Reinsurers shun significant volatility

Reinsurers’ inability to deliver returns that exceed their cost of capital has led their stakeholders to lose their appetite for significant volatility. That has led to a fundamental change in risk appetite, Mark Morley (pictured), managing director of Asia-Pacific, Gallagher Re, told Intelligent Insurer.

“They will trade the upside to contain the downside, particularly in the Asia-Pacific region,” he said. “Changing risk appetites will be a core focus for clients and markets in the coming period. Stakeholders in both camps have understandably become more wary of volatility and the focus is likely to be on that classic upside/downside trade-off. That looks to be the defining opportunity—as well as the defining challenge—of the next 12 to 18 months.”

One example of this change in risk appetite has been what Morley calls a clear and concerted push by reinsurers to lift attachment points in Australia in response to a number of flood losses in the past three to four years.

“The reinsurance community’s tolerance of attritional flood losses has dissipated, especially as inflation pushes marginal portfolio losses higher into excess of loss programmes,” he said. “It’s a matter of frequency versus severity, with limited appetite and capacity available for exposures at the bottom of programmes, particularly for placements on an aggregate basis.

“That same reduced appetite also impacted reinsurers’ appetite for individual risk covers at 1/7, after a plethora of single risk losses across the globe.”

Morley acknowledges that concerns over climate change are prevalent in the market—but stresses that this is factored into most models.

“We should be cautious in assuming that existing models are not adequately reflecting the underlying exposures. Flood, in particular, is adequately modelled in much of Asia, especially in the ASEAN region, and the market acknowledges the inherent volatility in modelled results across the curve.

“In practice, recent losses have not been significantly outside that volatility range,” he said.

He added: “Market stability is likely to be maintained by the adoption of a measured response to climate change. An over-reaction would likely return us to volatile pricing cyclicality which collectively we have managed to avoid over recent renewals.”

On a class-by-class basis, Gallagher Re eyes opportunities in several areas outside conventional property/casualty reinsurance. One is life reinsurance, where it sees more cedants moving away from the direct relationship model to access an intermediary’s advice and access to the entire market, Morley said.

Another opportunity is public-private solutions, particularly with respect to catastrophe risks, which are on the agenda of many national governments and international institutions in Asia-Pacific.