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The hardening markets notwithstanding, the capital markets have yet to be convinced about the sustainability of the reinsurance market, said Franz-Josef Hahn, chief executive of Peak Re.
“There’s still a huge uncertainty in the industry and the capital markets whether the industry can really continuously bring returns that are commensurate with the cost of capital. In the last seven years, there were not many years where capital costs were met by the reinsurance industry,” Hahn told InsuranceAsia News, on the sidelines of the Singapore International Reinsurance Conference.
“The mid-year results of this year are a great encouragement, but they are only a drop on the hot stove and they don’t yet move the dial for the capital markets.”
To be sustainable as an industry, much more has to be done. “Whether the level of pricing is adequate, we will see in the future, but certainly, the capital markets are not yet convinced”, according to Hahn.
“We have capacity available for increasing our portfolio on a risk-adjusted basis.”
Franz-Josef Hahn, Peak Re
There’s not much new capital that has entered the industry, Hahn said. “There is an additional 10% capital in the market this year but it went into alternative capital structures like ILS.”
The capital markets have been receiving much better yield for the cover they provide, and this is fair,” he said.
While globally, including in Asia Pacific, the prices need to go further up to address the growing frequency and severity of cat risks as well as inflation risks, the rising risk of unmodelled perils remains a key issue for the industry to address, said Hahn.
“A one-time underwriting adjustment to this phenomenon is not going to resolve the issue,” he added.
“We are looking at floods, torrential rains, or cloudbursts. There is a progression of losses racked up by these events, which won´t reverse as it is impacted by global warming.”
While 2023 may not have had single large events like Hurricane Ian last year, Hahn noted that medium-sized losses are creeping up.
“We had two large earthquakes, a number of floods starting with the Auckland flood and then Cyclone Gabriel shortly thereafter; we had a lot of floods in Europe from the north down to the South. Italy was inundated three times this year. Spain had strong floods, southern France again”.
“I don’t know what the latest forecast for the year-end is, but in aggregation, it’s not a far cry from the previous years, specifically in flood losses,” he added.
The industry and governments need to think about how public-private partnerships can support better engineering of the cities and their risks and to protect urban centres against such floods, Hahn argued.
“How long can the reinsurance and insurance markets go on providing cover at affordable price? When does the situation kick in that reinsurers or the capital markets say that we don’t want to be in this any longer?”
“That would be a disaster, because in the end, insurance and reinsurance want to provide viable solutions for any kind of reasonable covers, and flood risk cover is a reasonable cover,” he said.
Governments, with the help of insurers, should work to mitigate the losses before it really hits the industry.
1.1 renewals
Hahn said that renewals have started earlier this year. “In some areas discussions are ongoing including allocation of capital,” he said.
“We have capacity available for increasing our portfolio on a risk-adjusted basis,” Hahn said.
Peak Re, which reported losses in the last financial year, has been treading cautiously in the recent renewals, scripting financial turnaround, with this year’s first-half results posting record profit and robust combined ratios, on the back of careful risk selection and portfolio diversification.
“We were facing a dire situation in the third quarter of last year because of mark-to-market corrections as well as Hurricane Ian, when net asset values temporarily contracted at a time when business had to be renewed.
“We took that as an opportunity to reengineer the entire book,” he said on the Hong Kong reinsurer’s turnaround strategy.
“On the property side, we have been cutting sideways covers mainly, and with a few exceptions, we are not carrying any aggregate covers anymore.”
“We have been making it very clear that we don’t want to give sideways covers or dropdowns or free reinstatements in the future. We have been navigating further up in the excess of loss tower of the main program to reduce our exposure from unmodelled perils,” he said.
“We have not been radical in changing, we have been working together with our clients,” said Hahn adding, “I’m very proud to say that we hardly lost any of our clients. Instead, we took our clients along and weren’t standoffish like was in many other cases,” he added.
In recent renewals, Scor has seen significant retention increases on Cat excess-of-loss (XL) programmes across Asia Pacific due to diminished reinsurer appetite for frequency/climate change exposed risks, said David Johnstone, general manager, Scor Re Asia Pacific, Australia and regional chief underwriting officer for Scor’s APAC Mature Region.
“We saw some reduction in capacity for key perils and strong pricing increases on these contracts as reinsurers repositioned their appetite with the aim to provide adequate returns in the face of constant weather event losses and a prolonged period of underperformance in the reinsurance sector,” he said.
