Help us out now: stung by volatility, cedants seek a new reset

As reinsurers eye a potential third year of solid profits in 2025 driven by a persistent hard market and the 2022/23 reset to terms and conditions which included a sharp hike in retentions, some cedants, now bearing an ever-growing burden of nat cat losses, are starting to question the balance of power in the relationship. They are pushing for change—or at least stability.

That is the sentiment of several cedants and brokers who have spoken to Baden-Baden Today this week. As the share of nat cat losses, largely driven by secondary perils, absorbed by reinsurers falls towards 30 percent (down from 45 percent in 2022) some brokers have suggested that the relevance of reinsurers is being questioned in some quarters.

“Some are asking: ‘can you start helping us out now?’,” one broker said.

A key message from reinsurers at last year’s Baden-Baden was that one year’s solid earnings was not enough. The industry needed to prove it could deliver a solid return on equity (RoE) consistently, or at least for several years. That was what investors wanted and needed. Cedants reluctantly accepted the dynamic.

Fast-forward a year and reinsurers remain determined to hold the line. A plethora of unexpected cat losses, from hurricanes Helene and Milton to floods in Europe to severe convective storms almost everywhere, have highlighted the uncertainly and volatility incumbent in the industry. That has helped maintain the case for discipline.

However, as the reinsurance sector looks increasingly capable of achieving a third year of a robust RoE, sentiment is starting to turn. Higher attachment points have been central in shielding reinsurers from the bulk of nat cat losses, but some believe the reset went too far—that reinsurers now hold too many cards. Insurers want their partners back.

Trust is needed

One buyer happy to make that point is Roland Oppermann, member of the board and chief financial officer of SV SparkassenVersicherung, which has a dominant position in the state of Baden-Württemberg and a geographic reach that spans two other German states. Oppermann was a speaker at the Guy Carpenter Symposium in Baden-Baden, which took place on October 20.

At that event, he highlighted the importance of long-term, stable, partnerships. “Taking into account the significant and diverse challenges of the future related to climate change, cyber risks, and geopolitical tensions, trustworthy partnerships between primary insurers, reinsurers, and retrocessionaires are becoming increasingly important,” he said.

“However, true partnership requires developing a strategy that enables all parties to plan for the long term. I firmly believe there is a need for an innovative and collaborative approach to ensure this across the entire risk transfer supply chain.”

Speaking to Baden-Baden Today after that event, Oppermann went further. He said he now believes that the reset the market has seen in recent years has gone too far. “I could understand the 2022/23 reset, but what we see now, in my opinion, is overshooting,” he said.

As a cedant, he wants and needs long-term certainty from reinsurers. A more efficient, and maybe more understanding, reinsurance market wouldn’t constantly bounce from one long-standing imbalance to another.

He argued that the real volatility in the industry can be seen in the spread between reinsurers’ RoE and their cost of capital. This is certainly true for the bigger reinsurers, he suggests.

“Another correction is now due, to regain a balance.”

He describes a discrepancy between the challenges reinsurers use to justify the continued correction in the market versus their performance and underlying share prices.

“You will always have something—this time it’s losses in Italy, or this time loss creep: there is no risk-free margin,” he said.

“Yet when you look at the share prices, everybody is getting enough money for the risk they take,” he said.

Oppermann believes another correction is now due, to regain a balance, in favour of cedants. “I am a strong believer in balanced scenarios and sweet spots,” he said. “I would expect that this renewal, and from this renewal on, we look to return to the sweet spot as a market.”

“The reinsurers should give the primary insurers more time to adjust.”

He highlights another common complaint of cedants: that reinsurers can react and adjust their pricing much faster than reinsurers can react. This is a particular problem in the US, where insurers must often navigate lengthy delays by state regulators to get rate increases approved. But in any part of the world, in any healthy and competitive market, the end customer will only take so much change quickly.

Oppermann describes a discord between the business models and timeframes of listed reinsurers under short-term, quarterly pressure to deliver returns to shareholders, and primary carriers who can’t price-adjust to the retail sector as hard and fast as reinsurers can and did in 2022/23.

“The reinsurers should give the primary insurers more time to adjust,” Oppermann said. “Following the size and depth of the market reset we are unable to give this to our customers in this short a time. We should try to smooth this process.”

Being relevant

One problem for reinsurers, however, comes back to the idea of relevance. As cedants ponder their growing loss burden and exposure to volatility, they also consider other options. In response, they will seek to build buffers, share risks and search for alternative markets.

In many cases, the cost of capital for insurers is less than the cost of reinsurance. This raises the possibility of several alternatives.

In Oppermann’s case, he is mulling working with different types of counterparties. “I think we will be judging traditional reinsurers by comparing what they offer with alternative security models,” Oppermann told Baden-Baden Today. That can be finding ways to “manage enough buffers for ourselves”. He has also considered seeking out peers with similar business models with whom they might exchange risks, or heading to the insurance-linked securities (ILS) market.

SV SparkassenVersicherung has in fact been making exploratory forays into ILS for some 10 years but has yet to set up a deal. “It is definitely something we look at continuously; I think we are closer now than ever before,” Oppermann said.

The trick has been finding the sweet spot between investors and risk in the ILS European market where, although Oppermann praises a recent deal on the market, few have set a precedent.

The comparative pricing of ILS versus traditional reinsurance at the top of towers isn’t as clear cut in Europe where reinsurers favour the top. In the US, in contrast, ILS has a clearer place. Placing one’s own cat programme in Europe is a trickier balancing act of comparative pricing, he concluded.

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