Losses strain market despite rate hikesPosted On: Oct. 5, 2021 12:00 AM CST
Reinsurers recorded significant rate increases over the past two years, but large U.S. and European catastrophe losses this year and the prospect of higher liability losses as courts reopen after the COVID-19 pandemic may continue to drive rates higher.
New reinsurers entering the sector are not undercutting the market, but profit margins remain under pressure as losses mount, experts say.
While reinsurers are well-capitalized, some remain cautious as they deploy capacity, they say.
“The good news is that reinsurers generally performed pretty well in the first half of 2021, and capital has continued to build from what was already a pretty strong position; the bad news … is that nat cat loss activity has continued at a high level and that events early in the second half of the year are already threatening to derail full-year earnings,” said Mike Van Slooten, head of business intelligence for Aon PLC’s reinsurance solutions division in London.
Winter storm Uri, which hit Texas and other areas of the United States in February, caused more than $15 billion in losses and Hurricane Ida, which struck Louisiana in August and later led to flooding in the Northeastern U.S., caused more than $30 billion in losses, according to recent estimates.
The 22 reinsurers that Aon tracks had a 93.9% combined ratio in the first half of 2021, with natural catastrophe claims accounting for 5.1% of the total, the bulk of which related to the winter storm, Mr. Van Slooten said. He was speaking at a virtual Aon briefing that was held in lieu of Aon’s usual presentation at the Rendez-Vous de Septembre reinsurance meeting in Monte Carlo, Monaco, which was canceled for the second year in a row due to the pandemic.
Global reinsurance capital increased by $10 billion in the first half of the year, to $660 billion at the end of June, Mr. Van Slooten said.
The increased losses have led to capacity issues for some specialty property insurers in Florida and elsewhere along the Gulf Coast that are having problems securing reinsurance protection for layers of their programs with frequent claims, said Dan Miller, a partner at Minneapolis-based TigerRisk Partners LLC.
“They are starting to have real difficulties with the working layers of their programs, which have been hit multiple times over the last several years,” he said.
In addition, Uri was an unanticipated loss for reinsurers, he said. “It’s a secondary peril — it’s not hurricane or earthquake — and it’s not budgeted.”
Other pressures on the market include the European flooding in July, which was a significant loss for reinsurers that write international business, and some alternative capital in the insurance-linked securities market may be “trapped” while catastrophe losses are tallied, Mr. Miller said.
Insurance and reinsurance rates have increased in nearly all lines this year, said Keith Wolfe, president, U.S. P&C at Swiss Reinsurance Ltd. in New York.
However, the increased cost of labor and materials could push up loss costs for property reinsurers by 10%, which could lead to more pressure to increase rates, he said.
Reinsurers are focused on capturing the increase in the cost of materials in their rates, Mr. Miller said.
They are also closely looking at their exposures but may be more willing to deploy their available capacity, said Lara Mowery, Minneapolis-based global head of distribution for Guy Carpenter & Co. LLC.
According to Guy Carpenter research, the mid-year 2021 average rate on line for property reinsurance is 6% above the 2020 rate, and 2020 was 12% higher than 2019 (see chart).
Uncertainty around general financial market conditions in 2020 and the potential size of COVID-19 losses made reinsurers cautious, Ms. Mowery said.
But reported industry COVID-19 losses are a little under $45 billion — significantly lower than some original predictions of potentially a $100 billion loss, she said.
“You have a much greater level of engagement from reinsurers in terms of wanting to grow,” Ms. Mowery said.
New entrants are also seeking to grow. Over the past year, several new reinsurers have launched.
Vantage Group Holdings Ltd., a Bermuda-based insurer and reinsurer that launched last year, is concentrating its reinsurance business on property catastrophe reinsurance and specialty sectors such as marine, energy, aviation and satellite coverage, said Christopher McKeown, CEO for reinsurance ILS and innovation.
With uncertainty still surrounding the COVID-19 pandemic, old accident years still developing and continued significant catastrophes, opportunities remain for new reinsurers, he said.
