Reinsurance in rough waters
Insurers also have to insure themselves. Reinsurers take on part of the primary insurer's risk on their books and charge a premium for this, similar to what every company pays for its insurance policies. The price that reinsurers charge thus affects the price that the primary insurance customer has to pay. How is the reinsurance market developing? The relevant information is exchanged every year in October at the industry meeting in Baden-Baden. Gert Wellhöfer, Managing Director of the reinsurance broker Ecclesia Re from our group of companies, explains the situation.
Baden-Baden showed that we find ourselves in an extremely difficult environment in which the increasing demand for reinsurance meets a shrinking supply. Inflation was one of the dominant themes at the reinsurers' meeting in the famous spa town. It has reached an all-time high. In addition, the high frequency of severe natural catastrophes over the past two years is reflected in the reinsurers' books. These include the heavy rainstorm "Bernd", hurricane "Ian", the severe flooding in Australia and the hail damage in France. A rebalancing of relations between the insurance and reinsurance industries is therefore to be expected. It is far from certain whether the "equal terms" approach to risk assumption - i.e. the same conditions as in the previous year - that has been taken for granted for years in the co-operation between the insurance and reinsurance markets will survive the current treaty renewal phase.
The structure of reinsurance cover must evolve in line with inflation. The primary insurers' retentions will have to rise to ensure that the increase in risks and corresponding losses is shared between reinsurers and primary insurers on a sustainable basis. Reinsurers emphasise that they are willing to engage in dialogue as a reliable and consistent partner, but on their terms. Some reinsurers have already positioned themselves accordingly in this respect and made it clear that, firstly, the structure must be reviewed, secondly, wording issues, for example with regard to the definition of which events are actually covered by reinsurance, must be clarified and, thirdly, the price must be discussed. Others were not yet in a position to make a statement because the plans for 2023 had not yet been finalised. Considering that the reinsurers' conference took place at the end of October, nine weeks before the renewal date, this is also a statement about the difficult situation on the market. Some may not have wanted to show their cards, but in other cases this behaviour was due to the fact that the great uncertainty of retro covers at that time did not allow a reliable statement on the renewal positioning.
In the so-called retro market, many reinsurers cover themselves with reinsurance or other financial vehicles (e.g. insurance securitisations or parametric covers) for risk protection. The prices there therefore also influence the reinsurance prices, which in turn influence the primary insurance prices.
Only one reinsurer commented on the topic of prices. This concerned motor vehicle insurance. In its opinion, premiums in this segment should rise by around ten per cent. Other market observers see a need for adjustments of up to 14 per cent. Most recently, the German Federal Financial Supervisory Authority (BaFin) also warned that insurers must make their business "storm-proof". They need sufficient buffers in terms of capital and liquidity. This will inevitably lead to higher premiums next year, BaFin Director Dr Frank Grund announced at the annual conference of the insurance supervisory authority, which took place just a few days after the Baden-Baden Round Table.
The current situation is characterised by inflation and immense losses due to natural disasters. But where exactly are the reinsurers' problems? Quite often it is profitability. Margins have been relatively low over the past ten years and business has been very volatile. In addition, reinsurers are unlikely to have anywhere near the same capacity available in 2023 as they do now. Investors such as the large pension funds are migrating to other investment areas due to the interest rate environment. It is therefore to be expected that the required additional capacity of reinsurance cover totalling EUR 2.5 billion cannot be adequately purchased in Germany. The cedants, i.e. the primary insurers, will have to take on more risk. This in turn may result in higher prices on the primary insurance market.
The reinsurance market is urgently looking for ways to further diversify its balance sheets, not only geographically but also in terms of lines of business. Speciality lines - a very broad term that primarily excludes cover for natural catastrophes - are being sought.
The task for reinsurance brokers is now to have a balancing effect and find solutions that cushion the premium adjustments - also in order to mitigate the consequences for the primary insurance market. The reinsurers' quarterly figures in the first two quarters of 2023 will be crucial in consolidating the further forecast. It should then become clear how the effects of inflation and interest rates have actually been reflected. The large gap between double-digit inflation and interest rates to be realised in the range of three to five per cent suggests that the solvency capital ratios (SCR), i.e. the key figures for the solvency of companies, will decrease in the short to medium term. If further so-called capital events occur - i.e. events that, like "Bernd", significantly trigger reinsurance cover and lead to a considerable net loss in the reinsurers' balance sheets - the SCR could reach critical levels. The price spiral is then likely to continue.
Gert Wellhöfer