An unprecedented convergence of macroeconomic trends and climate risk intensification means challenging times ahead for reinsurance buyers in North America, according to Marcus Winter, President and CEO, Munich Re US.
“This is the most dynamic market that many of us have seen and possibly the most dynamic market that people will see again in their professional lives,” he told Insider Engage, speaking from the reinsurer’s Princeton, NJ office.
“The shortage of capacity is much worse than we anticipated in Monte Carlo and it is clear that the shortage has increased. Meanwhile, the demand for nat cat capacity has kept growing; so the gap has widened. I thought it would be a difficult renewal - but not this difficult.”
Hurricane Ian, which blasted through Florida at the end of September, has added to existing reinsurance market volatility. Noting that the re/insurance industry is once again proving its worth in helping stricken communities rebuild, Winter lamented that the overall loss picture remains unclear weeks after the event.
Industry estimates for insured Hurricane Ian losses have varied wildly, from $20bn initially, up to $65bn.
“One thing is certain – it will be a huge loss for the US market. The industry relies on models; the property and auto values are known, yet the loss estimates have a factor two variation, four weeks after the event. The gap between the models and estimates is too wide and it’s a big lesson.”
Cat programme design changes
The shortage of capacity is much worse than we anticipated in Monte Carlo and it is clear that the shortage has increased

Losses from Hurricane Ian will add to the impetus for reinsurers to simplify reinsurance programs, Winter believes. Reinsurance program structures will change and not only in the immediate loss affected areas, but in more general terms.
“Carriers may ultimately retain more risk. We hear statements from insurers saying they have hundreds of millions in losses but their retention is small enough that they don’t see it in their annual results. This is not sustainable for the reinsurance industry and retentions likely will go up,” he warns.
In addition, the reinsurance market is now less willing to provide structures that have aggregate, drop down or cascading features. Multi-year arrangements or prepaid reinstatements may also be harder to access.
“All such elements that have been introduced into programs over the last years may, to a large extent, disappear. Straight occurrence towers are easier to place than programs that have such features,” Winter says. “So there likely will be more retention overall across all programs and on the catXL side there likely will be more straight, single occurrence covers.”
On the demand side, there is a greater appetite among insurers to buy more limit, Winter says: “Storm tracks are no longer simple trajectories, and reinsurance buyers are more aware that storms might not behave as traditional models predict. So, together with concerns about inflation, there is a greater incentive to buy more cat limit both on the proportional and non-proportional side," he believes.
Nationwide need for capacity
The need for insurance companies to adjust their cat capacity purchase to match inflationary trends and exposure growth is apparent across the country and not only in places where Ian struck.
“It’s not just Ian. We had an unusual track with Hurricane Ida ‘Acts I & 2’. Also windstorm Henry last year, which hit Bermuda and then Long Island. Fiona this year similarly had a multiple claims track. Storm exposed areas in the north-east that have not had a claim this year are at risk and so the property market in regions outside Florida will be affected,” Winter says.
Client demand for reinsurance to protect other lines of business is also increasing. When companies that struggle to get their cat programs placed they look to protect their solvency ratios and capital by placing more non-cat exposed lines of business – such as specialty – into proportional reinsurance programs.
“That overspill from the property to the casualty side is leading to more demand for reinsurance that we haven’t seen before,” Winter notes.
“Munich Re US provides capacity across almost all classes of business but we have very little appetite for non-proportional casualty and also very little for proportional personal lines property business.”
Munich Re US focuses strongly on the quality of the cedant. Winter stresses: “We want to understand the discipline of the underwriting and the claims operations and what are the distribution arrangements; what is the track record of the cedant? Have we been in partnership with them for a number of years and how do they react to market trends?” he explains.
“In these challenging times, there is a flight to quality for both reinsurers and their clients.”
Macroeconomic risks multiply
Macroeconomic factors to do with exchange rates and higher interest rates are growing concerns for reinsurers.
“A lot of capacity for US risks comes from European companies and investors that otherwise do their business in the Eurozone or the UK, so exchange rate fluctuations can be significant,” Winter says. “The high interest rates at the moment have no immediate impact on our insurance risks but they are an indication that the Federal Reserve expects inflation to remain high for a longer period of time.”
Inflation is the dominating concern, across all lines of business, according to Winter.
“Continuing lockdowns in parts of the world is still impacting supply chains and global trade hasn’t fully recovered. This feeds inflation and we expect that inflation will stay high well into 2023 and possibly beyond.”
The problem for property insurers is not to do with the consumer price index (CPI) – it is about the high cost of materials and labor. On the auto side it is labor, spare parts and used cars; meanwhile some casualty lines are impacted by medical cost inflation. The inflation rate in all of these areas can be much higher than the CPI, Winter explains.
Munich Re US spends a lot of time improving its understanding of the economic impact on claim trends at a granular level per line of business and per geography within the US, Winter adds.
Legal system abuse, also referred to as social inflation adds yet another dimension to the rising claim cost picture, Winter observed. He says that the size of awards produced by the US legal system has increased over recent years. The plaintiffs’ bar has significantly increased their efforts, in combination with available litigation funding and legal structures in Florida and elsewhere, incentivising lawyers to be more aggressive in insurance litigation, he says.
“Juries no longer simply want to solve a specific case but want to punish insurers for perceived wrongdoing in order to obtain visibility. In Florida, official statistics show that more than half of insurance claim payments go to lawyers and only a small part of the claim payment goes to the ultimate insureds. It’s a big problem in Florida, especially in relation to property, but across other States as well.”
Stresses to capacity
Against this background of changing risk profiles and worsening macroeconomic conditions, stresses are beginning to show in the risk transfer value chain from distribution, MGAs, MGUs, to insurers, reinsurers and capital markets. It could be due to inadequate capacity on the retro side feeding the chain.
“The core established, traditional insurance and reinsurance and even traditional retro companies are still there, but dislocation is happening outside this core block,” Winter says. “I expect that many insurance companies will be forced to revise their business plans because they can’t get the cat capacity they need.”
One route for additional, alternative capacity – insurance linked securities – seems to be closing as better rates on government bonds diminish the appeal of riskier assets like cat bonds among investors.
“The current price levels, along with cat bonds’ poor track record on the collateral side, means that ILS capacity will not be readily available for 2023,” Winter says. “Some companies are saying that if they cannot place their cat programs at 1/1 then they will tap into the capital market in Q1: I think that is a very high risk strategy. But if they don’t get the cat bonds placed in Q1, what will they do then?”
Navigating stormy seas
It’s clear that reinsurance managers across the US planning for the forthcoming 2023 renewal have their work cut out for them. Demand for reinsurance is going up significantly across all lines of business, particularly the property side. But many insurance companies will struggle to get their reinsurance programs placed because supply from reinsurance companies, retro and ILS markets is limited, Winter concludes.
So what is Munich Re’s strategy?
“Our position is that we do not need to reduce our capacity for next year but we can’t solve the big increase in demand,” he tells Insider Engage. “So we will focus on our existing core partnerships and keep providing them with capacity. These core partnerships are all with high quality insurance companies. Together with those companies we will navigate the many challenges facing the market.”