Quite a symbol. It was under a blazing sun that global reinsurance met, from September 10 to 14, in Monte-Carlo, with its insurance clients to discuss prices, reinsurance capacities and risks.
After two years of absence from Monaco due to the pandemic, these “64th September Meetings” therefore mark the great return of the main round of tariff negotiations before the renewal of reinsurance contracts next January for the year 2023. These contracts allow insurers to remove part of their risks from their balance sheets, in return for a retrocession of commissions, and to reduce their capital requirements accordingly.
Accumulation of risk and inflation
It is traditional for reinsurers to draw up a picture of the worst each year in order to pass rate increases, of the order of 3% to 5% per year. But this year, it’s the worst of the worst. “I have never seen such an accumulation of risks at the same time”, acknowledges Thierry Léger, head of underwriting at Swiss Re.
The health crisis had already created a shock and failed reinsurers’ risk models. Bad luck, indeed, the health crisis has simultaneously weighed down the two branches of reinsurance, life and damage (non-life). The reality is that risks are becoming increasingly interdependent and increasingly global.
Added to geopolitical tensions and the increasingly obvious consequences of climate change are new factors of financial imbalances, with galloping inflation, a sudden rise in interest rates and strong instability in the financial markets, not to mention the fall in the euro for European reinsurers.
However, the demand for reinsurance is there, it even continues to grow in the face of a constantly increasing frequency and intensity of claims.
It is still necessary that the reinsurers have the financial backs strong enough to respond to it. Nothing is less sure. According to Munich Re’s estimates, reinsurance capital (capacities) should even decline this year for the first time since 2018 to 435 billion dollars in 2022 against 475 billion in 2021 (not including alternative reinsurance, transferred to the markets via cat bonds and estimated at around 100 billion dollars). Laurent Rousseau, CEO of SCOR, even mentions a “period of scarcity of capital” after a period “abundance”.
In fact, the sharp fall in the markets has melted the financial reserves of reinsurers, reducing their capacity to reinsure accordingly, and the rise in rates increases the requirements for return on capital employed (but also strengthens the solvency of both reinsurers and insurers) .
“The negotiations (with the insurers, editor’s note) will essentially focus on three points. One, the prices of course and it is not obvious that a 10% increase is sufficient. Two, it will be necessary to restructure the programs, ie to review the level of risk retention of the insurance company. Finally, three, there will be a lot of talk about the level of risk diversification with the same client”, entrusts us, on the sidelines of a conference, with a major local reinsurer. Clearly, insurers will not only be able to insure their risks less with reinsurers, but they will also have to pay more to do so. In the corridors of hotels, there is talk of price increases “double digit “, but the increases can be more or less strong depending on the risks.
The leaders intend to gain market share
Certain major risks will thus become increasingly difficult to “reinsure”, such as natural disasters or certain construction-related insurance. Some reinsurers, such as SCOR, have already announced that they will no longer take damage reinsurance in Florida. In 2021, natural disasters generated $270 billion in “economic” losses, of which only 40% are covered by reinsurance, according to the Signa study by Swiss Re.
However, over the past five years, according to the rating agency Standard & Poor’s, the reinsurance sector has generated losses on underwriting, with an average combined ratio (claims to premiums) of 102.3%, partly due high losses due to natural disasters. “Our industry is under pressure”, summarizes Torsten Jeworrek, member of the management board of Munich Re, in charge of reinsurance.
But the biggest players in the market, such as Munich Re or Swiss Re, have every intention of seizing this opportunity for price increases to consolidate their positions, or even increase their market share, particularly in natural disasters. “We do not intend to reduce our capacity during the next January renewals”, stressed Torsten Jeworrek.
Not at any price, of course. “To meet demand, we need to improve our underwriting margins to better reflect the risks and claims cost drift,” specifies Thierry Léger at Swiss Re, which also intends to pursue its growth strategy, including in the natural catastrophe market.
The rating agency Standard & Poor’s has clearly identified in a sector study the fragmentation of the market between those who increase their capacities and those who will reduce them. Munich Re and Swiss Re, number one and two in the sector, are clearly in the first category. The French SCOR is rather in the second category.