Hard market drivers point to sustained reinsurance rate increases

The reinsurance market has “a long way to go” before it shifts from being in recovery to growth mode as carriers tackle increasing losses, worries over prior year reserves and the Covid-19 fallout, Axa XL’s reinsurance CEO Charles Cooper told The ReInsurer.

Bermuda-based Cooper said that only when reinsurers “transition from being wary to being aggressive” will the current hardening pressures ease.

“It’s when people are looking to get into growth mode versus recovery mode. I think we have a long way to go [before that happens],” he said.

As Cooper explained, there are several reasons why the harder rate environment will prevail for some time yet.

“We’re coming from a very, very low starting point,” the executive explained.

“If you think about it, it’s really been about 10 years of compounded rate decreases. If you look at where we’re getting paid right now versus 10 years ago it’s substantially lower, so it will take some time to get back up to the rate level we were at 10 years ago.”

Further fuelling the rate momentum, Cooper explained, is that over the last 10 years, exposures and loss costs have increased.

“Not only have we been cutting the price, but the exposures have been going up. Social inflation and the loss trends and the evolving nature of the underlying hazard have all increased the exposure that reinsurers assume,” the executive stated.

Even with some of the increases imposed so far, Cooper said further improvements are needed. This is most notable in the casualty space where, while there has been a lot of rate improvement in the last 18 months, those increases have been offset by heightened loss trends.

“We haven’t really seen a lot of margin expansion in the casualty treaty reinsurance market, despite some significant underlying rate improvement,” he said.

“We are seeing the need for rate in almost every class of reinsurance business,” Cooper stated.

In the specialty reinsurance classes “there have been an extraordinary number of large losses recently”, said the executive. 

Downstream energy losses such as the Philadelphia Energy Solutions and Texas Petroleum Chemical refinery blasts, various sizable aviation claims and potential energy losses arising from Hurricane Laura will mean more of a recovery in pricing within the specialty reinsurance market.

Cooper said loss affected specialty classes have already seen their reinsurance costs rise, and treaties that were in a deficit position have “certainly paid more”.

“[The increases were] quite broad, and I expect that to continue,” Cooper said.

At the same, Cooper said the “high degree of uncertainty” among (re)insurers with regards to the extent of Covid-19 related losses as well the adequacy of loss reserves for the past five or six accident years will also mean carriers remain on the front foot when it comes to pricing.

The low interest rate environment that is expected to remain for the foreseeable future will also support insurers and reinsurers drive to improve pricing, Cooper said.