“As a relative newcomer, we feel well positioned to look at the opportunities that are in the marketplace still today,” Mr. McKeown said.
On the property cat side, Vantage is interested in California wildfire risks, and is working with analytics experts to better understand the evolving risk, Mr. McKeown said.
“The market will decide what is the cost of goods for our business, but I do see a compelling reason to continue pressure on rates in some of the specialty lines. The losses in marine and aviation are continuing,” he said.
“We have not seen any evidence, through the mid-year renewals, of any behavior on the part of new entrants that was pushing pricing down,” said Ms. Mowery of Guy Carpenter.
On the casualty side, large increases in primary rates are making the market more attractive for reinsurers, Ms. Mowery said.
Pricing is up but there are still concerns for reinsurance underwriters, said Wilton, Connecticut-based Christopher Buse, chief underwriting officer, reinsurance, North America, at Axa XL, a unit of Axa SA.
Social inflation, the term used in the insurance sector for increased court judgments and settlements, paused during the pandemic due to the closure of courts, he said.
“I don’t see any reason why it won’t come back when the courts reopen,” Mr. Buse said. In addition, interest rates remain very low by historical standards, he said.
While Axa XL has significant capacity, the company is wary of writing business at a low margin, Mr. Buse said.
With courts reopening, the trend toward increased judgments and settlements will likely continue, said Mr. Wolfe of Swiss Re.
“The good news is that it’s an identified issue that most of the industry has figured out, so reserves in aggregate are probably accurate at this point. However, you are just going to see a quicker shift from case reserves to paid claims as we go forward in the next 18 months,” he said.
Casualty reinsurers are also under pressure to increase ceding commissions they pay to ceding insurers purchasing proportional reinsurance.
Ceding commissions are calculated as a percentage of premium and compensate the ceding insurer for business acquisition and operating costs.
Ceding commissions for U.S. casualty reinsurance are going up about 2 percentage points, often into the 30% to 32% range or higher, even though primary insurers are increasing rates for their own customers, Mr. Buse said.
In addition, ceding companies have the capacity to retain more risks, he said.
“They are saying, ‘If I don’t get pretty favorable economics, I’m going to keep it myself, and rates are up and I’m going to do fine,’” Mr. Buse said. “There’s slightly less demand and a lot more supply.”
Increased ceding commissions are likely not sustainable, Mr. Wolfe said.
“There are justifications for making it a little bit richer for the primary company when there are higher margins available for everybody, so that dynamic is not unusual. But it’s been premature to see those adjustments being made when there’s been such a rough run,” particularly in general liability and professional liability, he said.
Cyberattacks increase interest in reinsurance coverage
The rise in ransomware attacks over the past 18 months has increased demand for cyber liability reinsurance from primary underwriters, but reinsurers are wary of the higher exposure.
Cyber liability is the most challenged sector of the market in 2021, said Lara Mowery, Minneapolis-based global head of distribution for Guy Carpenter & Co. LLC.
“Reinsurers will achieve some level of benefit from all the work that the insurers have been doing around pricing and refinement of the way they address the product themselves,” she said.
In the second quarter of 2021, cyber liability pricing increased more than 50% compared with the same period last year, according to Marsh LLC’s most recent pricing survey, and increases have continued in the third quarter, Ms. Mowery said.
While cyber rates have increased significantly, ransomware claims have been rising, too, said Wilton, Connecticut-based Christopher Buse, chief underwriting officer, reinsurance, North America, at Axa XL, a unit of Axa SA.
The catastrophic risk of cyber liability is huge and while some reinsurance treaties have caps for cyber losses, coverage wordings have not changed, he said.
Reinsurers have long participated in cyber liability coverage for large commercial risks, but cyber coverage for small commercial policyholders has often not been transferred to the reinsurance market, said Keith Wolfe, president, U.S. P&C, at Swiss Reinsurance Ltd. in New York.
As ransomware attacks have risen, however, there is more demand for reinsurance coverage for small commercial cyber risks, he said.
“We are happy to grow with the market, but it’s not the case that we want to be overweight in that space,” Mr. Wolfe said.