Insurers face pricing pressure after Monte Carlo reinsurance discussions

Reinsurance renewals in January will be characterised by hardening rates, conversations at the world’s largest reinsurance rendezvous, held in Monte Carlo every September, have revealed.

Insurance companies will struggle to find the same coverages as in previous years, amid a capacity shortage and higher prices, in what most commentators at the event agreed has become a seller’s market.

Demand is anticipated to easily outstrip supply, following reinsurers’ losses caused by catastrophe losses across the North America and European markets.

Rising prices have already become the norm at recent renewals, such as those in May, June and July, across global reinsurance markets.

Many of the losses experienced by reinsurers have come from so-called ‘secondary perils’, most of which are viewed as becoming costlier due to climate change.

Reinsurance industry losses experienced from summer droughts, wildfires, riverine floods and winter storms, on both sides of the Atlantic, have been higher than claims costs for North American hurricanes or earthquakes in 2021 and in the past five years cumulatively.

Reinsurers talking to media in Monte Carlo were particularly critical of vendors’ catastrophe risk models focused on hurricanes and earthquakes, in a situation that has contributed to a lack of confidence when pricing climate-exposed extreme weather business such as wildfires, storms or floods.

Historical data is the anchor for those models, something which is threatened by climate change and which is making decades-old data less reliable as a predictor of future extreme weather patterns.

Conversations at the event also confirmed what many already know: that investors are spooked by a toxic mix of macroeconomic risks.

Russia’s invasion of Ukraine, contributing to concurrent rises in energy prices, interest rates and inflation, are causing uncertainty for investors.

For reinsurers, this is particularly of concern for long-tail casualty classes – some of which carriers have turned to in the face of recent years’ high property catastrophe claims.

Casualty classes, such as workers’ compensation and directors’ and officers’ liability lines, are inextricably linked to inflation. Inflation, although rising, is hard to accurately predict for a year or two ahead. This can cause insurers and their reinsurers headaches when setting their annual premium rates that are designed to meet the changing claims costs that come from court judgments on the size of compensation payments.

Aviation market disputes between insurers and reinsurers are another cause for concern.

Sanctions on Russia for its invasion of Ukraine in February led the Russian state to seize scores of foreign airliners and aviation industry assets that were on the ground at Russian airports. The outcomes of such disputes are still to be decided, but will likely run to billions of dollars.

Michelle O'Neill, Partner, Financial Lines, McGill and Partners, commented:

“This raises the age-old question of who ultimately pays for the losses.

“With rising claims reserving behind the scenes on aviation insurance, buyers of all sizes and exposure have already begun to endure strong rate in addition to coverage restrictions to maintain their expiring capacity.

“The reinsurance market as a whole has suffered significant losses at a pace that surpasses premiums earned, the AerCap claim for example, will no doubt significantly add to this if it is to be successful.”