Rates are structurally too low and must change: Flandro

The reinsurance market is entering a phase of extreme disruption where it is becoming clear that rates have been structurally too low and must change, David Flandro, the managing director of Hyperion X Analytics, a joint venture between Hyperion X and RKH Reinsurance Brokers, told Monte Carlo Today.

He said that reinsurers are being pummelled by multiple factors at the moment—all of which have played a role in rate hardening, not only as part of a cycle, but on a long-term basis to correct fundamental structural problems in the market.

These include casualty reserves continuing to deteriorate, catastrophe losses unexpectedly deteriorating in the aftermath of recent losses, continued very high commission ratios that make business more expensive, and a number of macro headwinds including geopolitical uncertainty on many levels.

“The fact is that reinsurers have only one lever to pull: price. The dialogue in this renewal will likely focus on how much of that is cyclical and how much is structural,” Flandro said.

“Reinsurers will start to refocus, not on the cost and availability of capital, but on the cost of acquiring risk. That is a different way of looking at the market than has been the case until earlier this year.”

He added that it is now clear that rates have increased in the renewals that have taken place so far in 2019—the question now is whether that will continue.

“There will be more capital willing to come in but that will weigh against a changing reserving picture, a growing exposure to catastrophe risk and these other headwinds.

“It does seem that rates between 2013 and 2017, especially toward the end, were structurally too low. Reinsurers have had many reasons to push back in negotiations, most recently and visibly at June 1—we will just have to see how long and how hard they can persist,” he concluded.