However, Scor believes there is still a need for more pricing in those contracts, to account for further nat cat loss activity seen since prior renewals. Also, in focus will be contract wordings and ensuring adequate treaty retentions in line with exposure growth and inflation.
In Japan and other countries in the region, the reinsurer has a strong preference for nat cat exposures to be covered under cat treaties, rather than risk XLs.
“We note in our conversations with cedents that they understand more action is required to ensure we have a sustainable reinsurance industry for them to access in the long term,” Johnstone said.
“ We expect the insurance market to have increased needs in the coming renewals as they grapple with an increased frequency and severity of cat perils, along with the impact of inflation,” Johnstone said.
In recent renewals, Scor repositioned its traditional treaty capacity away from frequency-affected bottom layers.
Regarding the recent scale of capacity withdrawal in the global market for cat-affected programmes, Scor remains underweight compared to its peers in cat-exposed property.
“The rising tally of natural catastrophe losses for the year to date and the continued pressure on reinsurer’s balance sheets from climate-related perils have served to validate Scor’s approach to nat cat exposures,” Johnstone said.
“We see significant small to medium-sized cat activity, often with a secondary peril flavour, so flood losses, wildfire losses, and so on. We believe Scor is here to provide capital protection to our cedent partners rather than earnings protection,” he added.
Further hardening, caused by the ongoing cat activity in the region, is to come at January 1 renewals. It is to be seen in price and across terms and conditions, as the market looks to correct some of the loosening of policy terms seen during the previous five or so years, according to Johnstone.
“Early indications suggest the retro market will be able to engage earlier this year, compared to last. With that in mind we expect the 1/1/24 renewal to be more orderly compared to 1/1/23, but I stress this should not be misconstrued as an indication that the reinsurance treaty market is in any way softening, we expect ongoing discipline amongst our competitors.”
David Johnstone, Scor
Scor also believe that inflation remains an important factor to address, and throughout the region this remains a key factor within their pricing considerations.
There will be no large influx of new capacity into the market.
“Early indications suggest the retro market will be able to engage earlier this year, compared to last. With that in mind we expect the 1/1/24 renewal to be more orderly compared to 1/1/23, but I stress this should not be misconstrued as an indication that the reinsurance treaty market is in any way softening, we expect ongoing discipline amongst our competitors. ” he said.
While Scor does not anticipate its footprint expanding in a geographical sense, it anticipates growth in a number of product areas.
“We believe current market conditions create an increased demand for bespoke solvency transactions due to increased capital constraints following increased retentions, continued portfolio volatility, increased cost and reduced availability of capital within the market. With a strong team of experts within the region, we believe Scor to be well placed to address this demand,” Johnstone said.
Among regional opportunities Scor is targeting are specialty lines such as inherent defects insurance (IDI), engineering and marine, as well as across casualty lines and in areas such as credit and surety.
In terms of regional growth, the reinsurer will continue to strengthen its positions in India through renewal of its natural catastrophe exposed contracts, SME and personal lines and engineering and surety linked to infrastructure projects.
Japan also remains a key market for Scor within the APAC region. “We anticipate this continuing in the foreseeable future. In addition to the long-term treaty support we provide in the market, across many lines of business via traditional treaty and alterative solutions structures, we also continue to offer expertise from our single risk/facultative team. Scor will continue to focus on mitigation of fire exposures, while also continuing to work with its cedents on Japanese interests abroad risk considerations, two areas that have seen loss activity in recent years.
Gallagher Re’s head of APAC Mark Morley on risk sharing, capacity, structured solutions and APAC growth.
Commenting on the upcoming renewals, Mark Morley, managing director and head of Asia Pacific at Gallagher Re, told InsuranceAsia News: “Discussions around 1.1 renewals for 2024 are underway but at this stage it’s less around pricing and more around structural approach. At Monte Carlo there was a lot of talk about an ‘orderly’ renewal, but I prefer the term ‘predictable’ – so we can explain to our clients what they can expect in terms of reinsurer reaction. I have greater confidence this year than last year we will see that.”
Singapore-based Morley added: “Carriers understand the economic environment they are operating in. 1.1 is dominated by the emerging markets and our sense is that there is more than adequate capacity to deal with the demand. In the absence of any significant change in the demand / supply relationship, we don’t see a significant drive beyond a risk-adjusted approach. Where there have been losses, such as in Hong Kong and China, you can assume the market will readjust.”
