More risk margin needed to account for increasing uncertainty

Cincinnati Re’s Jamie Hole outlines the drivers behind the reinsurance unit’s growth momentum and highlights some of the challenges facing casualty and property catastrophe lines.

In which classes of business are you seeing the strongest growth?

Cincinnati Re finished 2020 with $302mn in net written premium, split roughly 51 percent casualty treaty, led by Phil Sandercox; 32 percent property treaty, led by Erin Skala; and 17 percent specialty treaty, led by Bill Lazzaro. 

Through the first half of 2021, we wrote $332mn in net written premium with similar distribution by segment. In addition to quoting on more transactions than ever before, firm order pricing lined up on more transactions than in past years. 

As a result, we connected with more clients, including some new transactions that came to market on mature portfolios that were only marketed on a semi-private basis to a small group of highly rated, large reinsurers. We also connected on some private transactions where we worked closely with brokers to structure creative solutions for clients across a range of treaties that didn’t work for us at open-market firm order terms.

Given some of the challenges facing casualty classes in recent years, has your appetite for this business been impacted? 

We are very much open for casualty business and maintain a strong appetite for it at the right terms and conditions. Pricing is clearly better on underlying casualty insurance lines, except for workers’ compensation. But we are not a top line-focused operation and approach business with a keen eye on alignment of interests with our clients as well as increasing loss trends, among other factors.    

While we certainly grew with existing clients, and connected with some new clients, on casualty lines in the first half of 2021, we also reduced and non-renewed participations where brokers pushed ceding commissions up to levels that turned attractive underlying insurance into marginal reinsurance. 

This is a challenge because some of the best underwriting companies are the ones able to drive ceding commissions up, but over time, we don’t think those expense levels are sustainable, nor do we think it’s wise to accept long-tailed casualty risk for materially less expected profit than our clients. 

Our team has a passion for the business, we love to dig deep, analyse the business, quote and offer solutions and iterate around deal structures. We are fortunate that without top-line pressure and with sterling security, there are plenty of solid opportunities that have allowed us to grow.

Has the team expanded with new hires to support this growth?

We have added to our team since 2015 and now have more than 40 people. The reinsurance business enjoys considerable operating leverage, and we expect to continue to grow selectively with a focus on the best people. We have the good fortune of executive leadership who understand our business, who only charge us for capital when we deploy it and who bring excellent, lean corporate infrastructure that we leverage.

We are hiring now for reinsurance actuaries, treaty underwriters and portfolio managers to assist with our third-party capital strategy, among other hires. Our team structure is flat, has fun despite long hours and is entrepreneurial, yet we still enjoy the enormous benefit of a large, stable parent organisation. 

Where do you see growth opportunities for the business in the year ahead?

Provided rates, terms and conditions show improvement relative to our view of risk, I expect continued growth in line with our current portfolio composition, but with faster growth potential in specialty and perhaps excess of loss casualty.

Property cat rates clearly need further strengthening in many areas. The industry was over its cat budget in Q1 2021 with the Texas freeze. Then came flood losses in Europe and now claims from Hurricane Ida.

We have capital and capacity to deploy on cat, but as with casualty, we and other market participants need more risk margin to account for increasing uncertainty with secondary perils and higher loss frequency, and property cat has become a longer-tail line of business as well. I also think an increasing number of reinsurers will continue to exercise more caution, reduce lines and manage down aggregates until we get at least a couple of clean years in a row.