Maintaining discipline and momentum – at Baden-Baden and beyond

Liberty Mutual Re’s Chantal Rodriguez, Dominique Laure and Hans van Oort discuss the need for a sustained focus on underwriting discipline.

2023 marked a significant shift for the reinsurance market. After several years of above-average loss experience and below-average returns, reinsurers took the required actions to reposition themselves as resilient industry leaders, adapting strategies for long-term sustainability and returning to their core role of providing capital protection. As one of the outcomes, insurers now often carry a larger part of the ‘smaller’ nat cat losses, whereas reinsurers have shifted towards the higher end of the tail risks.

Beyond one-time measures

Many of the external factors which precipitated the reinsurance market shift in 2023 have yet to disappear or reverse. While reinsurers are now in a better position to deal with these trends and have shown themselves to be increasingly adept at adjusting to a changing risk landscape, it is important to remain focused and disciplined.

Climate trends

Climate change remains at the forefront of today’s evolving risk landscape and the industry needs to continue to advance its capability to analyse this risk. We need to stay focused on exposure management and rigorous portfolio stress-testing, while adequately reflecting climate and volatility trends in pricing and terms and conditions.

Several events this year reminded us to expect the unexpected, with a series of extreme weather events in Europe, including floods, hails and droughts. Earlier this year, for example, we saw heavy floods in Slovenia, and Italy’s worst hailstorm in decades.

The term ‘secondary’ does not reflect the often devastating financial impact of these perils.

Geopolitical uncertainty

The heightened geopolitical uncertainties have also not subsided. Strike, riot and civil commotion risk is ever present and evolving in an age of social media, as highlighted by French riots.

In addition, we must not only grapple with the direct consequences of geopolitical tensions but also anticipate the far-reaching implications that they may have on macroeconomic conditions. We therefore need continued discipline to assess these risks through holistic approaches, taking a forward-looking view.

As is the case for climate, the social challenges which communities face today and tomorrow can only partially be explained by yesterday’s experiences.

Inflation and interest rate trends

While certain inflation trends at the macro level have moderated compared to a year ago – e.g. headline inflation – continued elevated loss trends, and the evolving dynamics between inflation and interest rates, remain pivotal risks that need our continued attention.

The discipline that the industry has built, focused on maintaining up-to-date exposure and valuation data, as well as conducting continual pricing assumption reviews, needs to be upheld. Analysis needs to remain meticulous, reflecting the significant variations in inflation trends across countries and the distinct underlying inflation drivers that impact various lines of business to varying degrees.

The current interest rate environment is, of course, also elevating the cost of capital, which will require sustained focus on rate momentum.

Casualty lines in focus

Against a backdrop of increasing natural catastrophe losses and the wars in Ukraine and Israel, the hardening of the reinsurance market was particularly pronounced for property catastrophe, political violence and war-exposed treaties during the last 1.1 renewal season.

While not entirely ‘new news’, the continued adverse developments on pre-pandemic years for casualty lines, coupled with uncertainties around forward-looking views on loss trends and emerging liability risks, such as PFAS, for example, hold these lines sharply in focus for the upcoming renewals.

Maintaining discipline going forward

As highlighted in these examples, we are operating in a fast-changing world with evolving risks and uncertainty. Therefore, as we look forward to the upcoming renewal season, it is important that momentum and discipline are maintained, and that risk is assessed on a forward-looking basis, with both insurers and reinsurers remaining focused on long-term sustainability.

The feeling is mutual – Liberty Mutual Re’s core role is to help our clients through this uncertainty. We are committed to working with clients to find common solutions to successfully navigate the ever-changing risk landscape.

Chantal Rodriguez is CUO of Liberty Mutual Re. Dominique Laure is head of Southern Europe and Hans van Oort is head of Northern Europe at Liberty Mutual Reinsurance.