Analysts at JP Morgan have asserted that the structure of reinsurance programs could play “as important of a role as pricing” at the upcoming renewal periods.
In a new report, the firm argued that recent years of poor returns for the reinsurance industry have not simply been due to bad luck, but have also been driven by program structures that have led to a higher proportion of ceded losses.
In particular, JP Morgan flagged the impact of secondary peril losses, which have hit reinsurers disproportionately after they opted to take on more frequency style exposures and moved closer to the risk during the soft cycle of the market.
At the same time, analysts noted that retentions have not materially increased over the years, and have failed to grow in line with inflation and higher underlying exposures.
Looking at examples of major re/insurers, JP Morgan observed that the retention of Zurich’s US all perils reinsurance program remained at $600 million between 2017 and 2020 and only increased to $650 million in 2021.
Similarly, the retention for Travelers’ corporate catastrophe XoL program remained at $3 billion from 2015 to 2022, and the retention for Chubb’s global property catastrophe program has remained at $1billion for the US program and $175m for its international program since 2017.
But using an example of a retention of $600 million in 2017, JP Morgan estimates that the value would have to be around 22% higher by 2022 to have moved in line with inflation.
Thus, assuming a $1 billion loss under the old structure and retention, the firm calculates that the split of losses would have been 60%:40% for the primary insurer/reinsurer.
And if retention had increased in line with inflation over this period, the same magnitude of loss by 2022 would have reduced the reinsurer’s share to around 27% instead.
“All of this suggests to us that structures could play as important of a role as pricing at the upcoming renewals,” JP Morgan concluded.
“Overall message from the (re)insurers on top of positive rates is for the need for structure changes. Reinsurers have suggested that retentions will most likely need to go up and on the primary side, insurers such as Zurich and Beazley are already expecting their retentions to go up as well.”