“For emerging Asia, we’re focusing on some of the lessons learned from [the] January renewals, which picked up pace in 1.4 and 1.7, specifically around risk sharing between reinsurers and insurers and the lifting of attachment points. In EMEA and the US that’s around the volatility piece, but in parts of APAC, particularly emerging APAC, lifting attachment points could be an existential issue,” he continued. “While we can understand reinsurers rebalancing the risk with carriers, we are looking for a more nuanced approach. There are more purchases moving towards the capital piece rather than the earnings piece.”
“We have never had more talks with CFOs and CEOs, and buying in emerging markets is now at least as sophisticated as in the more traditional markets.”
Mark Morley, Gallagher Re
Explaining the broker’s approach, Morley said: “Our ethos is around understanding thematic motivations or challenges for clients and their portfolios. Relative scarcity of capital is one. Retrospective solutions can help solve that particular challenge, while also benefiting regulatory capital positions and enabling growth. We have seen more demand for these. We have also done well in parametric, especially in the quasi-governmental space, for example in the Philippines. Private firms are still getting their heads around index basis risk. They want to match it to traditional and it’s harder to get through their procurement process.”
Morley describes buyers from the likes of Indonesia and the Philippines as “incredibly savvy buyers and inquisitive of information.” He said: “If you have a limited capital base, as a carrier you will naturally be thoughtful. We have never had more talks with CFOs and CEOs, and buying in emerging markets is now at least as sophisticated as in the more traditional markets. It has changed in the last five years, and this has been partly driven by regulation and partly by a desire for capital efficiency.”
Gallagher Re in APAC
In APAC, Gallagher Re has around 280 people across 17 offices in 11 countries. The broker placed over US$2.5 billion of premium from the region, with strong growth in the last 12 to 18 months and ambitious plans over the next five years.
Morley said: “The majority of global growth in (re)insurance is being driven by Asia Pacific – there is an organic growth opportunity which is irresistible. Our Singapore, Korean and Taiwan teams are all building out. In India we have hired Vinod Krishnan and increased our investment, and you will see that increase over the next 18 months.”
He added: “We have a license in Hong Kong and a joint venture in China and our aim very clearly is to have our own license in mainland China. That is our platform priority for the next 12 months.”
Commenting on changes in its Australia team which also covers New Zealand, Morley said: “We had two areas of turnover in Australia: first through the collapsed Willis Re deal with Aon and then the transition into Gallagher. The team has been entirely rebuilt with more appointments to come. We will be fully present in the coming cycles.”
Morley added: “Analytics underpins everything we do. Where we see gaps, we will look to build proprietary solutions. For example, we built the Malaysian flood models out the back of that complementary cat model approach. Over 25% of our resources are now analytically orientated. And that’s not sitting in silos but fully embedded.”
While there is still uncertainty, the APAC market is moving towards adequacy in the price, terms and conditions, say chief executives from Swiss Re, Munich Re and Axa XL.
In a CEO Roundtable on the morning of October 31, senior reinsurance market executives met to discuss the state of the reinsurance market in Asia Pacific.
The panellists were: Renaud Guidée, chief executive – reinsurance, Axa XL, Achim Kassow, member of the board of management, Munich Re and Urs Baertschi, chief executive, P&C Reinsurance at Swiss Re. The panel was chaired by James Vickers, international chairman at Gallagher Re.
“Many risks are changing. A case in point is natural hazards such as this year’s Cyclone Gabrielle, Typhoon Saola, Typhoon Doksuri, earthquakes in Turkey and Morocco. Meanwhile, and so called ‘secondary perils’ such as wildfires and floods that are far from being secondary when it comes to loss magnitudes. Losses are also on the rise in cyber insurance with the key challenge in cyber being accumulation control.”
Munich Re’s Kassow said: “We’re operating in a complex space. There is social inflation, geopolitical uncertainties, changing trends at the local level. There are visible and significant uncertainties. It is very important for reinsurance to be accurate at their estimates of inflation.”
He continued: “Many risks are changing. A case in point is natural hazards such as this year’s Cyclone Gabrielle, Typhoon Saola, Typhoon Doksuri, earthquakes in Turkey and Morocco. Meanwhile, and so called ‘secondary perils’ such as wildfires and floods that are far from being secondary when it comes to loss magnitudes. Losses are also on the rise in cyber insurance with the key challenge in cyber being accumulation control. There is also a need for sustainable and profitable cyber insurance market. One thing in common between cyber and nat cats is that you need the expertise to understand the risk.”
