The flatter pricing cycle that reinsurers have experienced following recent catastrophe events will ultimately ensure that primary insurance policyholders continue to be provided with affordable and widely available coverage.
This is according to Konrad Rentrup, President and CEO at Hannover Re Bermuda, who discussed the impact of recent pricing trends alongside Chief Underwriting Officer Dirk Hasselkuss during a recent interview with Reinsurance News in the company’s Hamilton office.
Rentrup and Hasselkuss agreed that reinsurance rates are still likely to increase after large catastrophe events in future, but noted that the sharp pricing swings of the last two decades are likely to be muted by an abundance of capital in the market.
“The attenuations will be to a much smaller degree,” Hasselkuss explained. “If you think you can jack up the prices post event to a large degree for a few years to achieve accelerated payback then you are likely to get massively disappointed by reality.”
“Those times are over because there is enough capacity on the sideline waiting to enter the market,” Rentrup added. “In case catastrophes cause losses of a couple billions, new capital will come in immediately.”
The Bermuda CEO remarked that reinsurance was historically a small, isolated segment of the overall capital market, but became flooded with capital after investors recognised the diversification potential and returns that it could offer.
“When the return on equity reduced in the other segments of the financial market, more capital went into the reinsurance market,” he said. “This increase of capacity led to the decreases in price and the shrinking returns for the reinsurance market participants.”
However, Rentrup also suggested that this new pricing trend may turn out to be a positive development for the global re/insurance market, despite the financial challenges it poses to some companies in the short term.
“After Hurricane Andrew in 1992, which was my first major event, the rates completely exploded and there still wasn’t capacity available for the primary market,” Rentrup told Reinsurance News.
“The additional capital available from alternative investors helps to provide better protection to primary insurance customers, which is the task of the insurance industry,” he said.
“In a disrupted market like the one we experienced after Hurricane Andrew, cedants developed different strategies and many of them de-risked their books and stopped providing cover to the original insured.”
Instead of arbitrary rate hikes, the Hannover Re executives argued that the market needs to work its way back towards a sustainable reinsurance pricing level.
“When you look at the US-market, primary insurers are very well aware that reinsurers have to earn a margin so that they can be around for the long run and provide stable and secure capacity,” Rentrup observed.
“There is a need actually to increase the prices across all business segments and territories, to bring the earnings up to a sustainable level,” Hasselkuss added.
“Reinsurers should not bet on having the ability to have excess returns post a major event, as was more or less guaranteed in the past,” the CUO said. “Underwriters need to be very disciplined on every single acceptance of business, to price it at the right level, to have a sustainable business model nowadays.”