US loss ratios rise on back of nat cat and secondary events

As Puerto Rico battled to recover from severe flooding after being lashed by Hurricane Fiona in September, Intelligent Insurer spoke with Jim D’Onofrio (pictured), general manager at Liberty Mutual Reinsurance (LM Re) about the impact for the US reinsurance industry.

“It’s horrible seeing the destruction in Puerto Rico caused by Fiona,” he said. “It’s a reminder of what we’ve been seeing over the past couple of years with this frequency of severity.”

Severe events such as hurricanes and earthquakes are areas the reinsurer continually monitors, he added.

“Additionally, LM Re and the industry have been impacted by secondary events, flooding, wildfire, tornados and winter storms. Those have seen an increase in frequency and that’s leading to increased loss ratios.”

With the industry heading to Dallas, Texas, for APCIA 2022, D’Onofrio was minded to recall Winter Storm Uri, a major winter and ice storm with wide-reaching impacts across the US, Northern Mexico, and parts of Canada in February 2021.

Uri was a “big event down there”, he said, highlighting the impact in the southern states of the US, “a $10 billion-plus event in 2021”.

“I’m not really sure an event like that has been properly priced for in the past, from a true severe hurricane or earthquake perspective. With the severity associated with those events, if you look at some initial estimates over recent events, they have not reflected the final loss costs.

“Now add in demand surge and inflation—they can drive these events even higher. So it’s a very big focus for us to try to understand the potential severity associated with these events in the future.”

Covering the cost of capital

In response to this increase in severity and frequency, LM Re is duty bound to make sure it’s getting adequate profit to cover the cost of capital, D’Onofrio explained, adding that the reinsurer needs to write business to its own terms and conditions. “If certain business doesn’t meet those criteria, we will probably need to decline it,” he said.

This strategy ensures the insurer can provide clients with stable capacity, especially for core trading partners.

“We need to monitor our exposure growth very closely. Total insurable values (TIVs) are going up and we need to stay within our risk tolerances to make sure we’re protecting the capital base of Liberty Mutual Group.”

D’Onofrio oversees the US reinsurance operation at LM Re, which is a $650 million portfolio of predominantly property and casualty business. It’s part of the $3 billion global LM Re portfolio.

“We’re a broker market reinsurer and we work with brokers and ceding company clients to build partnerships.”

This is collaborative work conducted with the reinsurer’s global product leaders to offer specialty lines such as cyber and political risk. D’Onofrio described it as a “very collaborative model” that enables his operation to work with LM Re’s actuarial claims, accounting and portfolio management teams.

Inflation is another factor having a major impact.

Generally the US market continues to see rate increases, although they’ve moderated over the past couple of years, and they vary line by line, according to D’Onofrio.

“As we speak today, we expect to see some significant improvement in property rates in those terms, especially from a reinsurance perspective, driven by factors such as catastrophic events and the inflationary environment.

“Again we’re seeing and hearing a lot about this supply/demand issue. There is growing demand for reinsurance protection, catastrophe protection in particular in the US, and supply is stable or in some cases even lower. So we expect that to continue to drive property rates up,” he said.

The market outlook for casualty was more of a “wait and see” situation, he said, although inflation will clearly be an influencing factor there too.

“We have economic and social inflation. We continue to be optimistic that we’ll see some smaller but continued improvement on casualty as the industry tries to focus on a proper return for our capital,” he said.

Strategy for a new normal

With the US National Oceanic and Atmospheric Administration standing by its predictions that this year’s Atlantic hurricane season activity will be “above normal” despite the record slow start, LM Re is prepared for action.

D’Onofrio was clear that the key word here is “prediction”. No one in the industry has a crystal ball but he explained that the reinsurer has to adjust prices to reflect the new normal, which accounts for the increase in the frequency and severity of cat events over the past several years.

“We don’t take a cookie-cutter approach to our pricing; we apply an individual price approach to our deals. We use actual experience and models or a blend of both to recognise these secondary events.

“With inflation, we have to recognise the impact of that. Claims costs are up for materials as there’s supply chain disruption. A big part of what we need to do is around data,” he added.

With the reinsurer’s decisions predicated on the quality of the data, he said it was crucial to work with LM Re’s broker and cedant company clients to make sure that the data being provided for TIVs is updated.

“It’s very important, so that we get the most accurate information and make the best decisions for LM Re,” he concluded.