Inflation-eroded retentions put property cat profitability at risk: AXA XL Reinsurance

With property catastrophe rates falling and inflation eroding cedant retentions, AXA XL Reinsurance CUO Jonathan Gale explains why disciplined attachments, selective casualty deployment and third-party capital are critical to sustainable earnings.

Key points:
Attachment and structure discipline vital
Casualty growth depends on rate adequacy
Third-party capital preserves client relevance 

“Earnings are important, but quality of earnings is also important.”

The reinsurance market should remain profitable in 2027, but falling rates and rising claims costs are putting greater emphasis on where and how capacity is deployed, according to AXA XL Reinsurance.

Jonathan Gale, chief underwriting officer for Reinsurance at AXA XL, said the market was in the second year of transition after several strong years, with conditions diverging across classes as competition increases. While discipline remains broadly intact, the focus is shifting towards cycle management and understanding how far reinsurers can adjust without compromising long-term sustainability.

Assuming loss experience remains broadly unchanged, he thinks the market could move closer to softer conditions in 2028 or 2029, although he cautioned that reinsurance conditions can change quickly. 

Hold firm on attachment points 

Property catastrophe is already coming under particular scrutiny. Rates are reducing while compounding inflation has eroded the real value of cedants’ retentions, he noted, increasing the importance of maintaining appropriate attachment points. Nominal retentions look unchanged on paper, but once adjusted for several years of elevated inflation, the true risk-sharing between cedant and reinsurer can shift significantly. 

As claims costs rise, lower and fixed attachment points (be it aggregate or each and every) produce a gearing effect, leaving reinsurers with a greater, and sometimes unexpected, share of mid-level losses rather than purely supporting against severe events. Gale said underwriters’ factor in the gearing effect of expected claims inflation, as well as loads for perceived model deficiencies for perils such as wildfire. This makes pricing for these covers look high relative to expectations. Reinsurers are cautious about any drift in structures that would reduce their ability to provide true catastrophic coverage to clients in the future.  

“I believe reinsurers’ primary value is preserving capacity for true catastrophic years rather than mild changes to frequency and severity” Gale said. 

While property catastrophe excess of loss business has produced strong results in recent years, Gale said the combination of falling rates and inflation meant that this line required careful cycle management.  

Selective growth in casualty

US bodily injury exposed casualty business is another area receiving close scrutiny. Rates are increasing overall, Gale said, but loss trends remain “high and prior development uncertain” including in more recent years, and underwriters increasingly need to factor in loads for systemic claims or mass torts. 

Reinsurers prefer to see more obvious profitability with underlying rate matching trend, a track record, higher levels of risk sharing, strong claims handling and careful limit management before materially expanding participation. 

The approach is part of a wider focus on maintaining diversified and sustainable earnings across the cycle .

“Earnings are important, but quality of earnings is also important,” Gale said. “The market knows it cannot just be dependent on the wind not blowing, the earth not shaking or cities not burning. We need sustainable, appropriate profitability through the cycle to be of use to our clients and brokers when they most need us.”

Staying relevant

As market conditions fluctuate, reinsurers are increasingly using third-party capital to manage how much risk is retained while maintaining capacity for important clients. This includes both traditional retrocession and broader capital-markets solutions, enabling the reinsurer to calibrate its net position more dynamically while keeping gross line sizes meaningful for cedants.

Gale said the approach allows reinsurers to remain consistent with their preferred cedants. They can spread the risk more widely across the market and beyond, while preserving direct relationships and service levels; ensuring clients have continuity of support.

“We make extensive use of third-party capital. We always have a lot of skin in the game ourselves, but we make use of knowledgeable third-party capital to keep our gross relevance to clients, so we can preserve consistency through the cycle.”

Client quality will also influence where capacity is deployed- we remain focused on those clients with meaningful risk retention, proven underwriting and claims, risk management, data quality and stable buying.

For AXA XL Reinsurance, he pointed to its’ financial strength, AA stable (recently upgraded) and its position within the wider AXA group as giving the reinsurer flexibility as the cycle develops.  “Ability to pay coupled with a willingness to pay is evidenced by our multi decade track record delivered by excellent people, expert, experienced and well liked provide a strong selling proposition to our valued clients and brokers.”

Jonathan Gale is the chief underwriting officer for reinsurance at AXA XL. He can be reached at: Jonathan.Gale@axaxl.com

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