Grant Hollyman, CEO for Australia and New Zealand at reinsurance broker Gallagher Re, highlighted a shift in Australia’s property reinsurance market, with reinsurers showing increased appetite for aggregate covers despite them remaining difficult to purchase.
In an interview with Reinsurance News, Hollyman discussed the current state of the Australian property reinsurance market, stating that Gallagher Re is seeing more demand from buyers for aggregate covers.
“What we are seeing is our clients wanting second event, third event, fourth, or even fifth event coverage, as part of a rising demand for more aggregate covers. And they’re becoming more prevalent.
“For the first time in quite some years, we’ve got reinsurers back supporting aggregate cover. During the hard market, it was very difficult to buy aggregate protection. Today, it’s still not easy to buy aggregate covers, but there is appetite now. People are spending more time modelling, with many of today’s aggregate covers calculated on a burning cost basis (a method used to calculate the reinsurance premium based on past claims experience)” said Hollyman.
Gallagher Re is currently seeing an abundance of capital in the market, suggesting it is a favourable time for reinsurance buyers in the region, although expectations will still need to be managed.
Hollyman said, “In the last two years, there has not been a reinsurer that’s come to Australia that’s said, ‘I want to reduce my capacity.’ So, we have an abundance of capacity and with that capacity is increased supply. And overall, we do expect improved conditions for our clients because there is an increase in supply.”
On the Australian casualty reinsurance market, Hollyman described conditions as similar to the property space.
“There’s supply. Casualty is a wonderful capital arbitrage for property, it’s non-correlating. So, if you write on property, more often than not, if you can, with your credit rating, you’d like to be on casualty. Therefore, we are seeing increased supply in casualty as well,” said Hollyman.
He continued, “The challenge is credit quality on casualty. Australia can be a particularly litigious country and we have a long tail, so therefore we have only the best security on our covers. But there is more and more excellent security. We spend a lot of time with our clients buying the best security, and the best security is available at the moment. And you look at all the markets that have been upgraded, for example Lloyd’s, from A+ to AA-, that’s a big change, and a wonderful thing for our reinsurance community.
“There’s never been a better time at the moment with capital and the quality of capital in the reinsurance industry. I’ve been doing this for 30 years and we’ve never had more capital and never had better capital in the market.”
In addition, Hollyman spoke on whether Australia is seeing increased demand for alternative capital solutions such as parametric insurance or catastrophe bonds.
He stated, “As I said, we’ve seen an increase in demand for aggregate covers. Now, aggregate covers are where our cat bonds come in, and cat bonds sit right down the lower layers. Cat bonds are a very effective tool and they’re utilised. However, the risk transfer price is still pretty cheap. So, cat bonds are extremely useful, but they’re also competing a little bit with our traditional risk transfer price.”
Meanwhile, Gallagher Re is not seeing as much demand for parametric covers.
“The interesting thing about parametric covers is the buyer usually knows a lot about the risk. We’ve got the same set of data. We can all agree on a loss cost. A lot of our clients aren’t willing to pay the margin and the expense on top. So, as a result, we’re not seeing as much parametric covers as we are, for example, cat bonds and aggregate covers,” said Hollyman.
