Primary and retro rates increasing; reinsurance will eventually follow: Schroders’ Lohmann

Pricing across the risk transfer market continues to resemble a U-curve, with primary rates increasing, retrocessional rates increasing—but reinsurance pricing remaining stubbornly flat with only loss-hit accounts experiencing any meaningful rate hikes.

That is according to Dirk Lohmann, who heads the insurance-linked securities (ILS) business of global asset management group Schroders. He told APCIA Today that he believes there are many forces that ultimately will shift pricing in the market, but these are not resulting in real changes—yet.

“Primary rates are going up and retro rates are increasing, yet reinsurance rates are not moving,” Lohmann said. “There is little movement in Europe; in the US it depends on the account; in Japan, rates have increased, but not by enough.

“Yet so many factors are pointing to a broader change in the market. It is early days and any change will not be uniform, but casualty rates have been soft for some 14 years. We have had several bad cat years, reserve deficiencies are starting to emerge, social inflation is adding to costs and court settlements are increasing.

“On top of that, you have a lot of companies retrenching and adjusting their books of business. It seems to me that we are in the early stages of a market correction; there are a lot of signs that the market could be about to turn in a meaningful way. If it did, we might consider entering a few more lines of business and maybe launching a balance sheet reinsurer,” he said.

In September, Lohmann admitted that Schroders has been considering launching a balance-sheet reinsurer on Bermuda, to provide a solution to challenges such as trapped capital and to accommodate the increasingly nuanced and sophisticated demands of different investors interested in playing in the risk transfer space.

Lohmann’s ILS unit has been called Schroder Secquaero since the former acquired 100 percent of Lohmann’s Secquaero business in July this year. He said that Schroders has “deep” relationships with a number of sovereign funds, several of which have previously invested in the reinsurance space.

He said that one possibility was that Schroders would play a central role in forming, managing and building a new reinsurer—but that, over time, it would take on a life of its own with key functions moving in-house.

The company has been building expertise in this space. For example, Stephan Ruoff, former CEO at Tokio Millennium Re (TMR), joined the company as deputy head in November; Beat Holliger, an experienced executive who has previously worked at Munich Re and Swiss Re, joined earlier this year.

The thought process behind launching a balance sheet reinsurer is part of a wider process of broadening the scope of risks Schroders can offer ILS investors. It has also looked at ILS funds targeting the life re/insurance space, run-off, and opportunities in Lloyd’s.

Lohmann said a clear indication of changes taking place on the primary side is that ILS funds such as Schroders are increasingly being shown large property accounts on the primary side.

“Some of the bigger insurers have retracted so much from this space, the brokers are sounding out the ILS side,” he said.

“These deals were not for us, but when you see these primary risks being shown to the ILS side, you know there is a squeeze on. The commercial and industrial side have also experienced some bad losses in recent years—their performance has not been good.

“Meanwhile, some corporate capital is being pulled from Lloyd’s. So, rates are increasing and capacity tightening. And then on the retro side, capacity is very tight, and it seems that will put pressure on reinsurers.”

Lohmann also commented on efforts being made in some parts of the industry to solve the challenge of trapped capital—an issue that has blighted in the ILS sector in the aftermath of the 2017 and 2018 losses. Some ILS funds have started introducing a clause that means the cedant pays an additional premium if capital is required to be trapped.

He said that Schroders largely dodged the trapped capital problem by pulling out of aggregate business after seeing the accumulation of secondary losses after 2017. He agrees that he would like to see a solution found, but that it is tough to change accepted norms in large swathes of the industry.

“We saw after 2017 that some perils such as wildfires were very poorly modelled and that the frequency of some primary perils was not understood. We exited most aggregate covers and avoided this problem in 2018.

“I would love to get an additional premium for trapped capital but in the largest part of the business—property—this is just not the way things are done and it is hard to change that mindset.”