Higher rates cannot mask the structural changes needed
Reinsurers must not let the fallout from Hurricane Ian concentrate focus only on a further hardening of rates at the expense of ignoring more fundamental changes required in North American reinsurance structures needed to ensure the viability of the market.
That is the perceptive of Mohit Pande (pictured), Swiss Re’s head of property underwriting for US and Canada.
“The market is focused on price, but the structural issues are very important,” Pande told APCIA Today. “Structural features are crucial for the viability of the product we offer.”
A lot of the market talk going into APCIA and the ensuing renewals season has been on rate and Hurricane Ian has given a boost to that discussion. But Ian has an equally powerful message for the full list of reinsurer concerns that have hindered capacity going into the season.
“The market pre-Ian was already unstable on the supply-demand imbalance,” Pande said. Rate was already expected to jump “significantly” in the hope of outpacing inflation and loss trends “and that sentiment has grown stronger over the past few days”.
Pande’s top worry is attachment points, frozen for a decade even as exposure values have doubled by his count and cat losses soared.
“Cascading structures need to be removed entirely.” Mohit Pande, Swiss Re
“We are potentially seeing that attachment points have to double to get back to the level they were 10 years ago,” he said. “Potentially they need to double to keep pace with this increased loss activity and exposure pace.”
The pending difficulties of the 2022 renewal could have been solved long ago had attachment points become unhinged from long-dated levels.
“The supply-demand dynamic goes right through the question of attachment points,” Pande said. Hike attachment points and capital is quickly and easily redeployed from bottom layers of programmes to new upper levels where inflation has forced cedants to seek added coverage.
Structural issues do not end there. Pande points to cascading structures that reduce attachment points even further once lower levels of programmes are exhausted. Loss trends and inflation have done their worst to assure that lower layers burn out early. The bottom line: “cascading structures need to be removed entirely”, he said. “That’s not supportable.”
Segment by segment, Pande says, a fair amount of work is being done on terms and conditions, for example the early steps to limit silent cyber. But he suspects that the work is not over. The North American lack of an absolute war exclusion at the reinsurance level increasingly looks like a curious anomaly for closing. Restrictions on civil unrest may also need to tighten up.