“The (re)insurance industries are tasked with two big trends: We need renewable energies on a large scale, efficient storage systems, environmentally friendly engines, interconnectedness and AI. The second problem is underinsurance, the gap is wide, on an aggregate level with a low insurance penetration needs time to recover to solve or reduce this problem,” Kassow added.
Possible solutions include arranging public private partnerships, introducing products that are easy to understand, parametric products and mobile ready ones.
Swiss Re’s Baertschi said: “Over the last 12 or 18 months or so, we saw a very significant shift in rebalancing the risk sharing between insurers and reinsurers. Demand is up, while the supply side remains disciplined. The industry functions with the global reinsurance pool, otherwise the rates would be much higher. The APAC region is not immune to nat cats, e.g. Cyclone Gabrielle, tragedies in India and I was personally in Beijing when Typhoon Doksuri was there – and it was wet!”
Kassow added: “If the underlying profitability of the risk we are taking is not sufficient, we cannot only share risks between ourselves.”
When Vickers asked about the state of the Asian market, Axa XL’s Guidée said: “The market is promising – it is moving towards adequacy in the price, terms and conditions. It’s also about rebalancing the value and risk sharing with our business partners with a long-term perspective. As we step out of low interest rates, the market will become much more selective.”
Kassow said: “The starting point is different in different markets. If you’re working with reinsurers, a lot of the volatilities translates into their business strategy. The reaction of the markets has been normal. It’s more about how do your capital base and your return to capital look like. The most important thing is to understand each other’s perspective in our business model and what our behaviour is driven by – e.g. retro and split of risk across business lines.”
Baertschi said: “The APAC region is a high-growth region with a large protection gap. There is a massive need for the industry as a whole to address these megacities and urban clusters from Mumbai to Tokyo to Shanghai.”
Kassow added: “The growth markets typically attract a lot of naïve capital, then they send some people and money. Then something happens that wasn’t planned, it draws back. The volatility in growth markets is not helpful for long-term growth. We need to have people understanding the markets. You would like to commit to a long-term perspective that is sustainable. Sometimes, it brings difficult discussions on what’s sustainable.”
Guidée added: “Some things are complementing and not competing with the reinsurance industry – for example the Australia cyclone pool closes the protection gap, while parametric products add an additional layer. If a place is not (re)insurable, it’s not liveable, then we have to diffuse the risks with regulators and governments — for example the concentration of people in local areas. Governments have to get their act together in terms of land zoning.”
On communication, Kassow commented: “I would be critical about our role in not talking to the public. We need to communicate more and better about how we price and assess risk.”
While price increases have helped bring a better balance between the return and its associated risks a focus of the upcoming renewal discussions could likely be on the development of contractual solutions that respond to the changing risk landscape and make the reinsurance agreement viable for all stakeholders involved, said Tarik Aouad, managing director for Middle East and Asia markets at Deutsche Rück.
“I prefer not to speculate on expected reactions of insurers and reinsurers, but I would rather like to remind that the observed elevated nat cat loss activity will likely lead to contractual adjustments on both primary insurance and reinsurance levels, leading, among others, to an increased focus on risk management and accumulation control,” he said.
There have been certain improvements during this year’s renewals, however, the general risk situation remains challenging, he added.
We are observing improving terms and conditions that ensure the interests of the reinsurer and reinsured are aligned, noted Aouad, who has been spearheading the German reinsurer’s recent foray into Asia.
“For example, we have seen significant improvements in the non-life treaty terms and conditions, particularly in South Korea and Japan. There, we saw switches from “variable” to “fixed” quota share/surplus treaties, improving treaty balances, and are witnessing a stronger emphasis on risk-based actuarial methodology leading to improved pricing,” he added.
The treaty terms and conditions progressively reflect the increased uncertainty of risks in terms of macroeconomic developments influenced by inflation, increasing frequency and severity of natural catastrophes, and also the risks associated with the changing technological, environmental, geopolitical and regulatory landscapes, according to Aouad.
“With regard to the appetite for non-property lines, I would say that in principle there will always be an appetite for a well-managed risk portfolio, whether it is property or not,” he said.
As far as the challenges are concerned for the reinsurer, the effects of climate change are undisputable, with the region also being exposed to higher volatility in terms of frequency and severity losses from natural catastrophes. Losses from wildfires, floods, droughts and hailstorms are gaining momentum, he said.
