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TransRe: Reinsurers are Looking to Reduce Property Cat Exposures

Paul McKeon headshot cropped.jpg

Property is dominating discussions among insurers and reinsurers, even spilling into casualty talks, said Paul McKeon, President of Regional Business Units for TransRe. He recently spoke with Insider Engage Managing Editor Meg Green about challenges in the marketplace. To view the video interview, click below, or read on to see an edited transcript of the conversation.

Meg Green: Property insurers have already started discussions with their clients ahead of the busy January 1 renewal season. Joining us now to discuss what's top of mind is Paul McKeon, President of Regional Business Units for TransRe. Paul, thanks for speaking with us today.

Paul McKeon: Hey, thanks Meg, great to be with you.

MG: So could you give us an overview of what you're hearing about January one renewals?

PM: Certainly. By all means, conference season is in full swing across the globe, albeit at reduced attendance in many places. But certainly, property is dominating the conversations. We're a full-service reinsurer, but even casualty meetings and non-property meetings end up being discussions about property - you just can't seem to get away from the topic right now, naturally.

So, I would just say there's a universal degree of frustration about property loss ratios, and not just cat and those types of losses, but the attritional for property has been a real source of frustration for folks, even after lots of rate has been thrown at that product and [even with] improved retentions and ITV [ insurance-to-value] and the like, people just can't seem to move that number downwards.

So that's one item. But the headline certainly is catastrophe. 2021, it seems like a broken record, but it's the fifth straight year of elevated cat activity, looking like another $100 billion loss, which is just unfathomable, or at least it was prior to five years ago. And certainly, property cat underwriters are not covering their cost of capital. So there's just too many issues to contend with right now.

But specific to your question about January 1 renewals, I think it feels different to me, and what I'm hearing is different, in that reinsurance markets aren't talking about rate, they're not talking about what rate they will need in order to maintain aggregate. It's just the opposite in fact. Regardless of rate, reinsurers are talking about reducing aggregate. That's very different from what we were hearing in the past. And it's particularly acute with lower return period structures and aggregate structures and the like.

The property purchase is an important one, notwithstanding what's been going on in the last five years. We as a market are going to look at each client, and each peril, in each region differently. But unless there's material movement in rate, and that is underscore material, we're going to be significantly smaller in cat.

MG: Could you explore a bit about what's driving that shift in the industry?

PM: Well, I think it's a couple of issues. And I think we need to highlight the fact that some of it might be just pure exhaustion: a fifth year of inadequate returns, and the common refrain is ‘it's just an earnings event, it's not a balance sheet event.’ And that's kind of worn thin at this point, and there's no longer that distinction: I think earnings events over and over again, eventually become frustrated capital providers. And I think they're questioning [whether] people know what they're doing in property cat. Some of the more classic wind events are somewhat classic: there's nothing particularly unique about them, but it's all these secondary perils, and it's wildfire and severe convective storm continues to rear its head and flooding events just everywhere. It’s the secondary perils that obviously is getting more of the attention right now.

Beyond just that sheer exhaustion and frustration there, is that many other products in the product set of most markets are now reaching a certain level whereby they don't necessarily have to rely on cat to achieve their return thresholds. The capital is being driven away from cat in many places, in many cases, and driven towards other casualty and other lines of business.

MG: That sounds like a dramatic shift. What do you see in terms of new capital coming into the market?

PM: You know, it's interesting. There have been – not necessarily the class of 20 or class of 21 per se that's come in. There have been new capital entrants in the last few years, and I don't necessarily think it's directly focused on taking advantage of the property market or the property cat market in particular, because I still think the jury is not convinced that property by and large is a reasonable bet at this point in time. And I touched on some of these issues before, but there are just a multitude of factors that all underwriters are wrestling with, including, obviously, increased frequency, climate change, which is getting all the press these days, but a lot of these elements feel like real climate change issues with respect to warmer temperatures and flash floods and the rest. But on top of that, you've got commodity prices, and significant demand surge. In fact, AIR suggests that there's a 30% increase in building costs as a result of staffing shortages, and the significant bottlenecks that exist in the system. There’s just many issues for underwriters to contend with and I think that's causing people to be somewhat concerned about where we stand right now in the property market.

You also note that over the last 15 years property cat XOL [excess of loss] rates are two-thirds of what they were at that point in time, and so, since 2017, between 2017 and 2021, rates are only up 6% globally. There's nothing to suggest this is the time to back up the truck and start writing property cat. So it's going to be a really interesting January 1 renewal season.

MG: Why do you think the rates haven't grown more?

PM: I do think there's a ton of capacity still. And it seems that every time one market pulls out, there's another market that comes up, and I do think ILS capacity is at an all time high. And so, I still think there will be capacity for those buyers that want to buy that product. I think for a classic balance sheet, all peril covers, I think those are going to be more and more challenged types of coverage to get done. So it just depends on what buyers are really looking for in terms of the coverage they're looking for,

MG: What other challenges are on your mind?

PM: Beyond secondary perils, and turning our business back to profitability, I think some of the things that I'm thinking about are retention of talent and attracting talent. I think that is always front of mind, because our business is relationships, and good smart underwriters, and frankly, it's the first time in a long time that we've had to focus on hiring talent. Talent was never an issue for our company. And I think right now, it's an issue that we're supremely focused on. And it's not just because of the new back-to-work schedules, but I do think COVID and changing work environments led a lot of people to rethink what they're doing and how they're doing it.

In addition to that, in respect of new capital, there has been an influx of fronting companies, I would call them - companies that take very little risk, and there's upwards of a dozen: generally speaking, they're A- rated, and some are built better than others. But we have seen this story before, and it doesn't usually end well for risk takers. So, I would say buyer beware, for those that are either looking to join those companies, or looking to write business through those companies. That's something that's certainly on our mind as well.

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