Reinsurers must use 1/1 renewal to tackle retro dislocation gap

The reinsurance industry “needs to reinvent itself” in the face of challenges from raging inflation to recurring record natural catastrophes and must use the 1/1 renewals to start narrowing the dislocation between the retro markets, capital markets and reinsurance.

That is the view of Franz Hahn (pictured), chief executive officer of Peak Re.

He told Intelligent Insurer that inflation alone represents a huge challenge for the market, the type of which it hasn’t seen for some 25 years. Reinsurers must tackle this on both sides of the balance sheet, he said.

“On the investment side, portfolios need to adjust to benefit from changes in investment opportunities. On the underwriting side, however, this means stress, because of inflation on the losses,” he said.

The other big issue, which affects Asia and the rest of the world, centres around the increasing frequency and severity of natural catastrophes.

“Before 2016 or 2017 we had a couple of years that didn’t show very strong natural catastrophes. Since then, we seem to be going from one record year to another. It’s obvious this is closely linked to global warming. So the reinsurance industry as a whole needs to reinvent itself,” Hahn said.

He noted that, in 2022, reinsurers are grappling with a dislocation in rates and terms and conditions between the retro markets, capital markets and the reinsurance market.

“For the 1/1 renewal and the ongoing renewals, reinsurers must start to close this gap; the dislocation requires us to support retro buying using other lines of business profits. That brings stress to the entire system of reinsurance. Everybody is aware of it.”

He acknowledged that geopolitics has changed “dramatically” in the last couple of years causing a lot of distress. But he added that in Asia, “it feels normal” and the reinsurer continues to see opportunities.

“We see the opportunities stemming from a growing middle class and an increase in the insurance needs of that society, which is not yet as fulfilled as in the UK, continental Europe or the US. Demand is there, we just need to meet it.”

Hahn gave kudos to the reinsurer’s chief economist Clarence Wong, who has led research whereby the company analysed opportunities in the Asia markets (read more on p8 of this edition of SIRC Today).

A chance to be taken

Hahn said that the reinsurer’s home markets are the emerging markets of Asia where he sees specific opportunities. “On one hand, we think that middle-class society should all get adequate coverage and very often, for various reasons, they don’t. It has been like that for the last 30 years I’ve been here.”

He explained that culture was part of the reason behind this as well as some supply and demand issues.

Wealth has been growing much faster than insurance penetration and despite the volatile environment, countries in Asia, particularly China and India, are still doing better than the rest of the world, he said.

“There is an opportunity to grab this chance, the 1 percent market share in one year, without changing anything. It gives you 15 to 35 percent growth in the next year because of the economic growth, which is fuelling the growth of the insurance market, and the reinsurance market,” Hahn explained.

He added that market-friendly regulatory changes, technology and better data understanding all add up to give reinsurance an opportunity to grow even faster.

“It’s not a short-term opportunity, but a very long-term opportunity that goes over decades, particularly with more than 165 million people joining middle-class society in Asia, outside India, every year. That’s more than double the number of people in my own country of Germany.”

Nat cats represent some of the biggest challenges for Peak Re in Asia, he said, even though in emerging Asia there are lower penetration ratios and therefore low aggregates.

“But the equity is rising very fast, because the penetration and the density of insurance is increasing specifically in the market. Trying to understand exactly what’s going on is certainly keeping us very busy,” he concluded.