Other major challenges continue to be the geopolitical and macroeconomic tensions.
“Inflation will continue to affect market dynamics, while an almost exponential rise of technological risks such as cyber and AI should alert us to take the necessary regulatory steps in proactively countering these challenges to the insurance and reinsurance industry,” he added.’
“We have seen significant improvements in the non-life treaty terms and conditions, particularly in South Korea and Japan. There, we saw switches from “variable” to “fixed” quota share/surplus treaties, improving treaty balances, and are witnessing a stronger emphasis on risk-based actuarial methodology leading to improved pricing.”
Tarik Aouad, Deutsche Rück
APAC plans
Aouad said the reinsurer is perfectly satisfied with its start in Asia. “We were successful in entering non-life treaty business in selected markets in South, South-East and East Asia with effect from 1 January 2023. Deutsche Rück has already and successfully exceeded its business plan targets,” he said.
Deutsche Rück currently has property and casualty non-life treaty business with clients in more than 10 countries in the region, in particular in markets such as Thailand, South Korea, Taiwan, Japan, Singapore, India and Vietnam.
“We are currently planning a further geographic diversification within South, Southeast and East Asia. Our target is to be a first choice when it comes to reliable and long-term partnerships, rather than going for opportunistic gains, because we have come to Asia to stay,” Aouad said.
The reinsurer recognises that the region is increasingly considered a key driver of global economic growth with a young and well-educated population and households accumulating wealth and knowledge while the middle class rapidly expands.
“Our goal is to continue to grow and diversify our portfolio as an informed following reinsurer, targeting a sustainable bottom-line while planning for a solid growth of the top-line,” he added.
Bogardus who started at the Bermuda-headquartered firm in September 2022 and moved to his current position in March 2022, said: “We are taking a long-term approach in the region. We want to be a strategic partner rather than a transactional, opportunistic reinsurer.”
He added: “In Asia we have significant underwriting authority across all lines including property, casualty, long tail and marine. We want to scale up cyber, health and structured solutions. Property is our biggest line, but it is reducing as a percentage of the total portfolio. This is according to plan. We are actively diversifying geographically, product wise, as well as excess of loss versus pro-rata.”
“We are looking for profitable growth across the region – not just for ourselves but for our clients as well. Our book has grown rapidly this year and we are targeting significant growth for 2024 but this will depend on market conditions. We want to deploy our (additional) capital to drive value for clients, shareholders and society overall,” Bogardus said.
Commenting on capacity, Bogardus said “Our message has been consistent since 1.1.2023 – we have capacity; we are committed to the market now and long-term; and we will utilise our capacity for quality partners throughout Asia Pacific – from the Indian sub-continent in the west to Japan in the east and Korea in the north down to Guam, Australia and New Zealand, including Greater China and South-East Asia. It’s a massive and varied region and we see potential in every market.”
“Our message has been consistent since 1.1.2023 – we have capacity; we are committed to the market now and long-term; and we will utilise our capacity for quality partners throughout Asia Pacific.”
Kevin Bogardus, Everest Re
Clearly the region required a diverse approach. “No one country, nor one client is treated in the same way. We don’t take a dogmatic one size fits all approach to our clients. The same pressing issues as at January 1, 2023 continue; in fact many are worse: climate change, high inflation, increasing loss costs, rising geopolitical instability, deglobalisation and supply chain disruption, increased frequency of cats, increased costs of capital and increased concern for credit and cyber risks, just to name a few. But rather than turning away, we are engaging.”
He added: “Unlike previous hard markets, we aren’t seeing a lot of new capital coming in. Much of what has come in thus far has gone to existing players – like us.”
Bogardus continued: “Our expectation is that overall prices will continue to go up into 1.1.2024 but we aren’t a knee jerk reinsurer. We want to be a stable, consistent partner, and we are trying to take a similar approach through the cycles. We want to go deep and broad with our clients, like roots on a tree so that we are firmly planted and grounded with our clients. If we have this, we can sustain long term relationships throughout future property cycles. The cost of capital has gone up. The market is not softening, but in some places where there haven’t been losses or where capacity requirements are less, there could be moderation.”
Renewals
At last year’s renewals, there was some criticism of reinsurers not communicating, not quoting or standing on the sidelines.
