Beyond the horizon: shaping the future of risk

David Flandro, head of industry analysis and strategic advisory at Howden Re, discusses the complex landscape shaped by heightened risk premia, increased frequency and severity of secondary perils and the industry's current capacity constraints.

“The 2024 risk landscape is as precarious as it has been since 1983,” said Flandro. "We are seeing risk premia at their highest levels in over 40 years, which directly affects pricing across multiple lines."

This is due to factors such as the increased severity of natural catastrophes, inflationary pressures and geopolitical tensions, which have all converged to strain the (re)insurance market, he explained.

The market is facing a delicate balancing act between capital availability and risk. Critical classes of business, such as property, casualty, climate and cyber insurance, will all need more capacity to meet the demand we know is coming.

“The protection gap is large and set to grow, and the assumption that insurance will always be there and that there will be sufficient capacity needs to be challenged,” Flandro remarked.

Indeed, he explained that the current market is particularly challenging for cedants, with many facing increased retentions and higher attritional catastrophe claims. "Cedants are experiencing a double-whammy of increased retentions and an uptick in non-nat-cat major loss claims," Flandro observed. This dynamic has led to underwriters pulling out of high-risk lines of business, such as in California, where several carriers have ceased writing wildfire coverage.

Secondary perils driving losses

Flandro highlighted that secondary perils, such as floods, hailstorms and wildfires, have become significant drivers of loss, especially in Europe. These risks have increased in both frequency and severity, putting additional strain on the market. According to Flandro, insured losses from secondary perils in 2024 have been substantial. For example, the floods in May/June 2024 in Bavaria were likely the sixth and seventh largest flood losses from an insured and economic loss perspective in Europe over the past 30 years.

He warned that the industry must adjust its models and pricing strategies to account for the unpredictability of these risks. "We need to incorporate more forward-looking climate data," Flandro stressed, noting that historical data is no longer sufficient to predict future risks accurately.

Capacity, capital and market dynamics

The issue of capacity is another key focus of Howden Re’s report. An industry challenge is the limited re-entry of capital, Flandro noted. "Capital raising has been slow, post hurricane Ian, and there is not much fat left in the system."

"Investment typically flows in when returns are good, but we need to find 'sticky capital' – the kind that stays committed to the sector," he explained. This challenge is exacerbated by the fact that reinsurers are not actively seeking to raise funds, as current return on equity levels are strong enough to maintain the status quo.

Despite the challenges, Flandro highlighted some positive developments in the alternative capital space, particularly in ILS. "2024 has been a record year for catastrophe bond issuance, driven by incoming capital,” he said, although fundraising has moderated during hurricane season.

The industry's reliance on alternative capital remains crucial for managing the rising frequency of natural catastrophe losses. "At $55bn, ILS capital is significant, but we need to ensure it is deployed effectively," Flandro noted. He warned of the potential for trapped collateral, which could hurt ILS funds' ability to redeploy capacity in the future.

2025 renewals and outlook

Looking ahead to 1.1.25 renewals, Flandro predicted elevated losses, alongside limited capital re-entry, may lead to an extension of hard market conditions. “While there were indications that the limited easing seen at mid-year renewals might continue, hurricanes Helene and Milton have caused significant insured losses and have refocused minds that 2024 looks sure to be yet another year of over $100bn global insured losses,” he explained.

He highlighted that the report contains a simple but powerful message, namely that the future of risk management depends on collaboration. “Whether it is working together to understand the evolving nature of natural and man-made catastrophes, or addressing emerging risks such as PFAS, the need for combined efforts between brokers, reinsurers, capital providers and clients has never been more critical to ensuring that both consumers and businesses continue to have sufficient access to the insurance they need.”

David Flandro, head of industry analysis and strategic advisory at Howden Re can be contacted at David.flandro@howdenre.com

Charlie Beeching, director, strategic advisory at Howden Re can be contacted at Charlie.Beeching@howdenre.com

Read Howden Re’s report here: https://howdenre.com/wp-content/uploads/2024/09/Beyond-the-Horizon-Howden-Re-Report-Sep924.pdf