What is reshaping the reinsurance market today?

CUO on an "interesting few" years for the sector

What is reshaping the reinsurance market today?


By Mia Wallace

Whether it’s data and analytics, communications or consolidation, a host of factors have reshaped the reinsurance market in recent years. Alongside these, the market has had to face up to the rising cost of natural catastrophes around the world, driven by the increasing frequency and severity of nat-cat events, while inflationary pressures continue to drive up repair and replacement costs.

It’s been a period of extensive change after one of relative calm. “For a number of years, the reinsurance industry was essentially subsidizing the insurance industry, and ultimately the front-end consumer, because we were bearing more of the risk than we were getting paid for,” said John Welch, chief underwriting officer at Aspen Reinsurance. “What we saw in 2023 is that, after several years of underperformance, the reinsurance companies said enough was enough.

“It reached a tipping point where the reinsurers said, ‘I can’t get the return I need if I’m participating on every secondary peril cat that comes along, so I need to refocus the business on the peak cats of earthquake, hurricane, etc. where there’s less frequency and more severity.

Mindset shift

It was this mindset shift that saw the whole industry raise its attachment points on the property-cat side and saw reinsurers withdraw from the more common peril losses that shouldn’t fall in the reinsurance wheelhouse. This, in turn, pushed quite a bit of that risk and volatility back on to the insurance companies and led to the “excellent results” posted by the reinsurers last year.

This, in turn, led to issues. “Unfortunately, if you look at our customers, they’re fairly frustrated because these risks have been pushed onto their income statements and balance sheets,” Welch said. “Now they’re experiencing more volatility than they had in the prior years, so they’re pushing that back onto the front-end consumers, whether that’s through higher rates or pulling back from regions.”

Current reinsurance market conditions

Current market conditions have started a chain reaction that is moving risk and volatility back to the consumer; an approach which is unlikely to be sustainable in the long term. Already you can see disruption with regulators and voters who are finding insurance more expensive or harder to get, Welch said, and the reinsurance sector is already coming under pressure to start lowering its attachment points or to approach losses in a different way to provide some relief to the ceding companies.

It’s likely to be an interesting couple of years. “I think, at this point, reinsurers would rather give up a little rate, or make moves on terms and conditions before they would drop their attachment points and pick up that loss,” Welch said. “So, that’s a major challenge for all of us in managing  the reactions we’re seeing to the market shift that has taken place.”

In the past, the harder part of the reinsurance cycle has led to the proposal of more government solutions, but it’s not in the best interest of the reinsurance market to be replaced by a public option, Welch indicated. However, there are some challenges the industry cannot do anything about, including where property and communities have built up in very nat-cat vulnerable areas, such as California and Florida, and it's clear that reinsurance cannot singlehandedly finance that kind of exposure growth. As such, it’s incumbent on the reinsurance sector to help find and provide a sustainable solution.

Talent – a pressing consideration for the market

Welch noted that acquiring great talent is another particularly pressing factor for the reinsurance market to consider. Most leaders he speaks with are facing similar challenges when it comes to acquiring the right specialist expertise to grow a specific line of business, he said, and it’s likely the result of years of the industry not fully investing in the right training and development programs.

“The breadth of talent programs aren’t what it used to be,” he said. “Then you also have the generational change that’s occurred in terms of how long people want to stay at companies and when they want to move on. You don’t always have somebody for 10 years to develop and train the way you would want.

“I would say that the competition for talent is as fierce as ever and it’s good for employees but it does make it hard to find people when you need them. Companies can go months looking for the right match in terms of culture and expertise. So, more focus is required to move the dial and create a healthy talent pipeline.”

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