Ben Madilynn
With Hurricane Helene expected to continue the recent run of US cat events that have largely been retained by insurers, the largest global reinsurers have given no sign that they will resume writing the lowest-attaching layers on XoL treaties.
There is a broad consensus that without major US cat loss events for reinsurers between now and the end of the year, modest softening of pricing will be seen in 2025, in line with that witnessed at mid-year 2024.
But in the lead-up to the Monte Carlo Rendez-Vous last month, some reinsurance brokers called on reinsurers to “lean in” by supporting the needs of cedants to buy more low-down cover after last year’s market-wide step-change which saw retentions march up.
Speaking to this publication, Aon’s CEO of Risk Capital Andy Marcell suggested that cedants are increasingly concerned about the value proposition of reinsurance and its effectiveness in protecting capital and earnings – especially in light of the continued volatility that’s been seen in 2024.
He said that most clients will buy more limit amid strong competition from traditional reinsurers and the cat bond market for high layers, but their desire – at least among national and regional insurers – will also be to find ways to protect earnings and balance sheets by attaching lower down.
“There’s going to be some pressure if reinsurers want to participate in the tail, in the scale they want. They’ll need to be offering some of that sideways coverage down below,” Marcell added.
Speaking at The Insurer’s pre-Monte Carlo briefing, Howden Group CEO David Howden warned the shift in cat loss burden from reinsurers to their clients may result in the sector losing relevance.
“Reinsurance is taking about 10 percent less of cat exposure in the last couple of years than it’s taken in the whole of the previous 25 years. Most of those secondary perils are 1728226205 on the balance sheets of insurance companies, not on the balance sheets of reinsurance companies,” he said.
However, in the numerous conversations and interviews conducted by this publication at the Rendez-Vous only one or two reinsurers expressed a real interest in dropping below the higher level of attachment for first layers on cat programs set last year.
There was also a reluctance to write sideways protection in the form of aggregates or similar structures – at least not at the current pricing or form.
Instead, the overwhelming consensus among reinsurers was that there will be no concession on retentions, even though most expect pricing to modestly soften in line with the decreases seen at mid-year 2024.
As we report later in this issue, Marcus Winter, president and CEO of Munich Re US, said that the reinsurer will not consider lowering retentions or offering buydown layers.
“The modeling uncertainty is too high in those ranges. The perils that affect those layers – like hail, frost and snow – are not very well modeled.
“When you look at the loss experience of the insurance companies, they don’t buy the lower layers for volatility management; they buy it more for earnings protection, and reinsurance is not a good tool for that,” he argued.
“Real” retentions down if all else equal
Scor CEO Thierry Léger made the case that the last year of positive returns for reinsurers, came off the back of multiple years of losses in a current risk landscape that does not allow room for meaningful price reductions.
He also suggested that, with the combined impacts of climate change and inflation, even leaving retentions as they are would in fact amount to a cut in real terms because of increased exposures.
“Technically we are already reducing the retentions just by keeping them the same,” the executive argued.
A senior reinsurance underwriting source questioned the likely success of brokers’ attempts to pressure reinsurers to attach lower in order to get favorable access to placements in the sought-after higher layers.
This, they suggested, is because buyers would prefer to have higher rated reinsurers – typically the global players – covering major cat tail risk, and would not look to sign them down on those higher layers.
Price adequacy key
Despite the argument of some reinsurers that the sector’s role is to provide protection for balance sheets rather than earnings protection against cat risk, most questioned by this publication conceded that there is a right price to cover frequency risk.
To pay that price, however, insurers will have to achieve rate adequacy on the underlying business, effectively passing on the cost of reinsurance to the insured.
Munich Re management board member Stefan Golling said that reinsurance continues to offer the best solution to manage non-peak perils. However, he said the insurance market must be adequate to begin with.
“If you know that some events occur almost every year, then you also need to focus on better risk prevention, you need to focus on exposure management, and maybe most importantly, you need to ensure that the original rates in the market are adequate.
“If original rates in the market are insufficient and the business is loss-making for our clients, before buying reinsurance, you will never be able to turn it around by buying more reinsurance, by buying more frequency covers, or by lowering down the retention,” he concluded.
Scor P&C CEO Jean-Paul Conoscente also subscribed to the view, even as he acknowledged the pressure coming from brokers and clients to lower retentions.
“I think the issue is really the adequate pricing of those risks, and because they’re not adequately priced, it is creating the issue for the insurers that have a bigger retention. They want to pass on the problem to somebody else.
“But I think that what we need to do as an industry is to fix the problem and charge the adequate price for the product,” said the executive.
He said that Scor would put up “a lot of resistance” to lowering retentions and supporting retention protections, or would seek pricing that insurers would likely view as uneconomical.
“It’s at the front end, that’s the problem… the insurance companies are not charging enough – it’s not hurricane, but it’s tornado, flood and hail,” said Conoscente.
The executive said there has not been a systematic drive to push up rates for tornado hail, which has been the driving force behind heavy US cat loss years even in the absence of a major industry hurricane loss.
Strong cat appetite
Overall, the reinsurance market’s appetite for cat risk remains strong – at least away from frequency losses. It is an area where most players in the sector have been looking to grow, even as they are now becoming increasingly cautious on US casualty.
Indeed, there has been a 180 degree shift in appetite from just two years ago, when reinsurers were showing strong appetite to grow in casualty, while retrenching from cat.
In its pre-Monte Carlo briefing, Guy Carpenter said that global demand for cat limit was up 10 percent so far this year, against dedicated reinsurance capital that is projected to increase 9 percent to $620bn this year.
David Duffy, the intermediary’s president for global clients, said the property market next year will continue to be guided by the trends seen so far in 2024, with a “more orderly trading environment” after the historic reset in pricing, program retentions and coverage seen in 2023.
Guy Carpenter chairman David Priebe said that risk appetite has continued to improve, albeit with underwriting discipline remaining in place at reinsurers.
“At mid-year, the reinsurance market transitioned into a rhythm where appetite was meeting demand in a dynamic trading environment,” he commented.
Meanwhile, Aon Reinsurance Solutions head of property Tracy Hatlestad told this publication that the property cat market is shaping up to be competitive for reinsurers.
“We’re seeing conditions where rates can soften while still allowing reinsurers to hit their target returns on equity. This suggests a healthy market for both sides,” she suggested.
The move by reinsurers to up retentions has had tangible positive impacts on their financial performance.
In a recent report S&P Global said that, based on 2024 cat budgets, it expects cat business to add 3 percentage points to the returns on equity of global reinsurers this year, in part because of the lower share of losses they are taking after pushing up retentions.
