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Social inflation more of a worry than climate change: O’Donnell

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RenaissanceRe CEO Kevin O’Donnell said that he has more concerns over the impact of social inflation than climate change, because the firm has been modelling the latter for many years.

In contrast, the effects of social inflation and higher-cost court awards are now showing up more broadly than previously, he said.

RenRe had pulled back on excess casualty business because that was where it first saw increased frequency from large awards, but “now it’s more persistent throughout the casualty market”, he said, speaking during Insurance Insider’s (Re)Connect conference.

“[Social inflation] will be a strong basis for continued rate enhancement within the primary markets for casualty particularly.”

In terms of climate change, the CEO said that based on the firm’s climate-adjusted models that assume more cat losses in a warmer future, the firm is still getting good returns – but cautioned that it was a complex market.

Climate change would change the shape of exceedance curves and the pattern of loss distribution, “not just shift them up”, he noted.

In terms of third-party capital, the 25-year veteran at RenRe said that it was a “very complex orchestration” running both owned and third-party balance sheets and funds.

“You need to be very careful to manage the agency conflict, what [risk] goes where and why,” he explained.

But he attributed the firm’s success in growing assets under management (AuM) to focusing on market demand.

“We’re careful to make sure that when we introduce a vehicle to the market to make sure it’s something that clients need and it’s something that...is beneficial to both the capital and the buyers.”

At the same time he said that focusing overly on AuM would be an “inward-looking exercise to think about the fees that can be earned from managing the capital”, taking a shorter term lens than the firm wanted.

Third-party capital would remain a “keystone to the foundation of Renaissance” he said, as there were some concentrated products that were more efficient to write outside a rated balance sheet.

Looking ahead, O’Donnell picked out cyber risks and the clean-energy transition as two areas of potential growth.

“As things change there is uncertainty, when there is uncertainty there is a greater need for risk sharing - from a growth perspective it’s a great industry.”

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