Secondary perils weigh heavily on reinsurance attachment points

The frequency of secondary perils such as severe convective storms (SCS) and wildfire are causing reinsurers to rethink attachment points.

That was one topic discussed by a panel of speakers discussing current trends in reinsurance at the APCIA conference in Chicago.

Chris Ross, a managing director for Guy Carpenter, said reinsurers had been finding that previously largely unmodelled losses had been leaking into their reinsurance catastrophe programmes as the prevalence of losses from SCS and wildfires has risen.

“Inflation and the cost of goods have gone up. So too then has the value of claims, so it’s become much more of a frequency issue, as opposed to a cat issue.”

As a result, he said, there was an “uncertain environment”. Outside of large events like hurricanes, there are too many unknowns. Attachment points have also been rising, to protect reinsurers from claims associated with unmodelled losses.

Ross said new models are needed that account for these events. Once reinsurers can quantify and control what the frequency is, he said, they will be able to apply appropriate pricing.

“Will pricing evolve over time? Yes. That will naturally find its corrective course through the supply and demand curve,” he said.

Robert Jones, North American regional treaty manager at Gen Re Group, said that attachment points and pricing are based on expected losses. Jones explained there was greater comfort in taking on risk at a higher level.

“There is comfort in moving away from lower layers that relate more to losses that weren’t anticipated. They are secondary perils, or perils that don’t model as well as hurricane risk, which has evolved so much in the last 30 years,” Jones said. 

“While no model is perfect, it allows us to rationally work out what losses might be in certain types of events.”

Living with volatility

While higher attachment points take reinsurers “out of harm’s way” on secondary perils, he appreciated that reinsurers are still on the hook for larger events.

However, he said, Gen Re is “in the volatility business” and is comfortable with volatility—provided it can price for it.

“The industry is seeing the value of the higher attachment points.”

“We’ll deal with the lumpiness of our results over a period of time. As long as we have some sense of what those losses might be long term, we can determine the appropriate loss cost, plus the margin associated with it,” he added.

Whatever the structure, Ross thinks reinsurers will remain disciplined on attachment points, and this would be a good thing for the industry.

“The industry is seeing the value of the higher attachment points. From a carrier perspective it means adjusting your own gross portfolio and managing your accumulations,” he said.

The casualty side is different, he noted. “More of the business is pro rata and quota share, so it’s very much an alignment of interests between the reinsurers and carriers, in terms of pricing, terms and conditions,” he added.

For more news from the American Property Casualty Insurance Association (APCIA) click here.

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