Market in Flux
Loss creep, shrinking retrocession and deteriorating casualty results define the market as reinsurers head into the annual Rendez-Vous de Septembre.
- Stephen Catlin
- August 2019
What is scary is that we are just beginning to see the problems that could be caused by casualty business that was underpriced in recent years.
Industry analysts each year attempt to describe the state of the reinsurance marketplace ahead of the Rendez-Vous de Septembre, the annual gathering of global reinsurance leaders in Monte Carlo, Monaco. This year, “a market in flux” would be a fitting description. Some pundits, tongues firmly planted in cheek, could even go so far as to call the market “creepy.”
I thought I would share my thoughts on the market as the 2019 Rendez-Vous approaches.
There is no surprise that “loss creep”—or deterioration in reinsurers' reserves arising from complex claims— is occurring today. Loss creep has always been present; it just seems to be more widely discussed today. When I started my career in the insurance industry in 1973, the market was still experiencing loss creep from Hurricane Betsy, which had occurred eight years earlier. As 2019 has progressed, many reinsurers have reported significant levels of loss creep from recent catastrophes such as typhoons Jebi and Trami, Hurricane Irma and other events.
Loss creep has had serious repercussions for insurance-linked securities. Due to the nature of collateralized products, loss creep causes capacity in the ILS market to decrease. Valid claims must be paid, so the party that is most hurt by this phenomenon is the ILS investor. It must be remembered that insurance-linked securities are fundamentally commodities, triggered by a parametric with a basis risk, whereas traditional reinsurance is built on relationships. As I have long maintained, many forms of alternative reinsurance capital are intrinsically opportunistic: If superior returns can be achieved elsewhere, the capital will disappear from the market, whereas traditional relationship-based reinsurance capacity remains available over the long term. I see this scenario playing out over the next two or three years.
Adding further pressure to reinsurers' fortunes is the deterioration in the casualty market. Pricing casualty business correctly is never easy, and past mistakes can cost reinsurers dearly in the future. The fact that casualty business has been written at rock-bottom rates over the past several years raises the question of whether reserves for this business will prove to be woefully inadequate. Underpricing casualty business—especially at times when companies cut back on writing property business due to competition and add casualty business to their books—inevitably causes a lot of pain. What is scary is that we are just beginning to see the problems that could be caused by casualty business that was underpriced in recent years; the true cost may not be known for another five years or so.
Capacity in the retrocessional market is shrinking, which is probably good news in the long term. A shortage of retro cover means that insurers and reinsurers will have to take extra steps to ensure that coverage is priced appropriately.
Another challenge is the systemic nature of cyber and the broad coverage that is still being given to many clients for virtually nothing. This can only end in tears.
Finally, I believe there is now clear evidence that climate change is increasing both the frequency and severity of natural catastrophes.
The good news is that many major players in the insurance and reinsurance markets are now showing genuine resolve to adequately price their products, both property and casualty business. As usual, as problems in the market come to the surface, the winners—and losers—will quickly become apparent.
Best’s Review contributor Stephen Catlin is the founder of Convex Group and Catlin Group and former executive deputy chairman of XL Catlin. He is a member of the International Insurance Society’s Insurance Hall of Fame. He can be reached at email@example.com.