Volatility means discipline must be sustained: Munich Re

Munich Re has vowed that discipline will hold in the market in the run up to the year-end renewal. There will be no slippage from the gains made on the European property reinsurance market during the 2022/23 market reset.

That was one of the key messages from the reinsurer’s press conference held in Baden-Baden on October 21, as it said continued increases in the frequency and severity of natural catastrophes back up its position with cedants.

“We have reached a fairly good balance.”

“We are not willing to let go,” said Clarisse Kopff, Munich Re’s board member for European and Latin America P&C operations. 

“We are not willing to be challenged on the reset we had in 2022 and 2023, when it comes to the higher attachment points, the clearer wordings, or the rates we have achieved. We think we have reached a fairly good balance,” she said.

There is no reason to think things should change, she added, because volatility in the market has not abated. And that includes from increasingly unexpected natural catastrophe losses in Europe. 

“Europe has been hit consistently since 2021,” she said, citing the many non-peak perils that have hurt insurers including flooding, hail and wildfires, which have hit increasingly varied geographies.

The upshot for the reinsurance market is that a clear division between losses being absorbed by primary players and where reinsurers step in. 

“When losses from secondary perils happen every year, it becomes business as usual,” Kopff said. “Then they should be covered primarily at the original level.”

“Reinsurers are here to absorb the very large losses,” she said, with a tip of her hat to the need to manage volatility on profit and loss accounts, but the focus on mitigating any potential balance sheet impact.

While broadly arguing that the renewal will be a settled affair, she did add that changes may be needed on some accounts. Individual geographies that lagged in the 2022/3 market reset may have revealed lingering gaps.

“There are places where claims have been worse and later than expected and this will need to be taken into account,” Kopff said, highlighting loss creep from Italian losses and flood losses in Germany.

European casualty

Property and property-cat lines were the first focus of the event, but Munich Re made a case for market vigilance on other lines. “There is a constantly changing risk environment and the pace of change has accelerated visibly in all lines,” Kopff noted. 

European casualty is exposed to severe inflation risk in long-tail liability categories. A host of emerging risks such as the “forever” chemicals known as PFAS, some US-style social inflation trends in the UK and class action cases in the Netherlands are all a worry. 

Munich Re, like others, expressed some doubts that a repricing done to accommodate prior reserve shortfalls has been adequate to get the primary industry ahead of the curve.

“We remain very cautious of the developments we are seeing,” Kopff said. “We have been cautious, not only in underwriting but in reserving and we will continue to be cautious about long tail.”

“Our preference is to provide our cyber capacity on a proportional basis.” 

Munich Re’s executives also discussed cyber, which remains a growth story for Munich Re. “We continue to grow our European cyber business and we expect to grow in line with the market,” Claudia Strametz, Munich Re’s point person for cyber in Europe said.

“We remain focused on our proportional-only offer and we do that in a very conscious way,” Strametz said. “Cyber is still a very dynamic market with a steep learning curve. 

“Our preference is to provide our cyber capacity on a proportional basis.” 

Talk is talk, but the supply-demand balance is decisive. To hear Munich Re tell it, both sides of the equation are growing, but demand for reinsurance may have more drivers.

“Supply is moderately increasing, essentially from retained earnings,” Kopff told the meeting. “It is fair to say that we don’t see a huge number of new entrants. Potential entrants are in ‘wait and see’ mode for hurricane outcomes before committing,” she suggested. Insurance-linked securities are less of an alternative in Europe, she added. 

The demand side, in turn, seems somewhat more robust. Kopff cites continued growth in underlying insurable assets and values, gains flowing through from motor segment policy price increases, the ever-rising world of cyber, and more. 

“We see strong demand and we are happy and ready to accommodate—provided the terms and conditions we get adequately compensate the risks we are taking,” Kopff concluded.

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