28 October 2022Insurance

Swiss Re won’t flee nat cat, but needs more cedant skin in the game

Swiss Re will not be chased from the nat cat space by yet another year of  “outsized” cat losses, but can’t be counted on to pony up cover for cedants with too little skin in the game who don’t “acknowledge the underlying risks and the price.”

“We believe that this is an important part of the future of Swiss Re’s business,” Swiss Re CFO John Dacey (Pictured) told a morning briefing for journalists. “We remain committed to providing capacity at the right price and with the right structures to our clients.”

But conditions for Swiss Re participation have steepened and “clear adjustments have to be made” both to pricing and to the level of “skin in the game” which primary carriers should bear via higher retention levels, Dacey said.

“We are prepared to work with our clients through renewals in 2023 to be sure we get to an adequate sharing of risk and an adequacy of pricing for the risk that we assume.”

Going into January, the reinsurance market is suffering “a true market dislocation” visible “both in reinsurance broadly and natural catastrophe specifically.”  Dacey knows the industry arguments: inflation has boosted underlying asset values to stoke demand while losses have destroyed capacity, both traditional and third-party capital. Even pre-Ian, third party capital was suffering “not just fatigue, but frustration.”

Swiss Re won’t necessarily be filling that nominal supply gap. “It is not obvious that we will actually increase in any meaningful way our overall exposure,” Dacey said. Treaty structures and retentions must first adjust to Swiss Re’s appetite.

Eventual offers are “likely to leave some people unhappy with the amount of price increase we believe is appropriate at this moment.” By the end of the renewals exercise, “prices will not show some evolutionary adjustment, but a quite radical adjustment to reflect the risk that is being transferred.”

Hurricane Ian was not a game-changer, just one among many straws accumulating on the camel’s back. A $50 billion industry loss on Hurricane Ian, a “large” storm, but far from unprecedented, “should not be a surprise.”

“We expect significant losses, it is just that the totality of it this year has created an outsize loss,” Dacey said, enumerating the full list of 2023 major events, but noting that the loss remains less than nat cat premiums collected.

Swiss Re’s estimate of $1.3 billion in losses on Hurricane Ian, while built on “fairly limited” information from the market, represents “a very prudent position” likely to withstand further cedant notifications, Dacey believes.

The forecast covers all the wildcard incidentals, including a litigation-driven tendency towards loss creep in Florida which “has caused some recent storms to cost considerably more than initially identified.” An increasingly blurred distinction between wind and flood damage is also in the number.

“The $1.3 billion loss estimate for Swiss Re reflects all of these factors and is likely to reflect the reality,” Dacey told journalists.

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