Bogardus said: “We were not one of these reinsurers. We have been communicating our position clearly and remain consistent in our words and actions – and this has been appreciated by both brokers and clients. We took the same approach at April and July [2023] renewals, which overall were more orderly. There will continue to be pressure on retro pricing, and this will continue to push reinsurance pricing up in a number of markets. Not being a purchaser of retro, gives us more flexibility.”
Adding colour, Bogardus said: “Each country is in a different stage of the market cycle – this allows us to balance the portfolio. For example, Japan will see moderate rate increases at 1.1.2024 after several years of hardening. In South Korea, we have grown significantly and still see growth opportunities in 2024. The issue for Korea is the long-term viability of property pro rata treaties, which are the best way to generate capacity. Suitable reinsurance solutions which work for both parties need to be found. And in some markets attachments points have moved up and aggregate XLs have gone away and frequency of losses below the XL attachments points are hitting the bottom lines of insurers. Here too insurers and reinsurers need to work together to find solutions.”
Reinsurance needs and capacity requirements in Asia Pacific are growing as penetration grows and the number of nat cat events increase with Bogardus noting that climate change “seems to be happening faster than anyone anticipated.”
Bogardus added: “The reinsurance industry has encountered many difficult times in the past e.g. post 9/11 and capital came back. This time economic conditions are different. Capital is slow to return but equilibrium will be found. With cheap capital of the past, both insurance and reinsurance were under-priced. Reinsurers gave capital away too cheaply – cheap reinsurance can’t continue – whether this is the end or the beginning of a ‘new normal’ remains to be seen.”
Brad Weir, head of analytics for Asia, Aon’s Reinsurance Solutions, provides insights into climate trends in the region and how the firm is shaping better decisions for its clients.
What are key factors shaping nat cat loss activity in Asia Pacific in recent years and what do you think will be the impact on the industry?
There are a few elements here. If we look at this year to date, and remember that the typhoon season is still running and monsoon elements are still in play, we’ve certainly seen a year with historically lower economic and insured losses across APAC. Relative to the past 10 years, it’s one of the lowest that we’ve seen.
A lot of people will consider that elevations in climate risk around rainfall and flood will directly lead to a correlation between increases in loss and severity. But it doesn’t always play out that way, because there are multiple influencing factors in operation.
While there’s a long-term climate change signal, there are also short-term decadal oscillations such as El Niño southern oscillation or La Niña. Three years preceding this year we had heightened La Niña conditions, which exacerbated rainfall in countries like Australia and led to significant flooding. But that is not unexpected when you have such climate conditions, and we’ve certainly had them in the past.
“One of our key services is to identify the appropriate risk transfer mechanisms to help clients maintain growth in a capital-efficient way.”
Brad Weir, Aon Reinsurance Solutions
Unmodelled perils seem to be the biggest concern with the reinsurers these days, how do you see the industry reacting to the challenges of secondary perils?
Experiencing hail or severe convective storms or flash flooding is not new and, in some instances, such perils are well understood and modelled. However, we still aim to try to elevate the capture of exposure data and the modelling of these types of risks far better than in the past.
We have our Impact Forecasting team, which has developed many, many models globally, including around flood risk in Asia – which captures storm surge, flash flood and riverine flooding, that sometimes can be viewed as secondary perils.
The market moves in cycles in response to losses as well, and there’s pressure on structures such as aggregate covers, given the number of losses that have occurred in recent history, but we may not expect that to continue into the future.
One of our key services is to identify the appropriate risk transfer mechanisms to help clients maintain growth in a capital-efficient way. These mechanisms also help clients to navigate volatility and build resilience by alleviating them of some the risks they face, rather than their retaining the risks in-house.
In 2023, in APAC we’ve seen a few one-in-100-year type events and not in the most obvious places for them to happen. How do you model for this and how can you help reinsurers?
We perform an analysis around the event in terms of rainfall and elucidate how that translates into the flood risk for a portfolio – which is a combination of both the exposure and the hazard.
Does a 100-year rainfall at a particular location relate to a 100-year flood risk? It may or may not, and often it doesn’t. It’s important to put this dynamic into context to enable clients, both insurers and reinsurers, to really understand where the flood loss happens, where it sits in the context of the portfolio, and whether is it a trend that may be out of step with what was expected.
The market is well-positioned to understand and assess the risks that we face, particularly from climatic perils. We have a perfect opportunity to elevate the resilience of communities in general by being more involved in the decision-making processes that occur from the planning stage to risk mitigation and financial protection.
