It’s important that property catastrophe is the most profitable line within the global property and casualty (P&C) market, but in order for this to happen, “there must be a step change in the pricing and structuring of reinsurance coverage”, according to Kevin O’Donnell, President and Chief Executive Officer (CEO) of RenaissanceRe.
After reporting its third-quarter 2022 results earlier today, which included a net loss of more than $825 million and an underwriting loss on the back of catastrophe losses of almost $649 million, mostly driven by Hurricane Ian, RenRe executives held an earnings call to discuss its performance in the period, and also broader market conditions.
During his opening remarks, CEO O’Donnell explained that, despite the volatility seen in the third-quarter, it continues to benefit from a strong capital position through a combination of both holdings company capital and committed partner capital, noting that the firm’s rated balance sheets will bring the same level of risk and base capital to clients in 2023 as it did this year.
“Our customers need this capacity,” said O’Donnell. “Reinsurance is a critical link in the insurance value chain and absorbing volatility is an important component of our value proposition.”
However, continued O’Donnell, in order to ensure the long-term availability of reinsurance capacity, which is currently constrained in certain areas, notably property cat, it’s vital to realign the interests of customers and investors.
“Investors need to be appropriately incentivized to continue providing their capital. This is especially true now, as investors have numerous attractive deployment opportunities in other asset classes,” said O’Donnell. “Consequently, property cat needs to be the most profitable business line in the P&C market commensurate with the level of volatility it absorbs.”
In order to achieve this goal, O’Donnell stressed the need for a “step change in the pricing and structuring of reinsurance coverage to ensure an additional margin of safety for our investors.”
Overall, the CEO of the Bermudian reinsurer feels that the firm’s models have both accurately and consistently captured the risk it’s assumed. But, in order to ensure an increased margin of safety, O’Donnell revealed that RenRe will be recalibrating its underwriting approach to property catastrophe in the following ways: “By requiring substantial rate increases whether or not the business is loss impacted – this will not be a glide path, but rather a step change; by increasing retentions on property programmes; by tightening terms and conditions and narrowing coverage in most instances to named peril only; by offering non-concurrent capacity and private placement on many deals; and by requiring broad participation at improved economics across the industry reinsurance programmes, not only in property, but also in casualty and specialty; and finally, by reducing our participation meaningfully on any programme where these conditions are not met.”
O’Donnell is confident that this “reasonable approach” will restore RenRe to its track record of rewarding investors, while at the same time ensuring the long-term capacity its customers need.
Looking forward, O’Donnell said that RenRe expects “the next several years will provide significant opportunities for reinsurance,” explaining that the Bermuda-based carrier has “multiple competitive advantage that make us our customers preferred trading partner, and which will allow us to optimise our underwriting portfolio.”
“We remain focused on profitability,” he continued. “In 2023, we will be paid more for every dollar of risk that we take. This increased profit will buffer our investors against potential loss. In addition, we will evaluate opportunities to grow where higher rates and significantly improved terms and conditions warrant. At January 1, these opportunities are more likely to manifest themselves in property cat, as well as certain lines in casualty and specialty.”
“We are entering one of the hardest markets we have observed in decades, and we expect this to be evidenced at the January one renewals,” said O’Donnell.
