‘Not a soft market yet’: DEVK Re expects attractive 1/1

Softening market is an opportunity to reshape cover, expand protection and grow selectively without losing sight of sustainable pricing, says DEVK Re chief underwriting officer.

Key points:
Europe cat cuts have limited room left
More frequency cover expected at 1/1
DEVK Re sees room for selective growth

Growing market capacity will give cedants greater bargaining power at 1/1, but DEVK Re chief underwriting officer Cliff Falkenhagen sees little room for further rate cuts in European catastrophe cover.

Additional traditional and alternative capital is pushing supply ahead of demand. Barring a major US hurricane landfall before January, Falkenhagen expects conditions to favour buyers, with cedants also purchasing more European cat protection.

“We hope we will still be trading in a sufficiently attractive market. We consider the market to be softening, but it’s not a soft market yet for the time being, and surely there will be options for buyers to save money or buy more reinsurance for the same money or buy different structures than in the harder market two or three years ago,” Falkenhagen told Baden-Baden Today.

Pricing limits

DEVK Re nevertheless believes the price of risk transfer must remain sustainable over the full reinsurance cycle. In European cat business specifically, Falkenhagen sees limited scope for further reductions because pricing is already close to what the reinsurer considers technically fair for the risk.

“We will not see price decreases in Europe that we saw in Japan or Florida in April or June or July.”

He stressed that the reinsurance market is not monolithic, either globally or within Europe. “We will take the individual situation of every client into consideration in the renewal negotiations, so that will not be a one-size-fits-all solution.”

Falkenhagen also cautioned against assuming the significant price reductions seen at the April and mid-year renewals in markets such as Japan and Florida would be replicated in Europe.

“We will not see price decreases in Europe that we saw in Japan or Florida in April or June or July,” he said.

Falkenhagen said cat pricing has not returned to 2017-19 levels, although some pockets of the market are already soft. However, the wider reinsurance market has not yet reached the bottom of the cycle.

Frequency cover

Despite speculation that softer conditions could lead cedants to lower retentions, Falkenhagen expects attachment points to remain broadly stable, with buyers having become more comfortable holding higher levels of risk in recent years.

“If they want to buy down to a lower retention level, it will come down to the pricing exercise,” he said, warning that “a buydown might be less attractive than some people hope for.”

He does, however, expect more frequency protection to be placed at 1/1 than in the past two years, with pricing ultimately determining how much buyers purchase.

DEVK Re maintained a small book of frequency covers, including aggregate excess-of-loss treaties, even during the harder market, but Falkenhagen said underwriters will continue to require an appropriate distribution of risk.

“We are not looking for treaties that see losses every year or every second year,” he said. “We are talking about extraordinary frequency, and there is definitely an appetite to cover that. A prerequisite for this is that we receive transparent information, understand why this coverage is being purchased, and that the price is appropriate.”

On broader terms and conditions, Falkenhagen said: “We do like what we achieved in the wordings in the last couple of years, as this had been needed to ensure a proper alignment of interest.”

Selective growth

DEVK Re is prepared to write more business where it believes profitability can be sustained across the cycle, while reducing participation where returns no longer meet its targets.

As part of a mutual group, the reinsurer operates without outside shareholders demanding a particular growth narrative or share-price performance. Falkenhagen said that, together with its comparatively low-cost ratio, gives DEVK Re scope to continue finding attractive opportunities as market conditions soften.

“Our cost of capital might be a bit lower than for some of our competitors, and together with our comparatively low-cost ratio, that means that we might find attractive business in a softening market longer than others,” he said.

The DEVK group’s direct insurance business gives it substantial exposure to Germany, so he wants the reinsurance portfolio to grow faster outside that peak zone while continuing to write attractive German business.

Specialty lines account for around 40% of the portfolio, while DEVK Re is also expanding in international casualty and European life. 

Falkenhagen also sees excess market capacity as an opportunity to narrow the protection gap, arguing that expanding the amount of risk transferred could offer a more sustainable route to growth than competing for existing business. 

“Reinsurance is a long-term partnership,” he said. “We are looking forward to see that also in the next renewal.”

Cliff Falkenhagen is chief underwriting officer at DEVK Re. He can be contacted at cliff.falkenhagen@devk.de

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