Postlewhite predicts divergence of P&C renewal rate rises
In all the conversations and negotiations currently underway around the virtual vista of the Monte Carlo Rendez-Vous, the talk on all sides is that prices are going one way: up.
After a year ravaged by the economic turmoil of the COVID-19 pandemic and multiple high-profile, and unexpected, natural catastrophe losses, the reinsurance industry is experiencing a definitive hardening market.
However, there remains a significant degree of uncertainty about the nature and size of those increases and which sectors are most likely to benefit from the rises, even as a broad consensus about the overall direction of rates emerges.
QBE Re managing director of global reinsurance Steve Postlewhite came to Intelligent Insurer’s 1.1 Club to discuss how the market is changing and what carriers and clients can expect from the forthcoming renewals.
“Investors find it much easier to get into property lines faster.” Steve Postlewhite, QBE Re
Property vs casualty
While rates are definitely rising, multiple industry players have expressed uncertainty about just how far things will go and whether the changes will be enough to solidify pricing at a more profitable level than the industry has managed over the past few years.
With abundant capacity still available and more attracted to the market as a function of its diversifying nature and other macroeconomic trends—namely, rock-bottom interest rates—there remains enough to deter any dramatic increases.
Postlewhite argues that the market should expect a divergence between rate rises in the property segment, which he says is a more approachable market for new capacity to enter, and the casualty space, where ongoing social inflation trends and the modelling difficulty are likely to result in larger hikes at January 1.
“Investors find it much easier to get into property lines faster. So that is why I think that bifurcation will start to happen. It’s more difficult, from an underwriting perspective, and also a different kind of underwriting perspective, to get into the casualty lines,” he said.
“They will get into specialty lines over time, but the immediate impact will be felt in property. Capacity flowing in will be looking at the rate and also at the losses of the last five years, and recognising the rate may still not be where it needs to be, so they need to be very disciplined in what they’re doing.”
Postlewhite added that he hoped the increasing discipline in pricing would persist, given that the reinsurance industry as a whole has posted underwhelming returns for investors over the past five years and failed to meet its cost of capital.
“I certainly hope that pricing discipline will continue because the industry has to recognise that it’s not met its cost of capital over the last five years and even at the current rate, given the enhanced level of risk around the world in terms of cat events and other types of risk, it needs to be robust in terms of how it approaches pricing,” he said.
For more content like this visit the Reinsurance Lounge
“The industry has to recognise that it’s not met its cost of capital over the last five years.”
More weather events
One of the major factors which prompted discussion around pricing adequacy has been the increased severity and frequency of unexpected weather events which many attribute to climate change and its impact on the broader environment.
While the industry has thrown millions of dollars in investment in trying to accurately forecast and capture these effects on risk portfolios, Postlewhite said that the changing dynamics meant that many carriers were taking on more risk than previously reliable models now suggest.
“Over the period of 2017 to date, we’ve been experiencing an increased frequency of large cat events and other types of events, many of which aren’t captured well by the model,” he said.
“In fact, just about every single large event we’ve had within the industry has had components which haven’t been captured, or the actual event itself is an out-of-model occurrence.
“Whatever is driving that—and almost certainly climate change is having a big influence, and I think it is already here, from the point of view of physical risk—we are looking at the returns over that period, which are poor.
“While rates have improved over the last two years, I believe they’re still not there in terms of beating our cost of capital as a reinsurance industry. Clients may not see it like that, but I think there’s a set of tough discussions and negotiations to be had around that.”
