How do you think the split of cat losses among insurers and reinsurers will influence APCIA conversations?
There’s a healthy balance around insurance carriers having a degree of retention, and I think if you look over the past 10 years prior to the pandemic when we had around 2% inflation, we didn’t really make any adjustments to retentions.
So we did need to make some reasonable level of correction, but the amount of loss that the primary carriers have borne in 2023 has certainly created outsized pain.
Again, we understand why retentions have moved up, but the balance I think has shifted too far and we’re spending a lot of time with reinsurers talking about how we can help provide coverage and protection for frequency of moderate-sized cat losses.
In isolation, any one of those may not be the type of volatility that reinsurers like to cover, but at the level they have occurred this year, it certainly becomes the volatility that we believe reinsurers need to be responding to in order to add value to insurers.
How are reinsurers responding on that call to provide sideways cover?
The discussion has evolved from Monte Carlo through CIAB and has been positive, with most reinsurers recognising that that is an area where they can provide value.
And while the amount of loss activity in 2023 has been extremely painful for cedants, it does give us additional data to help inform quantitative decisions around where we can help both sides come to landing point.
It’s incumbent upon all parties in that conversation to think about what’s a sustainable level for these structures over time. We want to avoid the deterioration of capital that occurred on deals which were, in hindsight, perhaps structured and priced too aggressively.
How are cedants juggling new demand with higher rates?
At the moment, the direction of travel that we see is a demand increase of roughly 5% around global property cat loss limit, which is more or less keeping up with inflation. Additional demand on the top of treaties will be well served. We’re seeing significant capital come into the cat bond market, which is targeting the upper or middle upper ends of program. So we think the supply will be there to meet or exceed the demand.
It feels like there’s more divergence in casualty appetite among reinsurers than in cat – is that your perception?
I would completely agree and we look at that as a function of the experience that reinsurers had from the 2014/15 through 2019 years. Those who leaned in heavily to casualty are feeling a bit more pain of that development, whereas those who were more conservative at the time see that this is still a very attractive environment for casualty risk.
We certainly need to monitor and be realistic about casualty. But I think those at risk of missing out are the ones that overreact to emergence from the prior years, swing too far and miss another couple of good years that are available.
This casualty segment has changed, with reduced limits, increased rates – the risk profile is different today and it’s further supported by a more robust risk-free interest rate.
What other themes are you expecting to come up in APCIA conversations?
I would say, as we approach year end, one theme is around the need for reinsurers to continue the good communication and a willingness to give feedback which we know we struggled with last fall. And right now it feels like that [ongoing communication] will be the case.
The second is to think about the big picture. Reinsurers need to show value and be partners to these insurance carriers, to think about how we can expand and address a much bigger opportunity than arguing over a point of ceding commission here or there.
What would you say to reinsurers who are emphasising that one good year is not enough to offset prior their losses?
I think a healthier reinsurance market is important for insurers. But reinsurers need to continue to focus on the distinction between individual clients and recognise that it is also true that these insurers have suffered significant loss as well.
