Reinsurers seeing the value of higher attachment points

The reinsurance market is seeing the benefits of the higher attachment points pushed through in recent years, according to speakers on a reinsurance panel at the APCIA Annual Meeting.

Speaking during the panel on Monday, Andrew Zastrow, business development executive at Munich Re US, suggested that the market a few years ago “had got away” from some of the discipline it previously had and was put in a difficult position.

“I think now the industry understands that better. We're much more able to move forward in a profitable way,” he said.

Zastrow highlighted three drivers of the strengthening of the reinsurance market: structure, risk-appropriate pricing and making sure values are in place.

Chris Ross, managing director at Guy Carpenter, said that previously a lot of unmodeled loss such as wildfire, severe convective storm and winter storm “was then leaking into the reinsurance cat programs, and they were becoming much more frequent and much more prevalent across the United States”.

This drove the adjustment to attachment points, he added.

Ross also commented that there will be a “mix of capital” across placements given where markets want to play.

“Some markets like to play down low. Some want to be at the top end. Some want to be on the side. So it really depends on the different structures that are in place, but I think there's definitely going to be discipline. The industry is seeing the value of the higher attachment points,” he said.

Hesitancy around growth expectations

Robert Jones, North American regional treaty manager at Gen Re, said that reinsurers are very comfortable with volatility as long as they can price for it.

“We'll deal with the lumpiness of our results over a period of time as long as we have some sense of what over the long term those losses might be, so that we can determine what's the appropriate loss cost plus margin associated with it,” he said.

Moderating the panel, Robert Hartwig, clinical associate professor, finance department at the University of South Carolina’s Darla Moore School of Business, noted recent projections from one large reinsurer that the reinsurance market will grow by 2 to 3 percent over the next three years.

But Hartwig added that various cost issues such as inflation, rising property values, elevated cat losses and social inflation remain concerns.

Ross at Guy Carpenter said it feels like the growth rate should be faster than 2 to 3 percent but added: “There is hesitancy a little bit, because it is all dependent upon: are the structures working for our clients? If they're not working, the clients will find a different way to either retain the risk, to fund for the risk, or another way which could be a limiting feature on that.

“The market has to find a balance between what is the right price and the right structure for the risk it wants to absorb, or find different ways of managing that risk.”

Munich Re’s Zastrow said that he thinks there will also be increased demand for reinsurance.

“We are not seeing values go down. We're seeing them go up. We're seeing the risk volatility go up as well. And I think there's going to be an increased pressure to be able to cede some of that off to the reinsurance market, and that's going to help facilitate some of that demand,” he said.