There is a need for “significant” pricing improvements throughout the global property catastrophe market regardless of whether specific geographies have been hit with losses or not, according to Axis Re’s CEO Steve Arora.
The executive, who made the comments during the latest edition of the The Best Policy podcast, said despite discussions on pricing improvements and broader terms and conditions, one area that has not been talked about enough is the global catastrophe pool.
“We run global cat portfolios, we hedge our global cat portfolios [and] we engage with investors on global cat portfolios,” Arora said.
“That means that even if you haven’t sustained a loss in a particular area and a territory is arguably below technical price or rate inadequate, we need to make progress and correct situations in those areas as well because we participate in a global cat pool.”
Clients in both Japan and Florida once again faced price rises during their respective catastrophe reinsurance renewals earlier this year. Those increases were in response to the losses of recent years, and Arora said those markets will likely face rate pressure once again next year.
“There is a lot of work to do in the property cat space”
Japan and Florida, Arora said, are very specific situations, as the two geographies suffered repeated losses in recent years as well as significant loss creep. “They are likely going to need even more improvement as we go forward,” said Arora.
But he also said that the broader catastrophe market will need to see improvements because coverage for this exposure is part of a global pool.
“I really believe that’s the way that market functions,” the executive said.
“There needs to be significant improvement,” Arora said.
“If you look at actual results and also expected results, they’re both very poor and I think there’s a dilemma that the insurers face quite often around diversification of certain territories versus technical price of the rates that are being offered, and whether the rates are adequate of not,” said Arora.
Losses not the only pricing factor
More broadly, climate risk is on the rise and that must also be contemplated on pricing decisions, not only in the selection and make-up of reinsurers’ portfolios, but also in the pricing and calculation of expected losses, said Arora.
Terms and conditions also need attention, he said, while carriers must also be disciplined in what they are offering clients. “It’s not only about rates,” Arora said.
“Underwriting discipline and portfolio management are critical [and] you’ve got to focus on your return on capital,” he explained.
“I think the winners as we move forward will emphasise quality over quantity and will really focus on portfolio construction and balance, and drive changes, not only in rates but in structures and terms and conditions.”
Another symptom of the soft market has been the evolution of certain structures that have proven beneficial to clients, for example cascades and top and drops. Arora does not think solutions will now be withdrawn as the market hardens, and said tailoring client-specific solutions remains an important part of the industry.
“I don’t think we should now all move towards commoditised products and not try to tailor-make something for our clients if it’s something that they need. Many companies including ours have that capability and we should continue to utilise it,” he said. However, as Arora reiterated, “the market needs to correct”. “There is a lot of work to do in the property cat space. It will continue to remain the centrepiece of client portfolios and also of the broader reinsurance industry… I look forward to a more profitable [time],” Arora said.