And that ignores the impact of any mitigation measures which may be implemented during this period and that is a very important part,” said Reina.
Hannover Re’s Henchoz, asserted the pressure is “clearly there” to put a number on the impact of climate change, but said that was not his main concern.
“I think my main worry is not really with the insured risks. My main worry is with the protection gap and some of the risk exposures which in the future might not be insurable,” he said.
“I think one aspect we need to look into is how to mitigate these risk exposures and you have to look at the economics of climate change from a holistic point of view and not only the price of insurance or the price of reinsurance,” continued Henchoz.
Questions Henchoz believes need to be asked are: what is it we need to do to mitigate the aftermath of a big hurricane on building standards? Why are we still building into territories with regular floods and on flood plains?
“That’s a good example of irrational decision-making which is not compatible with what we should do in the future,” he said.
For Henchoz, these topics need to be at the forefront of conversations, not just pricing.
“We need to do much more and if we don’t, that’s the big worry, that some risks will not be insurable anymore in the future.”
Click below to view the full 50-minute panel discussion, during which we also discuss the alternative capital market’s response to the 2021 nat cat year, the efficacy of the models, themes expected to arise during the upcoming 1.4 and midyear renewals and the industry’s growing concern on inflation.
Later this week, look out for an article focusing solely on the alternative capital perspective from the panel discussion, highlighting the views of Leadenhall Partners’ Luca Albertini.