The last few months of last year were a turning point for the reinsurance market, as the need to reset pricing and achieve more sustainable long-term rate adequacy intensified, leading to probably the most distressed market that Philip Hough of Aspen Re has ever experienced.
Hough has been the Global Head of Property Reinsurance at Bermuda-based Aspen Re, the reinsurance division of global re/insurer Aspen Insurance Holdings, for three and half years.
All in all, he has roughly three decades of experience in the reinsurance industry, with a strong focus on the property sector in both Europe and the Asia Pacific.
Given his extensive industry experience and knowledge, Reinsurance News reached out to speak with Hough about the present state of the reinsurance market, what current conditions mean for Aspen and what the months ahead might look like.
“It’s probably the most distressed market that I’ve experienced, and we’ve had a few cases, obviously, post-World Trade Centre in 2002, and post-Katrina in 2006,” said Hough on the January 1, 2023, reinsurance renewal season.
“I think what specifically marked January 2023 was a real contraction in capacity and in appetite, in combination with a generally challenging and very unfamiliar landscape.
“That really links to the social, geo-political and economic uncertainty we see, along with instability in the global financial markets. We’re facing recession in many parts of the world. Supply chain issues continue to be evident since COVID-19. We are seeing the impact of inflation through rising commodity prices. And, in addition to large natural catastrophe losses during 2022, we have seen a pretty significant mark-to-market impact on the value of investment portfolios,” explained Hough.
Having to deal with all of this at the same time is what Hough feels has distinguished this year’s January renewals from prior hard market 1/1’s, which were primarily driven by large industry losses.
“Towards the end of last year, there was a clear turning point, in terms of the risk appetite of capital providers,” said Hough.
A somewhat more cautious approach from ILS investors for property catastrophe exposure was, in many instances, shared by reinsurers. After all, 2023 was another year when insured cat losses exceeded $100 billion, causing the industry to rethink whether or not this is the new normal.
“So, I think that has caused some fatigue. In addition, the loss activity we’ve been seeing – and this was also very evident last year – is coming increasingly from under-modelled or non-modelled perils. We used to call these secondary perils, but they’re becoming primary concerns,” said Hough.
While the occurrence of truly large landfalling hurricanes, such as Hurricane Ian in 2022, will always be among the costliest for a single event, for insurers and reinsurers, the increased frequency of floods, wildfires and convective storms – the so-called secondary perils – has made a substantial impact on cat budgets in recent years.
“There’s a growing concern around the modelling accuracy for these perils in certain regions and, overlaying the concerns around climate, there’s the social inflation issue, too.
“So, to me it felt like ‘23 needed a complete reset to really attract the ongoing and continued support of the capital providers who are critical to our industry. The sum of that led to almost an imbalance of supply and demand for parts of the business for the first time in a long time, simply because we didn’t see alternative capital flow into the sector as we’ve been experiencing in previous years, although Aspen has seen continued growth in third-party capital providers including at January 1 2023 reflecting relative performance,” said Hough.
Moreover, Hough explained that in the months leading up to 1/1 2023, there already was an understanding that pricing needed to be reset and there was a requirement for more sustainable, long-term price adequacy. The arrival of Hurricane Ian only served to exacerbate an already untenable situation.
“We found the market became very dislocated, particularly in the retro market. Some reinsurers heavily depend on retro capacity, whereas for Aspen, it’s more of a portfolio management tool. Nevertheless, we still have retro, which was proving to be challenging to negotiate or to find some type of consensus on pricing, peril coverage and, of course, terms and conditions,” said Hough. He also noted that Aspen was pleased with their ability to renew their retro program after good relative cat performance in recent years.
Looking ahead to the upcoming April and mid-year 2023 renewals, Hough feels that it should be more orderly than what was seen in January, however, he expects the pricing momentum to persist.
“In order to provide the long-term capacity and support that our clients expect from us, we are in a position where we need to demonstrate our ability to make an attractive return to our shareholders and capital providers, and that can only be achieved through long-term, sustainable pricing. From that point of view, I don’t see January 1 as being an exception and I think it will continue,” said Hough.
But when it comes to loss occurrence event definitions and coverage terms – two factors that were a strong focus during 1/1 – Hough doesn’t foresee those issues to remain as critical for the remaining 2023 renewals.
“For the U.S. and Japan renewals, perhaps excluding Florida, I would expect it to be more orderly in terms of getting those renewals completed. I think there’s probably less retro uncertainty as we head into mid-year renewals, which will help the situation,” he said.
So, what does this all mean for Aspen Re? In terms of the company’s strategy, Hough believes the reinsurer is in a strong position.
“At Aspen, we are well positioned, having undertaken a large degree of portfolio optimization over the last three to four years. We reshaped our portfolio globally to the extent that we’re very happy with what we have.
“We see the opportunity from the market being more around margin growth. What we’re not doing is looking for top line growth per se, rather we will look to grow profitably and smartly into what we believe is an improving market. We’ll continue to reposition our portfolio and focus on expanding that underwriting margin while managing the volatility.
“Volatility for us is not just the tail risk, which we have been managing closely. It is also looking carefully at the volatility to earnings, which essentially means keeping our attrition loss ratio under control. I think the market gives us that opportunity. It’s about obtaining a price for the risks that we are taking onto our balance sheet at a level, which we require, to deliver those returns on our capital over a medium to long-term basis,” said Hough.
