Reinsurers must protect their margins

Reinsurers need to protect their margins, and prices need to reflect that in light of recent losses, Patrick Hartigan, leader of the treaty team at Beazley, told Baden-Baden Today.

He said that without the recent losses, the market would still have been dealing with flat rates. These illustrate the need for rate increases but some clients have resisted this.

“On the basis that the margins are being eroded to the extent where an average catastrophe year globally would reduce the loss for reinsurance, we have hit rock bottom,” Hartigan said.

As this has happened, the losses—which in some instance are projected to be up $100 billion—will have more of an effect on the global market, which is at the bottom of the cycle in terms of rate adequacy, he explained.

“Part of that is due to the supply/demand dynamic—that affects everybody because our cost of capital will go up, along with expectations from investors and also retrocession costs in the form of third party capital,” he said.

Hartigan said he is seeing some pushback on rates, particularly for clients who haven’t had losses in a while.

“What is somehow forgotten in all this is that there is risk price, and there is profit margin,” he added. “The risk price has to be taken into account, it cannot simply be added to the balance that reinsurers have achieved.”

The profit margin, in his view, has been eroded to the extent where it is negligible. And from a reinsurer’s perspective, they may question why they would offer capacity for a negligible margin.

“There will always be resistance; brokers will go into negotiations on behalf of clients. Clients will advocate that their performance should be recognised. But the dynamics are there that this needs to be spread among the many.

“Otherwise the reinsurance market will become less resilient and we will start to see companies going insolvent. And that’s not a good thing,” he added.

In this environment, Hartigan stressed that the ability to play claims is key with each cycle.

“If you lose that financial strength through eroding your margins too much, you have less of an ability to pay claims,” he said.

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