The disciplines of risk management, mitigation and transfer continue to evolve as insurers and reinsurers refine their underwriting practices to accommodate the potential mega-loss events arising from themes such as climate change and cyber liability. As insurance brokers break news about fire and flood exclusions to their commercial and personal lines clients, global reinsurers are coining new phrases to explain their risk approach.

The emergence of risk-adequate

One of the world’s largest reinsurers recently issued a media release under the title, ‘Volatile loss trends, complex risks: Munich Re to focus on risk-adequate conditions’. What? Your writer, who had not previously encountered this phrasing in an insurance context, wasted a few minutes in a vain attempt to find a dictionary definition online. His best guess is that by ‘risk-adequate conditions’ the reinsurer means establishing reinsurance contract conditions that are appropriately aligned with the actual level of risk on cover. Put somewhat differently, the reinsurer is seeking the underwriting Holy Grail of optimal balance between price; coverage; and terms. 

In its message to the ‘Rendez-Vous de Septembre’ reinsurance industry event taking place in Monte Carlo from 7-11 September 2024, Munich Re said that the reinsurance market has achieved a sensible balance in an environment characterised by high demand. Thomas Blunck, Member of the Board of Management, Munich Re Group, observed that “considerable uncertainty remained” in the global reinsurance market. Aside from high claims inflation across a number of segments, the board member was concerned over “significant downside risks hanging over the overall [global] economic environment.” 

An indispensable component of insurance

Reinsurance is an indispensable component of the South African insurance market, enabling insurers to manage large risks; stabilise their financial performance; and enhance their capacity to underwrite new policies, even in the face of significant claims from natural disasters and other large-loss events. It is only thanks to reinsurance contracts being in place that the likes of Santam, the country’s largest non-life insurer, can sustainably indemnify policyholders against the more frequent and more severe flood and storm events affecting parts of the Eastern Cape; KwaZulu-Natal; and the Western Cape of late. 

Santam’s 2024 Interim Report illustrates the scale of these natural catastrophes, reporting R607 million in total losses, net of reinsurance, from three loss events that occurred between January and June 2024. This compares to weather-related catastrophe losses of R150 million in the comparable prior year period. Other significant losses with net exposure exceeding R10 million per event came in at R98 million for the latest half-year, down from R358 million in 2023. Reinsurers do not sit idly by as the risk landscape changes; the respond by hiking prices and re-thinking coverage. 

Exclusions and limitations abound

As Santam mentioned early on in its 2023 Integrated Report: “the cost of reinsurance increased substantially following the significant losses experienced globally and in the South African market since 2020”. In addition, local insurers had no choice but to respond to global reinsurer demands with respect to limiting or restricting their ongoing exposures to systemic risks from grid failure and pandemic. The market remains tricky as we enter the final quarter of 2024. In the aforementioned media release, Munich Re conceded that the reinsurance market presented both challenges and opportunities. 

On the opportunity side, the sector’s growth outlook seems baked in. “Following pronounced growth in recent years, the global reinsurance market is set to grow by 2-3%, adjusted for inflation, over the next three years,” Munich Re wrote. “That puts the reinsurance sector virtually neck-and-neck with the primary insurance sector.” Current expectations are for slightly stronger growth in Asia-Pacific and Latin America, and slightly weaker growth in Europe and North America. Africa did not crack a mention. 

The challenge, it seems, is for global reinsurers to maintain the solid earnings achieved in 2023 over the coming three-year period. “Adequate earnings are crucial for the reinsurance sector, which was unable to earn the cost of capital in four out of the last seven years,” said Blunck, reminding stakeholders of the need to achieve risk-adequate rates to accommodate rising volatility and risk exposures. The reinsurer highlighted three topics that necessitate specialist risk expertise and a disciplined approach to underwriting. 

NATCAT costing USD100 billion, annually

First on the list was the perennial favourite ‘natural catastrophes and climate change’. Citing its own data, Munich Re noted an upward trend in insured losses that was closely linked to increasingly exposed assets. Who would have guessed, right? Annual natural catastrophe related losses now often surpass USD100 billion; but the higher loss trend is being driven by non-peak perils such as severe thunderstorms with hail; tornadoes; flooding; and forest fires. “The scientific community believes that climate change has an impact, and in some cases, a significant one, on the number and severity of these natural hazards,” Munich Re wrote. 

The second topic focused on claims inflation in the casualty business. “Due to the long-tail nature of the business, insufficient rates can impact profitability for several years,” Munich Re said. An analysis conducted by the reinsurer has revealed many years in which rate development has not kept pace with claims inflation in the US, an experience that will no doubt worsen as the world’s largest economy struggles to throw its latest multi-year dalliance with high inflation and interest rates. 

And third, cyber, which your writer acknowledged early on in the context of cyber liability. “The global cyber insurance market continues to gain importance and will experience substantial growth,” wrote Munich Re. “As a leading cyber re/insurer, we plan to continue providing significant capacity to match that growth over the coming years with commensurate prices, terms and conditions.” In plain English, dear reader, your insurer will likely soon be informing your of new exclusions for what their reinsurance partners call ‘uninsurable systemic risks’. And that means you can soon add cyber war to grid failure and pandemic as perils that are impossible to insure against. 

Reinsurers are not holding any punches

Munich Re Group Board member, Stefan Golling, was quite direct. He said that areas like natural catastrophe, casualty and cyber were symbolic of a reinsurer’s role, but warned that a sustainability driven reinsurer “would not hesitate to discontinue business that does not meet technical criteria for sustainable profitability.” 

Writer’s thoughts:

Insurers and reinsurers are engaged in a constant trade-off between coverage and sustainability. Unfortunately, sustainability focused actions such as higher premiums and a growing list of exclusions leave many insureds questioning the worth of their insurance contracts.

Original Article - FA NEWS