James Sharpington, underwriter at K2 CAT wrote a piece featured in Insurance day. James’ article highlights the hardening market conditions, the importance of trust in business relationships and a brief insight into the catastrophe market. See his piece below.
By understanding the risk and realistically pricing for the exposure, a mutually beneficial relationship between reinsurer and cedant can be maintained
Trust is at the heart of any business relationship and nowhere is a relationship based on trust more vital than in the long-term partnership between insurer and reinsurer.
No one can be in any doubt we are entering a hardening market, but at the same time we face the uncertainties of an economic downturn driven by a pandemic – a set of circumstances none of us have ever had to face before.
In these circumstances the lev- el of trust built – or not – during softer market conditions will be decisive in how well insurance businesses and reinsurers nav- igate their way through a rate hardening environment.
Our approach throughout the past few years has been to identify and work with quality insurers that share a commitment to developing a sustainable, long-term relationship with their reinsurer and that engage in active management and mitigation of claims.
Insurers that put the swift and competent payment of claims at the heart of everything they do have not only served their clients better but will have maintained the confidence of their reinsurer.
And these insurers are out- performers, with high-quality, efficient processes and a tight leash on claims management. They also rely less on third-party providers for their claims ser- vice, instead preferring experi- enced in-house teams. Where they do use external third par- ties, their effectiveness is closely managed and monitored.
In recent years, the management of “claims creep” has become even more complex. Changes to the assignment of benefits legislation in Florida in 2019 have seen claims from 2017’s Hurricane Irma continue to be received and grow in scale.
However, even in an uncertain environment like this, not all in- surers have seen the same level of claims passed back to their re- insurers. It is these well-run businesses, which have not used cat reinsurance as a crutch but as in- tended as respite from significant losses, that are likely to find the hardening market less challenging than many of their peers.
However, even those insurers with strong ties to quality reinsurers will nevertheless see increases in their premium rate and in terms and conditions, as the market continues to harden.
Early indications are the market is in the process of a significant hardening and not just a 5%correction like that experienced after Hurricane Sandy in 2013. At the April 1 Japanese renewal we saw across the board rate increase of up to 60% on wind/flood business and as we move towards January 1 we are likely to see the full momentum of the increasing rate environment gather pace.
This is not, however, just a knee- jerk upward movement based on the opportunism of a market after years of falling prices but is also driven by a rapidly changing loss environment.
Traditional markets have a wealth of modelling and reporting data that has helped navigate ups and downs, but in recent years some of this modelling has been overtaken by unexpected or perceived low-risk events causing significant upheaval to carriers. At the same time, severe events such as the California wildfires are challenging modelled ultimate loss levels for perils across the US.
In August this year a derecho or inland hurricane hit the US Mid- west, bringing winds of 140 mph and destroying 35% of Iowa’s corn crop. This extreme event saw a number of Midwestern insurers burn through their entire reinsurance programme and look to buy back-up reinsurance cover. It is likely to force them to re-evaluate the potential that events of this magnitude might become more significant as climate change gathers pace. And as a result, this marketplace will undoubtedly face rate increases at renewal plus more limit purchased.
Meanwhile, US wildfires have be- come an increasing challenge for the industry since 2017. Before then, California’s largest exposure was always considered to be earthquake, of which 1994’s Northridge quake was the largest. The 2017 wildfire season cost substantially more than that and 2020’s fires look set to deliverrecord-breaking losses.
It is clear reinsurers need to look again at these emerging and growing risks, reviewing their concentration in those areas and reconsider what the true cost of risk is for these perils.
However, managed effectively and in partnership with insurers, any re-rating should be proportionate, and capacity is unlikely to fall away altogether.
We face an uncertain economic and health environment while climate change and loss patterns are creating larger and less predictable losses. With a good understanding of risk, and price increases that reflect the reality of the marketplace rather than profiteering, positive rela- tionships between insureds and reinsurers can be maintained. A durable relationship that can be sustained once the market correction has been completed and the cycle swings in the opposite direction can be established