Reinsurers sound bullish note for 1.1 on Bernd and climate change
Reinsurance market sources are predicting increases of 5%-10% on clean European cat programmes and 20%-30% rate hikes on loss-hit covers, as reinsurers cite Bernd flooding as an indication of the increasing cost of climate change on the continent.
Discussions at and around this year’s Baden Baden conference centred on how the impact of Bernd should be spread among cedants, as well as the still ongoing issue of unresolved disputes over how 2020 treaties should respond to Covid-19 BI losses.
The trapping, or destruction of capital, within the retro market is another factor contributing to upwards momentum on rating in the reinsurance market.
However, the surprising magnitude of Bernd, which racked up an estimated $12bn of insured losses, coupled with a markedly reduced physical attendance at Baden Baden this year, has meant that there is less clarity around the direction of the market than would normally be expected by mid-October.
Additionally, as ever, the behaviour of the European “Big Four” – Swiss Re, Munich Re, Hannover Re and Scor – will have significant influence on the reinsurance market’s resolve to push for higher pricing. So far, in their public statements, the quartet of continental carriers have displayed differing degrees of bullishness.
Stern words from the Big Four
It is to be expected that the four reinsurers with the largest European market share would make bullish statements at the outset and then in the midst of the 1 January renewal season, and this year is no exception.
As ever, reinsurers’ messaging dominated, with little to no input from brokers or cedants, who tend to communicate their views directly to reinsurers rather than engaging in public debate.
However, whereas last year carriers pointed to attritional weather losses, economic uncertainty due to the impact of Covid-19 and low interest rates, achieving largely single-digit rate increases, this year the message was more cohesive and dramatic.
Flooding associated with low-pressure area Bernd caused around $12bn of industry-wide losses according to a Swiss Re estimate, the majority of which was in Germany but with a secondary impact on Belgium and the Netherlands. This, coupled with hail events earlier in the year, makes 2021 the most expensive on record for Germany for at least the past two decades.
Reinsurers have been quick to point to Bernd as evidence of the impact that climate change can have in Europe, rather than in peak cat zones such as the US and Japan where the effects have so far been more evident.
“Climate change has arrived in Europe, and it's getting worse,” Swiss Re’s EMEA head of property underwriting Beat Kramer Mölbert said at a Baden Baden press conference.
He added that he expected significant changes to structures of programmes, focusing on reducing exposure to low-attaching secondary perils.
Hannover Re’s board member Michael Pickel, meanwhile, told the conference that German programmes hit by Bernd flooding must pay double-digit increases this year, adding that “every reinsurance buyer has underestimated the magnitude of this loss”.
Not if, but how much
Sources returning from the Baden Baden conference said that there was a marked difference in the framing of the pricing discussion this year, with brokers having prepared cedants across the market, and with differing loss records, to pay at least some increases.
The conference was a muted affair in its first return to in-person meeting post-Covid, with around half the usual 3,000 delegates attending, according to conference registrations, and reports of a scarcity of cedant attendees, with reinsurers sending “skeleton crews”.
Further, given the unexpected scale of the Bernd loss and the potential for significant market hardening, neither cedants nor reinsurers are keen to show their hands at this stage. “Expectations are adrift,” as one source said.
This makes a consensus on market-wide pricing difficult, but sources pointed to increases of around 5%-10% for loss-free programmes and rate hikes of 20%-30% possible for those with significant Bernd losses.
Sources said cedants and reinsurers alike are beginning to see flood as more of a “mainstream” peril in terms of the severity possible given the way that climate change is linked to more intense, localised periods of heavy rainfall.
Broking sources, while preparing cedants for increases of some description across the board, are arguing that losses falling primarily in Germany should not unfairly impact cedants in other European countries.
At the same time, however, reinsurers argue that European treaties have been underpriced given rising attritional losses for several years, with Bernd simply the catalyst for long-needed increases.
Meanwhile, the experiences of Bernd-hit cedants have prompted something of an awakening in reinsurance buyers across the continent, sources said, as they saw German and Belgian cedants blow through their cat programmes, some of which were “irresponsible” buys.
Reinsurance underwriting and broking sources alike cited increased demand for reinsurance cover, particularly for flood, as cedants looked to protect themselves from future severe storms.
Cedants are looking to buy increased limits, and while there is pressure on the buyer side to maintain retentions at current levels, reinsurers are pushing for increases.
The greatest upwards pricing pressure is on the top layers of current programmes, where cedants typically pay only around 1%-2% rate-on-line.
Here, reinsurers are pushing to double or triple pricing.
“Those [1%] layers have now got to go to 2.5% on-line, and then the layer beneath that, that is at 2% on-line, has to go to 4.5% on-line,” a source said.
Another added: “In the past 10 years, the average rate on line for a European cat programme has halved from 8% to 4% on-line. They don’t buy enough cover and it attaches too low.”
Other changes to structure predicted include a reduction in pre-paid reinstatements and the endings of no-claims bonuses on reinsurance programmes, with aggregate covers likely to be difficult if not impossible to buy affordably.
Covid-19: Not out of the woods yet
This time last year, discussions at Baden Baden and in the following weeks were dominated by Covid-19 non-property damage BI claims and how, if at all, reinsurance treaties should respond.
Discussions centred on the validity of claims where no physical property damage was present, the aggregation of claims and the application of hours clauses.
At the last renewal, in many cases, reinsurers and cedants agreed to price contracts for 2021 without accounting for Covid losses given the lack of clarity.
A year on, however, many disputes are still ongoing, with some reinsurers not anticipating resolution of outstanding claims on treaties they write until the middle of next year.
This raises a question of whether reinsurers will attempt to price for Covid-19 losses in 2022 treaties regardless of the lack of clarity, or postpone that discussion once more. Sources said reinsurers’ approaches to the issue differ widely, depending on the experiences they have so far had with cedants.