European cat in focus as reinsurers expected to push for meaningful 1.1 increases

Escalating insured losses of €10bn+ from the European floods will meaningfully impact some reinsurers and retro writers and drive 1 January cat renewal discussions on the continent as underwriters push hard for higher rates and buyers argue that moderation is warranted due to historically low loss ratios.

The Monte Carlo stage may not have been set for a second consecutive year, but that hasn’t stopped the grandstanding as senior executives have begun to put out the public messages they will hope filter through to colleagues on the front line.

In recent interviews with this publication, several reinsurance executives have emphasised the need for significant rate increases at 1 January after what was generally seen as a disappointing round of European renewals at the start of 2021.

Meanwhile, in private others have expressed concerns over lumpy losses coming through that could impact some players disproportionately depending on the make-up of their portfolio.

But brokers have said that while increases of some magnitude are now expected, past performance of European cedants and the dynamics of the market mean they will be limited to mid-single digits.

In an interview with The Insurer TV, Guy Carpenter’s Europe CEO Massimo Reina said there were early signs ahead of proper negotiations that reinsurers were also trying to narrow coverage from all risks to named perils.

Reina said the reinsurance broker was advising clients to “hold firm” against any attempts to restrict coverage on this basis. 

Upward pressure

Aon’s Reinsurance Solutions CEO Andy Marcell told The Insurer that European cat loss ratios historically run at around 22 percent.

“What that means is that if the flood losses in Europe truly are €11bn to €12bn, there will be upward pressure on price. But what upward pressure on price really means for clients traditionally is about a 5 percent increase,” he suggested.

The executive said that the outcome is uncertain at this stage because reinsurers will be looking at balancing their global portfolios.

US losses – including Winter Storm Uri and Hurricane Ida – combined with European flood losses mean that most reinsurers’ earnings are nearly at a point where they’ve been eroded for the year, with more than a quarter still to run.

Marcell said loss-hit layers lower down, where the impact has been greater, as well as aggregate covers will be under greater pressure.

“But we were here last year, there were similar questions and people were talking up the market. I think I said at the time that cooler heads will likely prevail, and they did,” he said.

United front

Reinsurers for now appear to be giving a united front on the need to push hard on rate, however.

Swiss Re’s reinsurance CEO Moses Ojeisekhoba told The Insurer for #ReinsuranceMonth that while it is too early to say how much recent losses will drive up pricing, there was “clearly” a need to maintain price adequacy.

“The numbers are always going to be a function of each individual client, of each individual treaty and each country, but on balance, clearly with a greater frequency of events in secondary perils, overall we need to make sure that there is price adequacy,” he said.

“Certainly from my own perspective, we would expect pricing to go up in the 2022 renewals.”

Axis Re’s president of international Andy Hottinger said the floods in Germany will have a “significant” impact on the market, with cat losses in the country set to be the highest observed in the last 50 years.

As previously reported, German insurance association GDV said German carriers now expect to incur losses of around €11.5bn from the flooding in July and severe convective storms in late June, as the country was caught up in record convective storm losses for Europe as a whole.

That could lead underwriters to review risk assumptions around increasing insured values as well as climate risk trends.

With the European losses likely to represent several years’ worth of premium in the region for treaty underwriters, after rates on line dipped by 40-50 percent over the past decade, multiple other reinsurer sources have said renewal pricing will respond in a meaningful way to the events.

Portfolio composition to drive loss

But while the messaging may show a degree of unity among reinsurers, there is an expectation that treaty and retro underwriters will see a broad range of outcomes depending on their books of business.

In the retro space, for example, there is a rule of thumb that a loss of above $7.5bn in European cat will start to be ceded by reinsurers on their own covers.

There can be very different experiences depending on the nature of the underlying loss and whether it is very regionally focused, or has a greater personal lines or commercial lines component.