‘Grey rhino’ risks will ensure continued upward pressure on rates

A number of so-called grey rhino risks could continue to exert pressure on rates to rise for some time to come, especially given that reinsurers’ returns could well be underwhelming for this year, Stuart Shipperlee, managing director,  Litmus Analysis, told Monte Carlo Today.

He added that different reinsurers are taking very different approaches to securing these increases.

In a video interview available to watch on Intelligent Insurer’s Re/insurance Lounge, the former ratings analyst said that, despite the positive sentiment in the industry in light of rate increases, returns, especially if reserve releases are ignored, are predicted to be “not that great”.

“And that is with the big leap of faith that we will have a normalised rest of year in terms of cat losses,” Shipperlee said.

Different approaches

Shipperlee went on to explain that what is driving rate increases is different from previous hard markets. Rather than stemming from a shortage of capital, due to heavy losses and/or a reticence of investors to reinvest, this is instead driven by reinsurers understanding they are simply not earning enough, given the cost of capital.

He stresses that predicted returns are unlikely to satisfy this problem, leading to yet more rate hikes. “And on top of that, you have a number of ‘grey rhino’ risks—a highly probable but neglected threat.

“These include cyber, inadequate reserves (potentially) and the increasing frequency and severity of cat losses. In a logical world, this means pricing momentum should continue.”

Against this backdrop, however, Shipperlee sees big differences between reinsurers in the way they approach this. Litmus Analysis has published a comprehensive evaluation of the mid-year renewal disclosures of Hannover Re, Munich Re, SCOR and Swiss Re.

It revealed substantial differences in the approach of these four companies and the extent to which they have achieved rate increases, something that could be an important indicator for the year-end renewals.

In aggregate, the four companies renewed some €12 billion ($14 billion) of treaty premium, with growth of 11 percent and an average risk-adjusted price increase of 2.1 percent. This compares to growth of 5 percent and an average price increase of 4.9 percent achieved at mid-year 2020.

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However, some substantial differences between the four are highlighted by the report. Hannover Re led the way in terms of overall growth, adding 15 percent in renewed premiums—almost double the 8 percent achieved by SCOR.But when it came to price increases, SCOR was the stand-out, achieving almost 8 percent; in contrast, Swiss Re saw average rate changes of an estimated 0.7 percent. Over the last six quarters SCOR leads the way with an average quarterly increase of 6.3 percent, although Swiss Re jumps to second at 5 percent, with Hannover Re at 4.3 percent and Munich Re at just 2.3 percent.The report reveals that, for the most part, premium rate increases appear to have slowed at mid-year 2021, compared with those reported at January 1, 2021, the exception being SCOR whose average price increase was bigger than that at January 1.Shipperlee said: “It’s interesting that Munich Re and SCOR both made a point of stressing that buyers are looking for high levels of financial strength backing long-term relationships.“With their very high ratings they might be expected to say that, and the pricing increases achieved don’t necessarily prove the point.“Nonetheless it is not difficult to see how the last 18 months will have further heightened cedants’ focus on reinsurer financial strength ratings and their likely resilience to severe stress.”