With the ongoing war in Ukraine and climate change set to add to inflationary pressure on the economy, at a time when some reinsurers are looking to diversify away from catastrophe business, it’s an interesting time for the marketplace, according to Jonathan Prinn, Chief Executive Officer (CEO), London, Inver Re.
As the reinsurance industry meets in-person once again at the 2022 RVS event in Monte Carlo, Reinsurance News spoke with Prinn, who works at Ardonagh Group’s reinsurance broking arm, Inver Re, about current market dynamics.
“There is a continuing flight from natural catastrophe exposed business due to growing loss frequency and severity,” said Prinn. “Uncertainty around climate change has capital spooked while immediate factors including the aftermath of COVID-19, fraud, global supply chain disruption and rampant inflation continue to drive up loss costs – exposing the long term inadequacy of rating across the board.”
Currently, however, the consequential hunger for non-cat exposed business has not softened rates significantly, but Prinn feels that this can only lead in one direction.
“From a long tail perspective, US Casualty has been hardening for several years, there is plenty of RI capacity, but a reluctance to deploy this in all but low volatility segments,” he said.
Prinn explained that the issues of the war in Ukraine and climate change will increase inflationary pressure on the economy, which in turn is expected to impact the upcoming reinsurance renewals.
“Adding in the reduction in appetite to provide global retrocession capacity, and the increasing trend for international reinsurers to diversify away from catastrophe business means the market is at an interesting point,” said Prinn.
“We don’t see these as threats as such, however. The industry is, as it always is, an efficient way of matching capital to risk. The flows of capital and pricing changes with each new discovery, and market emotion,” he added.
While many reinsurers are restructuring their books and reducing catastrophe exposure, Prinn feels that although diversification has always been an important tool in portfolio and capital management, it’s no more important than before.
“But as with any of the many levers of portfolio management, if you focus too much on any one lever at the expense of the rest, the resulting imbalance is disastrous. Diversification for diversification’s sake is dangerous and can only be effective when considered in the round as part of detailed capital management. Inver Re love to get deep into these interesting and difficult problems and can bring an alternative voice to the conversation,” he explained.
As the market moves through the rest of this year amidst a high inflation environment, Prinn told Reinsurance News that these conditions can quickly see lags in pricing adequacy and a resulting negative impact on performance and results.
“Those who proactively manage these challenges will prosper,” said Prinn. “That said, forecasts of losses going forward rising due to inflation which will add momentum to a hardening market. Cedents will be under increased scrutiny from reinsurers and will need to demonstrate that they have a clear strategy in place to tackle these external pressures.”