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Jan 1st reinsurance renewal season is an “epiphany”, says SiriusPoint’s Ari Chester

23rd December 2022 - Author: Jack Willard

With the upcoming 1/1 reinsurance renewals looming closer, SiriusPoint’s Head of US and Canada Reinsurance, Ari Chester, spoke to Reinsurance News about the renewal season and the firm’s outlook.

“This renewal season is an epiphany, a sudden awareness that insurance balance sheets need to be compensated for property volatility. And it’s not just rate. The bar is rising with risk selection. Reinsurers are more selective in deploying scarce capacity, there is less appetite for broad-brush market support,” he said.

Chester stated that this is one of the “hardest property markets ever”, and highlighted how this is the first time in recent history where it is questionable whether new capital can be attracted after six years of “poor experience” as well as numerous market participants withdrawing from the class.

“In the last few years, it was in vogue to speculate if the insurance cycle was dead. It turns out, it’s not. Despite many quarters of rate improvement, rate has not kept up with loss cost. 2017 was the beginning of the bad with record-high insured property cat loss.

“Shortly after, Covid contributed more than $40b of unmodeled loss. 2021 was tough with secondary peril exposure highlighted by Texas Winter Storm and European flooding. 2022 has seen another $100 billion or more insured cat loss year, including the largest US hurricane in years with Ian. 2022 was also a heavy year of secondary peril exposure globally, not to mention, unexpectedly high inflation and supply chain disruption.”

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Chester describes the recent events of Hurricane Ian as a “tipping point”, and noted that earlier in the year, SiriusPoint had anticipated a hardening market for the key January 1st reinsurance renewals.

“After Ian, it’s harder than most had anticipated. Capital is pulling out, retro markets are very tight, terms are tightening, retentions are increasing. We are seeing rates increasing from 10-20% across the board in US markets and upwards of 50% in Excess of Loss,” said Chester.

Moreover, Chester addressed the variety of different factors that have been stressing the market, as he highlighted exposure shifts, climate change, inflation and rising interest rates, as well as litigation, structural issues with ILS capital, and overall insurance market returns.

He particularly noted how it’s clear that secondary perils such as flood, wildfire, winter storm, and convective storm, are also increasing, and how globally, adjusting for current pricing, research shows that secondary peril exposure in the last decade has been two-to-three times the threshold of prior decades.

“It’s hard to pinpoint how much of this is true frequency vs. exposure shifts, but arguably it is moot. The fact is, it’s happening,” he explained.

He then addressed inflation, and how it was initially prompted by supply chain disruption, and how it is now becoming systemic monetary inflation.

“We’ve seen this impact in our portfolio across the board, whether property or auto. Repairs which used to take weeks have been taking months; repairs which used to take months, have been taking years,” Chester said.

Additionally, Chester noted that on the supply side, ILS capital is pulling back, and this pullback is particularly “impacting retro markets for 1/1s.”

“Since 2017, well before Hurricane Ian and recent supply chain disruption, the industry started experiencing trapped capital in collateralized vehicles. It turns out that property is more medium tail, than short tail. It’s been taking a few years for losses to fully develop and capital to be released. Stepping back, the ILS investment thesis is under pressure. The 2022 increase in yields detracts from the attractiveness of this alternative asset class,” he added.

Chester concluded by addressing that on top of everything, mark-to-market investment losses are expected to have cumulative 25% or more impact on book values across the industry in 2022.

“Putting this all together, the industry has had sub-par returns for at least six years, due to a confluence of factors.  And there is continued, forward-looking uncertainty from climate change and from inflation. It’s no surprise the cycle is back,” said Chester.

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