In this regard, there are a number of elements that contribute, including being able to capture the correct data and exposure information to ensure clients have a really good understanding of their portfolio at risk. Being able to differentiate their situation from the perspective of their markets, as they seek to grow and develop their portfolios.
We certainly help clients to do that in terms of having a huge number of specialists on the ground in Asia, with backgrounds in the science related to perils, improving the capture of data, and improving the exposure databases that are used to understand catastrophe risk.
What are some of the changes you are seeing in climate events in the region and what are the challenges from a modelling perspective?
With the underlying influence of climate change, we might not expect more frequent events or more severe events overall, but we do certainly expect a change in event patterns and more unusual behaviour.
For instance, a cyclone or a typhoon might start to approach a different area than was previously expected, or we might start to see different flooding patterns, and the changes in spatial variation of events can attributed to factors such as climate change.
This scenario creates a challenge for us; not so much from a modelling perspective, but from a communications perspective too. Most models would be able to replicate the types of events that we are seeing; the issue is whether we are seeing more or less of these events than expected in light of a longer-term variation in climate, and to date, we’ve only had a small window of opportunity in which to test that.
The upcoming renewals are expected to be more stable, following the changes implemented last time but focus will remain on retention levels, terms and the pricing of clients’ exposures, Rob Saville, TransRe’s president, Asia Pacific, told InsuranceAsia News (IAN).
“Communication is better this year, and expectations are more realistic,” Saville said.
“We believe that clients will come to the market earlier to secure capacity, having digested what occurred last renewal when the completion of some programs was very late and, in some cases, ran over the renewal date,” he added.
He pointed out that while rates are rising in some markets, that is not true in other markets and there is “still more to go everywhere” given the continuing loss activity in the region.
“Capacity always goes where it is rewarded best for the risks it assumes, and where it receives adequate rates on fair and reasonable terms. Asia Pacific is not immune from global developments,” said Saville, who has been at TransRe in Singapore since 2013. TransRe is owned by Berkshire Hathaway following the US$11.6 billion transaction late in 2022.
From a global perspective, rates have continued to harden through 2023, and Saville said he sees no reason for that to stop. While more frequent severe losses and loss inflation continues to affect property rates, the casualty market is also being impacted by inflation and loss trends.
With little evidence so far of significant new capacity and ongoing exposure issues, “there is no rational reason for rates to drop”, according to Saville.
“Insurers are not all the same – we differentiate between smaller, local insurers and regional/global carriers because their needs are different. However, there are minimum rates we expect, and we also have minimum data requirements, and we are working very closely with clients on this aspect.”
Rob Saville, TransRe
Aligning interests
Saville notes a material shift in alignment between insurers and reinsurers, said Saville. Now, when a loss occurs, the client and reinsurer will both feel the pain, whereas before that wasn’t always the case, he said.
“We reinsurers are rumoured to have short memories and are quick to cut rates when results are good. However, this market feels different. Insurers are now paying for secondary peril events and attritional natural catastrophes, which had previously been passed onto reinsurers. Again, insurance rates and coverages need to reflect these exposures, so that the insurer and the reinsurer get paid adequately for the risk and exposure they assume. We all have skin in this game,” Saville told IAN.
“In recent years insurers have been able to buy and transfer risks that protect their income statements. We understand it can be difficult to raise primary rates. If insurers are unable to increase their rates to adequate levels, they can expect reinsurers to move away from proportional support towards excess of loss structures in response.”
Commissions are also being reduced to more realistic levels because the market had been overly generous in recent years, according to Saville.
“Insurers are not all the same – we differentiate between smaller, local insurers and regional/global carriers because their needs are different. However, there are minimum rates we expect, and we also have minimum data requirements, and we are working very closely with clients on this aspect,” he added.
APAC plans
TransRe has been in Asia Pacific since 1982 with teams in Singapore, Hong Kong, Shanghai, Tokyo and Sydney, writing property and casualty on a treaty and facultative basis.
“Following the structural and price changes in recent renewals, we have been able to grow our regional portfolio, and we hope to maintain that momentum,” said Saville.
As treaty terms tighten, more business enters the facultative market.
“We have strengthened our local facultative team to support this business flow,” he said.
There is a recent flight to quality among reinsurance buyers, Saville said.
