Five Key Questions for the Post-Pandemic Reinsurance Market
Hurricane Ida has stirred up the ongoing challenge of catastrophe pricing.
September is a key point in the annual business planning process for reinsurers, and comes as Hurricane Ida’s dual strike to Louisiana and the northeast has shaken up what seemed to be a calming catastrophe reinsurance market.
Beyond this hurricane season, as the industry prepares to emerge into a post-pandemic working environment, there are multiple other fronts of uncertainty that carriers and brokers are grappling with heading in 2022.
Here we examine five key questions that reinsurance executives will be asking in the upcoming conference season:
How far do cat budgets need to be trimmed in light of repeated moderate-sized losses?
Ahead of Hurricane Ida, upwards pricing momentum in the catastrophe sector appeared to be stalling rapidly. While Winterstorm Uri and the European floods had certainly proven a costly start to the year, the distribution of claims was to some extent localised and confined to different segments of the market.
Even though Ida may also be a manageable earnings event from a fiscal point of view, it is more the gloomy reality that this will be the fourth of five above-average cat years in a row.
As risk modelling pioneer Karen Clark told sister title Inside P&C, the industry had not yet “internalised” the fact that the 1-in-5, -10 and -20 year return periods are now escalating in risk amidst climate change.
“We've focused for so long on the PML, but that's a quick death. The 20- and 10-years, that's a slow death,” she explained. “We used to think $20bn was a big loss and now it's like, well, we have it every five years.”
Where is the competitive edge to be found in setting ESG goals?
The topic of ESG is becoming far more powerful within the industry, although unlike climate change which cannot be ignored, there are broader divisions on ESG ambitions and goals.
Some, notably led by Berkshire Hathaway, seem to see little competitive advantage in setting goals or providing new laboursome disclosures - partly because they believe the underlying work is being done by other entities. But particularly for the European market, it is more likely that there will be a new minimum baseline of ESG compliance to be met in order to assuage investors.
For both European and US or global carriers, however, there will be the question of how far they need to go: weighing up the costs of carbon-zero strategies for example with the competitive advantage gained in going above and beyond these minimum levels.
Moreover, there is a risk the growing demand to cover ESG-friendly lines of business such as renewable energy will undermine pricing discipline and returns. For now, primary renewable market participants told sister title Insurance Insider that there is sufficient rising demand for (re)insurance cover for risk-takers to pick and choose their opportunities – but some feared that increased supply of cover would hamstring a pricing “reset”.
For now, the problems might seem relatively far away for this question to be parked as one with time on its side: many reinsurers have set a goal of eliminating coverage on oil and gas facilities by 2040. But if they have time to deal with clients, the image threat from activists or investors could loom quicker.
Amid gnashing of teeth over stalling pricing momentum in the broader post-Covid reinsurance sector, casualty business has been a brighter growth spot for reinsurers.
Will casualty insurers start keeping more of their better-priced risk?
Improved primary rates are flowing through to quota share carriers – although increased reinsurer demand has led to pressure on ceding commissions. But perhaps a bigger concern is whether improved fundamentals leads buyers to cut back quota share cessions.
But perhaps the biggest casualty-related concern is that of real and social inflation and how long the uptick will last, given the potential double whammy impact on mark-to-market investments and loss costs.
As inflation and supply chain disruptions are impacting everyday post-pandemic life, reinsurers do not have far to go to imagine how this could increase severity of jury awards and claims inflation.
Looking at one data point of the power behind potential lawsuits, funding for litigation finance providers in the US rose by 18% in the year to June 2020 to reach $11.3bn, data from Westfleet Advisors shows.
Have cyber carriers done enough to limit systemic exposure to a major catastrophe?
Spiralling ransomware claims have unleashed a hard market for cyber insurers.
As the cyber reinsurance sector, which takes around 40% of all risks originated by cyber carriers, is primarily quota share based, this has meant rising rates for reinsurers as well
But with the pandemic a fresh example of how systemic Black Swan loss events can drive huge aggregations of risk, the ultimate question for the cyber market is how far sub-limits and management of line sizes will go to control the spread of claims.
Indeed, during a virtual Monte Carlo season conference, Guy Carpenter commented that the risk of a major systemic cyber loss event “is beginning to feel more like an inevitability”.
Is the lid finally settling on Covid claims, or are long-tail losses set to emerge as a sting in the tail?
This final question is the one over which reinsurers arguably have the least control, as so much rests on the actions of courts hearing ongoing attempts from US corporates to secure business interruption payouts, or on future jury awards for possible malfeasance.
To date, Covid industry losses have settled towards the low end of expectations: with around $40bn to date reserved, against early estimates that the pandemic could produce up to $80bn or more in total claims activity.
Reinsurers have high levels of IBNR headroom in their Covid reserves, as the transfer to paid claims has been slow.
But the world has yet to fully emerge from the pandemic pause of the past 18 months. Many are still working from home, courts are still working through backlogs and the virus threat is still not under control.