Let’s talk… rate
As with any discussion of market conditions after a series of catastrophes, we are mindful of the immense suffering, including loss of life, these events brought about. Our claims and risk engineering teams are working tirelessly to help people, companies and communities recover from these tragic events; we’ll profile these efforts in more detail in the coming weeks.
The purpose of this article is to offer an overview of the market dynamics currently roiling the re/insurance industry following the 2017 catastrophe loss activity. The topics are primarily rooted in the fundamentals of the global re/insurance market and the role of capital markets in our business.
The implications of these recent disasters on the re/insurance industry are starting to come into focus. Here’s our take.
Our raw material
The dynamic is familiar: when there is a change in the supply of an essential raw material, existing market conditions can be upset, and all customers usually are affected.
New Zealanders, for example, are currently facing a shortage of potatoes after heavy rains destroyed around 30 percent of the country’s crops. Grocers are already warning consumers of pending crisp/chip shortages and price shocks. The mind, and the stomach, shudders.
Re/insurance is no different. In our industry, our most significant raw material is providing underwriting capacity in a global marketplace. And when the costs associated with providing that capacity change, clients around the world can expect to be affected, regardless of whether or not they were directly impacted by something such as three category 4-5 hurricanes hitting the Caribbean and the U.S. in quick succession plus a series of devastating earthquakes in Mexico. And not to mention numerous other events around the globe including typhoons, brush fires and tornado/hail catastrophes.
Our catastrophe models anticipate extreme events – even though the variability of their estimation of a specific event can be great . The recent hurricanes and earthquake saw our own protection, including reinsurance and cat bonds, largely perform as expected and we are today in a strong position, solving our clients’ risk needs.
Even so, Hurricanes Harvey, Irma and Maria (HIM) and the Mexican earthquake – along with Cyclone Debbie in Australia, Typhoon Hato in southeast Asia and Hurricane Ophelia in Ireland not to mention other catastophe and large loss events in 2017 – have taken a toll on the industry. Although the damages are still being tallied, insured losses for the industry from HIM, for instance, are estimated between USD 75-100 billion.
Let’s add it up
The insured losses we and other re/insurers are and will be paying out are only part of the story. The broader context includes:
A market that has been underpriced for several years, especially in short-tail lines. Today, margins are thin.
Reinsurance costs are increasingly driven by alternative capital; these investors will support the market post-event but are also demanding higher returns going forward.
In the wake of these events, the returns shareholders expect from catastrophe-exposed re/insurers will only go up.
Conversations with brokers and clients at renewal are likely to have a different dynamic compared with last year.
Many providers of retrocessional coverage – the reinsurance of reinsurance – will be paying out on losses incurred in the recent catastrophes. And as these losses eat into their capital, and supply becomes tighter, rates for that coverage will likely rise. And those rate increases, naturally, start to affect the capital of reinsurers. And so on. This means an insurance buyer with no exposure to the recent catastrophes will likely see the effect of that pinch in capital further up the chain.
From our perspective, we believe change in the market is warranted. To paraphrase our CEO Mike McGavick from our recent earnings announcement, we believe we'll see improving rate. The risk world is simply different today than it was prior to these events. The cost of carrying risk has changed. As a result, it is totally reasonable to expect rate to be more realistic and more sustainable. Change has to be appropriate to each company's profile and each client's risk. We will not adopt a one size fits all approach to our discussions, each client’s risk and trading relationship will be factored in to the renewal. But we are certain that change is warranted, and it will likely evolve positively over time.
The preceding should not be construed, however, to suggest that renewal discussions will focus exclusively on rate. We have deep expertise in our underwriting, claims, pricing and analytics teams, and our objective, as always, is to devise cost-effective solutions for managing and mitigating risks while delivering the returns our shareholders and we need to maintain a sustainable insurance market in a world where more unusual and extreme weather events are likely.
In this evolving market, that means our experts will be working closely with clients and brokers to tailor cost-effective program structures – including creative approaches to retentions, sub-limits and exclusions – to ensure that our policies adequately cover the risk.
Finally, I want to emphasize that in the wake of these challenging events, XL Catlin’s commitment to its clients is unwavering. We have already paid out hundreds of millions in claims to help companies affected by HIM get back in business, and we remain in a strong position to solve the risk needs of clients around the world.