“We have always been a dedicated P&C reinsurer, and now as part of the Berkshire Hathaway family, we have the rating and balance sheet strength to support growth opportunities for our clients.
“We also know that insurers have a choice of who to do business with. We never expect to be given business. We work hard to earn and develop our relationships with our clients and brokers. They can expect quick responses and creative offerings,” he said.
There is reinsurance capacity, but it is at the lower layers where pricing has needed to reflect recent losses: Moody’s RMS
IAN SIRC Today has recently sat down with Andrew Hare, managing director, Moody’s RMS, before the Singapore International Reinsurance Conference (SIRC) 2023, to discuss recent losses from the elevated nat cat activity in the region, nuances between different climate-conditioned models and pricing in lower layers.
Are there capacity constraints, especially following major catastrophes of the year? What trends do you see regarding nat cats and uninsurable risks in the region? How do you see the market reacting to the elevated loss activity?
From the conversations we’ve had, there is reinsurance capacity, but it is at the lower layers where pricing has needed to reflect recent losses. So, at these lower layers, the insurer could be retaining the potential losses, but in terms of how this plays out for the insurance consumer, it boils down to how any extra costs are passed through. Consumers will buy if the premium is affordable and the coverage is sufficient, and to achieve this, the market needs to ensure it has products that are sustainable for both the consumer and the insurer.
Which reinsurance trends are you expecting, do you see the lack of retrocessional capacity, especially with ILS investors hit by nat cats? Do you see any new forms of capital or some innovative instruments like ILS bonds being available?
The ILS sector is generally very healthy, and looking to innovate, we see a lot of interest in developing new cyber cat bonds, for instance. We’d say that to move further forward, ILS firms will need to also invest in more advanced risk analytics to gain more confidence in the risks they are taking on.
“ILS firms will need to also invest in more advanced risk analytics to gain more confidence in the risks they are taking on.”
Andrew Hare, Moody's RMS
How have reinsurers (and retrocessionaires) reacted to the elevated loss activity? Has anything else contributed to the global market hardening?
Inflation is contributing to losses, especially as the cost of repairing and rebuilding damaged structures has seen increases in both the cost of materials and labour, although inflationary pressures are a global issue and not just confined to the Asia-Pacific region. We have seen flood events in APAC topping the US$500 million insured loss mark, such as the Auckland, New Zealand floods in January this year, and the Turkey–Syria earthquakes in February, with insured losses in excess of US$5 billion, adding to recent losses.
Please comment on the nature of the losses affecting APAC reinsurers over the past few years. What climate trends or signals can help explain this and how can modelling help with that?
Our 300-people team of modellers and developers is working hard on identifying and modelling the linkages between various perils and climate change, alongside non-manmade climate variations such as El Niño-Southern Oscillation (ENSO) for example. Perils such as wildfire and flood, with rising temperatures and sea levels have clearer climate change signals than other perils, and we now offer a total of seven climate-conditioned models that allow (re)insurers to look ahead at how their exposure could be impacted in the future, using various IPCC Representative Carbon Pathway (RCP) scenarios.
We have seen recent examples of severely intense rainfall events, and records being broken, such as across Hong Kong in early September this year, when a rare ‘black’ rain alert was issued. Between 11 pm and midnight on September 7, the Hong Kong Observatory recorded 158.1 millimetres (6.2 inches) of rainfall in a single hour between 11 pm on Thursday and midnight, the most rainfall in an hour since records began in 1884. With more than 200 millimetres (7.9 inches) of rainfall that night, disruption was significant and insurance claims were estimated by various agencies at US$100 million.
Are you looking to expand your footprint in Asia Pacific in terms of models and perils? In which markets?
Moody’s RMS has continually expanded its peril/model footprint across Asia Pacific, and in countries such as China, Japan, India, Taiwan, Australia, and New Zealand, our models cover at least two or more of the major perils for the country. Many of our models in the region benefit from the use of our advanced high-definition (HD) model framework, designed to provide a more granular view of risk from a location through to portfolio level – especially useful for high-gradient perils such as flood.
Even with the recent introduction of HD models, we have also gone on to introduce new updates to these models, such as with the Moody’s RMS New Zealand Earthquake HD Model, which incorporates the latest GNS National Seismic Map for the country, and extensive learnings and insights from recent earthquake events. We also recently unveiled our Australia model development roadmap at our Exceedance conference in May 2023 as we look at HD modelling for major perils such as severe convective storms to bushfire.