Reinsurance affordability pushed to the limit

At this year’s ANZIIF Reinsurance Rendezvous Conference, reinsurance affordability will be on top of the agenda following five years of severe natural catastrophes.

According to Paul Lacey, Senior Underwriter, Hannover Re, and Chair of the Organising Committee for the upcoming conference, reinsurers and clients are sharing more risk than five years ago.

“This has pushed affordability and the search for highly rated reinsurance capacity to its limits,” he says.

As the industry would be aware, the key issue it is facing is the increased frequency and severity trends in natural hazards. The catastrophe events from bushfires, floods and hail in the last five years has resulted in high demand for the use of all traditional and non-traditional (investor funded) capital.

“As clients grow, they seek to manage volatility protection from these events with non-proportional covers. They also seek efficient and flexible capital management in the form of proportional quota share solutions,” says Lacey.

Government intervention can reduce the impact of reinsurance pricing through policies and funding to alleviate cost pressures. Lacey observes that this intervention generally “follows societal perceptions that market failure exists in some form.”

Making CRP fitter for purpose

One example is the Government Cyclone Reinsurance Pool (CRP), which seeks to address insurance affordability issues for high-risk areas. The CRP is aimed at reducing insurance rates through the removal of profit margins and government levies and taxes.

However, according to Tony Smith, Reinsurance Rendezvous Conference Organising Committee member and retired reinsurance executive, the design of the CRP is not appropriate for the risk. 

“The CRP only covers flood following 48 hours after the cyclone is downgraded to the tropical low. This is 120 hours less than the 168 hours basis on which standard market event definitions for flood perils operate," Smith says.

Lacy says that as a result, Cyclone Jasper saw a smaller share of the loss being recovered from the CRP compared with the flood losses following the event covered by the Insurance / Reinsurance market.

Lacey and Smith argue that event definitions across Cyclone and Flood need to be addressed, to provide more certainty to market participants on the expected losses and inuring benefit that a CRP is seeking to provide.

The definition of flood following the cyclone event remains a considerable challenge in determining insurance coverage. The key question the industry wants answered, according to Lacey, is “Will the CRP increase its Cyclone Event Period to 168 hours and therefore, increase the expected loss and CRP cyclone rates? This remains to be resolved.

Government steps in

Government intervention has proven more effective with other reinsurance pools, such as the Terrorism Reinsurance Pool. The Terrorism Pool was created in response to the “lack of Terrorism cover following the “reduced appetite by risk takers post the events of 9/11.”

Smith says the Terrorism Pool is "exactly the right answer for that risk". In the case of Terrorism cover for Commercial Property Risks, following 9/11, the Terrorism Pool met the urgent need for some type of terrorism cover, in the face of the immediate lack of reinsurer appetite.

“The federal government stepped in at a time when the traditional market could not provide cover for terrorism events, thus there was no other option,” Smith explains.

Lacey adds that over time, reinsurers have been able to model and assess such risks and provide support to the Terrorism pool. “The pool helped the transition and sharing of this societal risk,” he says.

Lacey and Smith agree that further government interaction is needed concerning increased natural hazards as a result of climate change. They say a broader range of perils should be covered.

“While government intervention with regards to the cyclone pool may alleviate cost pressures for Northern Australia, the increased frequency of non-Cyclone Perils (bushfire, flood, hail) will be the main driver of loss-driven rate increases across the ANZ region,” Lacey says.

The threat of cyber attacks

Cyber risk is another significant issue for insurance and reinsurance today to be discussed at the conference. The threat landscape is changing rapidly as emerging technologies increase digital risk and liability. Managing cyber risk, improving cybersecurity and developing greater cyber resilience, are primary concerns for many businesses.

The ability of regulation to keep pace with these changes, and the availability of traditional and non-traditional reinsurance pools can address some of the fiscal challenges that rapidly changing technology brings.

In addition, geo-political conflict and its effects on supply chains is a growing challenge that the reinsurance industry faces. Smith argues that the next pandemic and the effect it will have globally is also an important concern, as is the continued development of reinsurance talent.

The availability of reinsurance capital also remains a pertinent issue. Reinsurance currently draws primarily on traditional capital. Smith expects this to continue to be the case.

“Until the regulators give non-traditional capital access to the Australian market, we will continue to see the traditional capacity dominate for the foreseeable future,” he says.

Lacey says that the market consensus is that the next 18 months will see “pressure on risk adjusted pricing, given insurers have increased CatXL [Catastrophe Excess of Loss Reinsurance] retentions. However, this will be subject to natural hazard events returning to expected levels for both insurers and reinsurers."

Inflation changes the game

Inflation has led to increased losses for property and liability classes, which has impacted insurers and insurance customers. Insurance pricing is expected to stabilise as inflation reduces to target ranges.

Reduced inflation, removal of government levies and taxes, increased reinsurance capacity and increased self-insured retentions will alleviate cost pressures in the short term.

Lacey predicts that a continual effort to move existing exposures from high-risk areas will establish a sustainable insurance market in the longer term..

He is proud to chair the Reinsurance Rendezvous Committee. “For the past 10 years the committee has focussed upon delivering insights to a dynamic reinsurance marketplace, developing long term relationships and leading change with a diverse and inclusive committee made up of industry professionals,” he says.

Also a Reinsurance Rendezvous organising committee member, Michelle Kälin, who is Senior Underwriter - ANZ, Gen Re, is working with Lacey, Smith and other industry representatives to organise this year’s conference.

The 2024 conference is the third event she has helped plan. Kälin first joined the Reinsurance Rendezvous Conference organising group in 2020. She says that that was “a particularly challenging time: rescheduling dates, adapting content to relevant matters and trying to remain optimistic that our repeated efforts would not be in vain.”

Kälin has been on the organising committee since then, and also helped organise the most recent Reinsurance Rendezvous conference in 2022. She says, “For me, the most important part of sitting on the committee is the opportunity to give back to our industry.”

Finalising the agenda

The organising committee is working to finalise the agenda of the 2024 Reinsurance Rendezvous Conference. Kälin lists the ICA loss listing, mapping and new technology as topics that particularly interest her and will be included in the conference.

While the official program is yet to be released, among the panels and presentations confirmed for the conference, Smith is particularly interested in “the casualty challenges around gender transitioning,” noting that this is a current and complex issue.

The biennial Reinsurance Rendezvous Conference is a “must attend event” that attracts industry professionals across the Asia-Pacific.

Held over three days, the conference will feature presentations and panel discussions by leaders in the field, who will explore reinsurance issues, emerging trends and market directions, and the future of the reinsurance industry. This year’s conference will also offer many networking opportunities.

The conference promises to “provide delegates with the most up-to-date and thought-provoking market developments and insights”.

Participants can expect to “gain inspirational ideas and fresh insights on strategy from global reinsurance experts, learn more about emerging and current insurance and reinsurance issues and broaden networks with industry colleagues.”

Kälin says she hopes “participants will use the opportunity to engage with subject matter experts, broaden their knowledge and perspective on the real matters facing our industry, connect with old friends, make some new ones and have some fun along the way.”

ANZIIF’s biennial Reinsurance Rendezvous Conference is in person only.

Find out more about the ANZIIF Reinsurance Rendezvous