Insurer balance sheet strain could lift 1/1 reinsurance demand – Arundo Re

Falling bond values and claims inflation could increase demand for protection at January 1, although ample capacity should keep pricing competitive, says Arundo Re’s Laurent Montador.

Key points:
Claims inflation puts reserves under strain
Past losses cannot capture changing risks
Sidecars combine capital with expertise

Insurers facing pressure on both sides of their balance sheets could seek more reinsurance protection at the 1 January renewals, as higher interest rates weigh on bond values while claims inflation puts reserves under strain.

But Laurent Montador, deputy chief executive of Arundo Re, expects sufficient market capacity to keep pricing competitive, even if demand increases.

“For this renewal, the situation is a little bit different now than it was at the end of August, because interest rates have risen quite a lot,” Montador told Baden-Baden Today. “It means the value of the assets, and especially the bond portfolios, is lower. There are also claims of escalation with inflation that could put some reserves under pressure.”

Deployable capital across the sector has fallen slightly from late-summer levels, Montador said, but remains sufficient to maintain competition.

He also cautioned against assuming two relatively benign catastrophe years represent a new normal, warning that “Mother Nature will show that it’s not the rule for every year”.

Whatever the competitive pressures at renewal, Montador said deals still need to remain technically and economically viable.

“Pricing should reflect the risk taken. I think renewal negotiations will sometimes be hard-fought, but the industry should remain relevant.”

Pricing risks 

Determining what constitutes adequate pricing and wording is becoming more difficult as underwriters contend with risks that cannot be assessed through historical loss records alone.

“You cannot only rely on past data to predict the future because the future is not coming with the same processes,” Montador said, pointing to changing loss drivers across both natural catastrophe and liability business.

Social inflation, while often associated with the US, is also putting upward pressure on claims in Europe, he said. Rising litigation costs and uncapped bodily injury awards, for example, can leave European motor insurers facing severe third-party liability losses exceeding €100 million.

“This has an effect. Many things are different now. The industry needs to adapt and be able to reduce the protection gap that, in some ways, in some areas, is continuing to increase.”

Reinsurance has an important role to play where risks remain difficult to quantify, Montador added, pointing to renewable energy as one example where past experience may offer only limited guidance on future losses.

At the same time, reinsurers have access to increasingly mature datasets and more powerful analytical tools. Montador sees scope to use these to improve the speed and quality of underwriting decisions, claims management and wording analysis, while also improving the quality of data feeding models.

But judgement remains essential. “Models can give a kind of truth, but not all the truth,” he said. “Models can make some mistakes.”

Sidecars and ILS

The limitations of modelling also matter as third-party capital takes a greater role in supporting reinsurance portfolios.

Montador regards sidecars and insurance-linked securities as permanent parts of the market, but said their value extends beyond simply adding capacity.

“The real value of sidecars is not simply that they provide additional capacity,” he said. “They allow reinsurers to combine underwriting expertise with third-party capital.”

Alternative capital can also provide reinsurers with another layer of balance sheet protection. Montador favours a hybrid approach combining traditional retrocession with capital markets capacity.

Investors, however, increasingly want visibility over exactly where their money is deployed. “They really want to have a view on where their capital will be allocated, and they can be very precise in the type of risk to be seen,” Montador said.

Meeting those requirements demands sufficiently granular data to allocate capacity to specific exposures, alongside regular and transparent valuations.

 “The risk is there, so the pricing should reflect the risk taken.”

Investors also value reinsurers with established client relationships and direct access to original business, Montador said. Arundo Re uses long-term partnerships with cedants to take additional risk and secure larger shares of client programmes.

Ultimately, he said, sustainable underwriting depends on the interests of cedants, reinsurers and capital providers remaining aligned. “Alignment of interest is really the key.”

That discipline will remain important at the coming renewals, particularly where negotiations over price and terms become tougher. “The risk is there, so the pricing should reflect the risk taken,” Montador said.

Laurent Montador is the deputy CEO of Arundo Re. He can be contacted at lmontador@arundore.com.

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