After a prolonged soft market state, characterised by fading margins amid low interest rates, elevated catastrophe losses and inadequate rates, the reinsurance industry can expect to see a significant amount of price and condition strengthening, according to Franz Josef Hahn, Chief Executive Officer (CEO) of Hong Kong reinsurer, Peak Re.
“Everybody who has responsibility for underwriting, should be aware that there is not a little wave of price and condition strengthening coming, but there is a tsunami,” said Hahn.
Speaking with the Global Chairman of broker Aon’s Reinsurance Solutions arm, Dominic Christian, as part of the firm’s series of fireside chats with industry leaders, Hahn commented on both regional and global market hardening.
In China, he explained, the market is not yet strong enough for Peak Re owing to the fact that the Chinese marketplace is predominantly a proportional book for the reinsurer.
However, there were “slight signs of hardening” at the Jan 1st, 2020 renewals, which was then accelerated on a global basis by the COVID-19 pandemic.
“And, I see this trend to prevail in Asia, but also definitely in the USA. In Europe, I think the signs are not too bad to also believe in at least a correction. What was missing in Europe were certainly the strongest storms. And, over the last couple of years we haven’t had a margin. And the whole structures are different in Europe.
“I think in general, definitely it’s a hardening market and that hardening market is around the globe. And, whenever there is capacity in the game, the more capacity is needed for a certain kind of structure, the more the market will harden. Because it’s all depending on the capital market in the end,” he explained.
It’s apparent that the COVID-19 pandemic has accelerated the current positive rate momentum. And, with wildfires continuing to rage in parts of the U.S., coupled with an extremely active 2020 Atlantic hurricane season and other, persistent challenges such as social inflation in the U.S., conditions seem to be trending increasingly favourable for buyers at 1/1, and beyond.
Of course, for some in the industry this is likely to be their first hard market and for those sector participants, Hahn stressed that “it’s in your hand whether you want to make it a tsunami”, adding that price correction should happen now.
“The normal period for the hard cycle on the property cat side is around 15 to 20 years, and the hard market on the casualty side in the USA, is about 30 to 40 years. And, the positive news is that they all come together this year, so we better make use of it.
“I myself had to learn what is a hard market. Go for it. Go for what you think is right. Discuss it adequately with your clients but also with your brokers. Don’t be unreasonable, don’t shoot over, don’t squeeze, don’t make them scream, but please apply the right measures and make sure that you get the right price for what you are doing,” said Hahn.
Only time will tell how favourable pricing and terms and conditions (T&Cs) will be for reinsurers at the upcoming renewals. Industry sentiment suggests that many of the factors at play through 2020 will persist and in some instances intensify, resulting in the expectation for some fairly significant price increases and further tightening of T&Cs.
Of course, a number of capital raises have already been reported and there might well be more to come. At the same time, there could also be some additions to the much discussed Class of 2021 as those on the sidelines look to capitalise on the current environment.
Whether capital raises, new market entrants and also the influence of alternative capital have any meaningful impact on rate momentum at 1/1 remains to be seen. But with demand projected to spike sharply on the back of heightened risk awareness, there looks set to be an opportunity for profitable growth.