According to analysts at Jefferies, the industry has been redirected from rapidly rising rates to surging retrocession costs amidst the 1/1 renewal results, resulting in a divergence in strategy between reinsurance giants, Hannover Re and SCOR.
During the report, Jefferies analysts highlighted that Hannover Re’s retrocession program shrank considerably at the renewals. However, this meant that the company was able to retain much more catastrophe risk after 1/1.
Guy Carpenter’s index rose by 10.8%, while SCOR showed +13.0%. When risk adjusted, prices rose by 6.6%, as per Hannover Re.
Howden reported that retrocession outpaced its reinsurance rates, leading to an increase of prices by 15.0%, which has resulted in several cedants having to restructure the contracts.
The analysts noted that Underwriting Margins are materially expanding, with Hannover Re highlighting that pricing is the best it has been in decades and SCOR has shown gross underwriting margins far in excess of other lines.
According to Jefferies, gross underwriting margins make catastrophe risk an attractive source of potential future earnings although this depends on a reinsurer’s appetite to retain tail risk.
The decision of what to write and how much to lay off is complicated by the fact that considerably more (in $m terms) is taken on than ceded to lay off the tail exposure.
When weighing up their options, Jefferies added that Hannover Re and SCOR have come to directly opposing conclusions.
Following their 1/1 updates, the market appeared to express a clear preference for SCOR, with SCOR up +2.4% on the day, while Hannover Re fell -9.5% in two days.
Jefferies believes this reflects the market’s assessment of taking on additional risk and introducing potential volatility, which is understandable against the backdrop of >$500bn of insured catastrophe losses incurred over the past 5-years.
“However, we believe that investors are too cautious, as industry prices are up 22.9% since 2017,” its analysts said, adding that reinsurers should take on more risk when prices are high or rising and cut back when prices are low or falling, just as Hannover Re is now doing.
