SRCC (re)insurance market may be one cat away from complete dislocation: Howden

The global strikes, riots, and civil commotions (SRCC) (re)insurance market may be only one catastrophic event away from complete dislocation if current treaty reinsurance contract limits persist, according to Howden Re.

In its Beyond the Horizon sector report, the broker emphasised that modern drivers of SRCC activity are no longer siloed by geography and have become increasingly interconnected.

At present, Howden said treaty reinsurance contract limits standardly cover “any one city” or a defined radius – maximum 20 miles, per se. However, the broker said these have become less fit for purpose as locations thousands of miles apart can be affected by the same event.

“This presents a significant concern when insurers can only recover or reinstate on one location (i.e. their largest loss), resulting in significant horizontal net exposure. If these restrictions persist, the market may be ‘only one catastrophe away from complete dislocation’, heightening the need for multi-city clauses,” said Howden.

The broker said parametric products could also offer a solution for this increasing aggregation risk and the sizeable gap between sustaining a loss and making a claim.

Howden said inflation-adjusted SRCC losses have surpassed $13bn since 2015. As a result, reinsurers remain increasingly tentative in underwriting this exposure. The broker suggested concerns largely related to uncertainties around the composition of the underlying portfolio and on the adequacy of pricing for the standalone product.

At present, terror and PV is usually written to an aggregate limit, with all risks cover given to SRCC events on an “each and every basis”. As a result, Howden said the property market is vulnerable to black swan events with effectively uncapped cover.

And one event that reaffirmed these concerns was the April riots in New Caledonia, in which the market incurred~$1bn of losses from embedded exposure.

Casualty concerns continue

Consistent with other pre-renewals market commentaries, Howden also emphasised concerns about the adequacy of casualty reserves particularly in relation to the accident years 2014 through 2019.

A combination of higher repair costs, legal fees, healthcare expenses, increased nuclear verdicts, and social inflation have contributed to the most recent calendar-year claims experience.

While reinsurers have pushed for price increases across casualty to offset reserve development for a number of years, memories of the late 1990s have continued to fuel further apprehension.

The prospect that new risks associated with PFAs, and product liability concerns in the motor market, may impact (re)insurers’ future loss experience have underlined these concerns.

However, Howden said industry-wide reserve positions continue to show redundancies across the board, with all carriers in the broker’s composite (see below) releasing reserves in H1 2024.

Falling inflation and fewer natural catastrophe losses contributed to broadly favourable reserve development in the first half of the year. But the broker warned that shifting conditions in certain lines could alter this.

Earlier this week Guy Carpenter said that casualty renewals will focus on underlying rate conditions and portfolio performance, while Aon said that the market should expect a stable renewal with differentiation a critical factor.

Some insurers reassess participation over higher attachment points

Increased attachment points at 2023 and 2024 renewals have seen smaller, more frequent events slip outside of the reinsurance coverage threshold, a trend that has eroded the profitability of primary international insurers.

Although European reinsurers' major non-catastrophe loss ratios have doubled since 2023, the highest level since the pandemic, the shift in attachment points has seen improved underwriting performance and return on capital.

Consequently, Howden emphasised that there is a limit to the risk insurers can prudently take on, with some already having to reassess participation in certain lines.

Flood, severe convective storms, and hail have been the most significant contributors to European losses. And this comes with insurance penetration sitting behind US level.

Howden’s comments come after its CEO David Howden warned that this dramatic shift in the loss burden could see the global reinsurance sector lose its relevance.

“The relevance of reinsurance reduced dramatically. Reinsurance is taking about 10 percent less of cat exposure in the last couple of years than it's taken in the whole of the previous 25 years. Most of those second perils are [now] in the balance sheets of insurance companies, not in the balance sheets of reinsurance companies,” said Howden.