Climate, war and inflation push reinsurers to action

Life has not been easy for reinsurers in recent years. Natural disaster claims and pandemic-related losses wiped out much of their profits.

But the latest set of global issues – the war in Ukraine, runaway inflation and the ever-increasing risks of climate change – have spurred them into action. In some regions, they increase the price of coverage, in others they completely reduce.

“What was it like. . . incremental change looks more and more like instinctive change,” said Stephen Catlin, an industry veteran and chief executive of insurer Convex.

Reinsurers play a vital role in global trade and economy, providing insurance to insurers to reduce the risk of a large loss wiping them out. This safety net against a range of financial risks – backed by $700 billion in capital – gives insurers the confidence to cover a much wider market.

Among the largest reinsurance groups are Europe’s Big Four, Munich Re, Swiss Re, Hannover Re and Scor, as well as Lloyd’s Market of London and Warren Buffett’s Berkshire Hathaway.

Swiss Re chief executive Christian Mumenthaler told the Financial Times that the “timid” increases in natural catastrophe reinsurance prices in recent years had now accelerated after three years of rising claims costs.

For contracts renewed in July, Swiss Re implemented a 12% increase in premiums across its P&C business, which includes natural disaster cover and other types of insurance. “It’s very big, because it’s [across] everything . . . I don’t remember such a climb,” Mumenthaler said.

Executives attribute the market tightening to robust demand – fueled by inflation which is driving up the value of what is insured – and a drop in supply after pressure from investors caused some reinsurers to pull out, in particular the natural disaster business.

Institutional investors are also less willing to take on reinsurance risk through insurance-linked securities, they say, partly after losses on these types of investments and partly because bond yields have risen.

“We think the [reinsurance] market is turning, we are now seeing momentum,” said Aki Hussain, managing director of Hiscox, one of the largest insurers in the London market, which has its own reinsurance unit.

“Over the past five years [reinsurance] prices have lagged and now, for the first time, they are rising faster than insurance.

Another factor driving up prices today is the large claims resulting from Russia’s invasion of Ukraine. Insurers in areas such as aviation now expect billions of dollars in claims from the owners of the hundreds of war-stranded planes.

Claims and expenses as a percentage of premiums

Reinsurers who reduce their capacity can create what is called a “hard market”, where demand greatly exceeds supply and prices soar.

Some executives say these conditions are now present, citing the recent exits of some reinsurers from the natural catastrophe sector. The big losses related to Ukraine could persuade more providers to reduce their exposure.

After years of volatility and rising claims, New York-listed reinsurer Axis Capital said in June it was pulling out of the property reinsurance business, which includes natural catastrophe coverage. Chief executive Albert Benchimol said “the significant and growing effects of climate change and the challenges facing the catastrophe reinsurance market” had forced his hand.

A month earlier, France’s Scor said it was on track to reduce its exposure to natural disasters by 15%, while Axa said its reinsurance unit had reduced its exposure to natural disasters by 40%. at the beginning of the year.

Executives and brokers attribute some of these measures to investor pressure on reinsurers. “Investors said we don’t want more catastrophe risk,” said Rod Fox, co-founder of reinsurance broker TigerRisk. “It sank.”

Many see 2022 as a turning point. In recent years, an “abundance” of catastrophe reinsurance has exceeded demand and kept rates low, said Lara Mowery, global head of distribution at reinsurance broker Guy Carpenter.

“Over the past five years, high catastrophic losses have led to poor underwriting results, which have now contributed to a reduction in the supply of reinsurance capacity,” she added. This, coupled with increased demand, has made it easier for reinsurers to drive up prices, Mowery said.

A sign that things are changing came in June, a busy time for Florida market-focused catastrophe reinsurance policy renewals. Lack of capacity has been one of the factors driving up the cost of reinsurance by an average of 20-30%, according to TigerRisk.

Broker Aon said in a report on policy renewals in June and July that years of “above-average” natural disaster claims had reduced reinsurers’ appetite for taking catastrophe risk.

“For the first time since the American hurricanes of 2004 and 2005, the capacity to protect against natural disasters has contracted significantly, and some reinsurers would not underwrite certain risks. . . at all costs,” he said.

Those seeking reinsurance in specialist areas such as the air force and navy also faced “the toughest renewal in a generation, reflecting the potential for significant casualties from the Russia-Ukraine conflict”, Aon added.

Joe Monaghan, a senior executive in its reinsurance brokerage division, said the reinsurance industry “could quickly approach a real hard market”.

Line chart of stock prices (% change) showing pandemic recovery weakening for European reinsurers

The next key renewal season on January 1 – known as 1/1 – is seen as a litmus test of the market. A rush to reprice insurance and reinsurance for risks such as war and political violence is already underway, several industry executives have said.

As some reinsurers step back, others may seek to fill the void. At a recent investor event, Munich Re said it was ready to take advantage of rising prices by writing more reinsurance business, according to a person familiar with the talks.

Yet much of the industry predicts that reinsurance coverage will become more expensive and harder to find.

As the year progresses, primary insurers “are going to realize that they’re going to have to take on more risk, buy less reinsurance, and it’s going to cost a lot more,” Catlin said. “The [primary] the market will view life very differently at 1/1 than it does today.

The natural conclusion would be that the cost of insurance, which has already been rising for years in some markets, must rise further.

Jerome Haegeli, chief group economist at Swiss Re’s research arm, agreed that higher reinsurance prices should trickle down: “I expect a ripple effect.

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