California reforms moving too slowly

Climate change is not making some risks uninsurable, but poor building standards, construction in high-risk areas and California’s failure to enable sustainable insurance pricing are all causing problems for insurers and reinsurers.

That was the view of Kerri Hamm, executive vice president of business development at Munich Re US, speaking at a panel on the state of the reinsurance market at the APCIA annual conference.

Hamm said wildfires and floods in California this year emphasised the need for the state’s insurance regulators to allow reinsurance prices and forward-looking models to be used in pricing applications by insurers.

She was joined by Alex van Dijk, president of US Branches for Guy Carpenter, who said it was “crazy” that California did not allow reinsurance to be taken into consideration.

“Something has to give,” he said. “If not, you will see what happened in Florida, with too little too late.”

The third panellist, Molly Tully, executive managing director of Aon Reinsurance Solutions, said the market was seeing increasing floods, more extreme rainfall events and development in areas that were prone to flooding and catastrophic events.

“Land use management is an important part of that,” she said, adding insurers needed to increase their use of stochastic models to better understand the risk.

She noted that losses from severe convective storms had increased by an average of 9 percent a year since 1990, but this was not due to climate change.

An Aon study showed that 80 percent of the increase was due to where people were living. “It should be an insurable risk,” Tully said.

Earlier, the panel clashed over the 1/1, 2023 renewals in which there were dramatic increases in attachment points and rates by reinsurers.

Van Dijk said he worried that reinsurance was becoming less relevant as a result, saying he was concerned that cedants had gaps in their exposures because the reinsurance community was unwilling to carry the risk.

He said the hikes in rates at the renewals had surprised clients who were not ready for the increases in rates and attachment points, or additional exclusions for political violence.

But Hamm responded that the reset in rates was necessary and she noted that insureds were much better prepared for the rate increases in the mid-year renewals.

Tully said that capacity shortages in 2022 were caused by unrealised investment losses and that capacity was returning to the market as the bond market rallied and offered returns at 40-year highs. Capacity was also increasing in the catastrophe bond market, she said.

Hamm said the rise in interest rates was a double-edged sword as it increased the cost of capital. She noted that some third-party investors were exiting the market as they could get higher returns with less risk elsewhere.

Van Dijk predicted more capital would come into the market as underwriting performance improved.

“Better combined ratios will get more capital,” he said. “We are seeing balance sheet insurers raise capital to deploy in 2024. The capital won’t be there immediately, but it is coming.”

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