High loss burden likely to move markets in the 2021 renewals, says Deutsche Rück

Every renewal season is different from the previous ones, and this holds true for the renewals ahead of us. Compared to previous years, the much earlier start indicates a certain amount of unrest in the market, especially with a view to nat cat rates.

It is obvious that market participants are trying to secure capacity early on, as they have developed a sense of when rates will rise. Moreover, it appears not too bold an assessment to point out that due to COVID-19 restrictions, reduced travel is yet another cause for the early start of renewals.

Nat cat events put the pressure on

Let us have a look at the current situation: In 2021, we have seen so far an extraordinary accumulation of nat cat losses in Europe. For Germany alone, we are currently expecting a total of around €7 billion ($8 billion) in insured losses due to the massive flood event caused by Storm Bernd in July alone, which also hit Belgium and the Netherlands. In Belgium, the losses from Bernd are currently estimated to reach between €1.4 and €1.8 billion, mostly resulting from damages in Wallonia.

In Austria, insurers expect massive losses from hail events in June that could set a new record for the country. In Switzerland, the 19 cantonal building insurers have already factored in about CHF650 million ($701 million) in losses from hail and heavy rainfall in June and July, while the recording of all damage is not yet finished.

The intensity of the hurricane season in North America could further complicate matters. The losses incurred by the insurance industry in the wake of Hurricane Ida alone are currently estimated to total between $30 and well over $40 billion. Add to that the other, smaller nat cat events, the overall pressure is high enough to make rates move up.

High loss burden for the industry

In addition, let us not forget the effects the COVID-19 pandemic has had on the industry. On one hand, measures such as lockdowns resulted in significantly lower loss ratios in motor business. On the other hand, massive losses incurred from business interruptions and a high frequency of major fire losses have led to a high loss burden for the insurance industry this year.

Reinsurers have been experiencing unsatisfactory results for six years in a row. At the same time, low interest rates continue to place reinsurers in a dismal situation that poses challenges, especially for their asset managers. Many indicators show that interest rates will not improve in the foreseeable future.

At the same time, it seems that periods of low inflation belong to the past. Thus, as things remain challenging on the investment side, the strong underwriting discipline that has been in place so far will continue or toughen even more.

Flight to quality helps the recovery of rates

We again see new capital flowing into reinsurance. In contrast to previous years, however, mainly professional players are willing to provide additional capital at the moment.

As return on equity has recently been below the cost of capital, strict return requirements will be placed on the use of this capacity. In addition to the observable “flight to quality”, this once again underscores our expectation that there will be a further recovery in rate levels.

Diversification process continues at Deutsche Rück

What is certain is that we will continue to provide stable and longstanding support in the upcoming renewals. Our continuously excellent capital base serves as a guarantee that we will manage the challenges ahead in a proven manner.

We have been laying the foundations for a further regional diversification of our business, which we are driving forward to further optimise our capital deployment. Our market entry in the Gulf States in 2020, followed by Latin America in 2021, have been the next logical steps in this process, which will continue with establishing further markets in the near future.

Needless to say: constant process optimisation is a key success factor and Deutsche Rück is an active member of the B3i initiative. New technologies such as blockchain also help us to focus the whole organisation towards ever-improving customer relationships.

Klaus-Gregor Hahn is head of Central and Eastern European markets at Deutsche Rück in Düsseldorf, Germany. He can be contacted at:  klaus-gregor.hahn@deutscherueck.de